Accounting S Role in Providing for Life After Work

Accounting S Role in Providing for Life After Work

Matthew Haigh



Associate Professor Matthew Haigh,

Department of Business Studies,

AarhusSchool of Business,


Fuglesangs Allé 4,

Aarhus V,

8210 Denmark.

Fax: +4589486660.

E-mail address: .

Prepared for the ILPC conference, Edinburgh, 2009.


Accounting standard setters have asserted and denied connections between the public interest and the reporting of employer-sponsored pension plans. Recognition of the public interest involves a real and apparent contribution to the idea of the public. For accounting standard setters, this rests on a capacity to contribute to the type of political economy to which the professionwould claim its strongest commitment. Hence we see pensions reporting justified using assumptions aboutfrictionless markets and, in particular, statements of the usefulness of reporting a marketised value. Other values are imbricated in private pension plans. Membersproject socialised economic expectations, liberal governmentalities inject a hoped-for release on the public purse, while investment consortia are on the lookout for unrecognised financial value. A shift of perspective made to include these concomitant values reveals an unwanted antagonism of representation according to fitness for trading. The model has been used to shape rather than to reflect realities. Sponsors have withdrawn their support from pension plans, which by promoting a transfer of the social security burden to the state, has detracted from an important ideal of the profession and its credibility in the business community.



As the calculative technology of accounting continues to gain in importance in so many spheres of social life, an understanding of the conditions and consequences of such a calculative technology is vital (Miller, 1994, p. 3). Accounting’s acquittance of the obligations it owes its ‘moral employers’ (Cooper, 2005, p. 596)hinges on acapacity to contribute to the type of liberalist political economy to which the profession claims its strongest commitment (Willmott, 1990). The techniques that standard setters have determined appropriate to measure and report employer-sponsored pension provisionare those that would facilitate efficient capital markets. According to standard setters, this is the best way to serve the public interest. The reporting requirements have brought reductions of pension benefit levels, corollary outcome of which has been to transfer the welfare burden onto public systems. Such seemingly perverse outcome provides useful information on the location of the public interestin accounting requirement.

The management of pensions arrangement is of some transnational political importance. Demographic changes have required actuarial adjustments to assumptions of the longevity of populations (Disney, 2000). Countries are urged to find ‘strong financial incentives to carry on working and existing [in which] subsidised pathways to early retirement have to be eliminated’ (OECD, 2006). Guarantees of social security using unregulated, private means of governance in which primary consideration is cost have proved difficult to maintain (Held, 2000).Eleven OECD countries operate mandatory employer-sponsored pensions as substitute for and supplementation of public pension provision[[1]]. These countries have adopted a position, to varying degrees, that the effective maintenance of private pensions requires structural adjustment to global capital (and occasionally labour) markets. Agents of stateshave turned to the actuarial and accountancy professions. ‘Adopt International Accounting Standards’ (Regulation 1606 of the European Parliament) and value relevance for potential investors in plan sponsors (Hann et al., 2007)have become catchwords before modernisation (EU Directives 43 and 51), integration (OECD, 2007a), single passport (The Pensions Regulator, 2007a), convergence (Lamfalussy, 2000a), smooth functioning (Lamfalussy, 2000b) and regularised monitoring (Thornton, 2007). By fiat, one type of pension plan, defined benefit arrangement, in which the sponsor promises a predetermined amount to its members, has beenrepresented as expensive and risky for the sponsor. Sponsors have sought to replace the defined benefit with accumulation arrangements in which contributions invested directly, together with investment returns arising from the contributions, determine the amount of the post-employment benefits received. Accounting requirement for accumulation arrangement is much less extensive as relevant investment risks are transferred to plan members who, assumedly, have less need for reports of investment and actuarial assessments of their plans.

At consideration in this paper is how the reporting treatment of employment-related pension plans in the US, UK and Australia might provide for the efficiency of capital markets (rather laudable goals and an objective of standard setters), articulate with national pensions policies and so serve as a vehicle for the accounting profession (both in the narrow sense of standard setting bodies and the wider sense of ‘accountants in practice’) to acquit its public interest obligations.

The paper uses both traditional and critical research paradigms. An objective common to the more traditional research conducted in capital markets, in pensions policy development and, to a lesser extent, in professional public interest obligations is ‘promotion of the rationalisation of society by being purposive, ... developing productive forces, [and] increasing technical mastery over nature’ (Benhabib, 1986, p. 230). In this tradition, value relevance of reporting of financial items becomes expressed in terms of, for example, ‘the association between financial statement measures and equity investors’ future cash flow expectations [… ]as proxied through stock prices’ (Hann et al., 2007, p. 329). (Conventional treatment in conventional capital markets research is to draw large samplesof financial statements of quoted companies over a relatively short period.) Usefully, this tradition addresses those aspects of accounting treatment whose acceptability is not decided and points at the political nature of standard-setting processes.

A critical theoretic approach is used to give credence to the structural conditions of pensions accounting treatment that in the usual case will escape consideration. Justification for a critical approach is found in much of the argument expressed in Willmott (1986, p. 556):

However, at present, accountancy continues to be graced by a public image which, in stressing its technical, esoteric qualities, underplays the social and political formation of its practices and standards. ... The present paper ... reflect[s] the view that the organisation of the profession cannot be adequately understood independently of an appreciation of the political, economic and legal circumstances that have supported and constrained its development.

A policy paradigm, in the framework expounded by the political scientist Peter Hall (1993), is constituted by an overarching set of ideas that specify how the problems facing policymakers are to be perceived, which goals might be attained, and what sorts of techniques can be used to reach these goals. Hall emphasises that all policy paradigms operate ideologically. An example is public pensions policy, where the ideological underpinnings of the idea of the public pension are found in the liberal welfare state, in which the policy goal might be to ‘alleviate the financial problems of the elderly’ part of the population no longer working, the policy instrument used ‘might be an old age pension’ and the instrument’s setting would concern the benefit level and its delivery (Hall, 1993, p. 278). Hall’s interpretation of policy development is used in a reading of Slavoj Žižek’s revival of dialectical materialism. Žižek (2006, pp. ix-x) seeks to ‘revive a practice of reading which confronts a classic text, author or notion with its own hidden presuppositions’ so as to reveal its ‘disavowed truth’. Using the contextual notion of parallax, which is defined in quantum mechanics as the apparent displacement of an object caused by a change in observational position, Žižek sees the dialectic as a way to comprehend conflicting perspectives whose existence necessarily binds them together. Parallax refers to a social (or political, or scientific ...) duality in which two perspectives that seem incommensurate reveal themselves, on analysis, to be composed of the same material.

Thus there is no rapport between the two levels, no shared space—although they are closely connected, even identical in a way, they are, as it were, on the opposed sides of a Moebius strip. (Žižek, 2006, p. 4)

Objective of analysis using the idea of parallax becomes identification of a ‘minimal difference [between rhetoric and reality] and which divides one and the same object from itself’ (Žižek, 2006, p. 18). Structural asymmetries are revealed by identification of constitutiveopposites. Parallaxes are shown between the public interest ideal—as encapsulated in accounting’s ‘conceptual framework’ and its supporting ideas of representational faithfulness and a true and fair view—with the social potential, depth of promise, and burden of the private pension. The text used is pronouncements about private pensions as appearing in legislation and issued by regulators, and contested between the accountancy, investment analysis and actuarial professions. National statistics of changes in private pension schemes are used to identify the social outcomes of such pronouncements.

The paper proceeds in five sections. The next section justifies and outlines the method of data collection. A following section identifies the location of the public interest in the reporting requirements imposed on private pension plans. This is followed by a section which identifies and interprets the competition between the accountancy, investmentanalysis and actuarial professions for control of policy setting. A penultimate section discusses the real effects that accounting has brought to post-employment cessation benefits. A final section considers the problems that accounting standard setters face in the representation of social and economic realities, here problematizing accounting bodies’ constitutive allegiances and the wider implications this has for the contribution accounting practice might make to social security.


The United States, United Kingdom and Australia were chosen for their mature, large and lightly regulated pension systems designed to supplement public pensions[[2]], the relatively high equity allocation in investment portfolios held by their private pension schemes, making them subject to many of the same policy-setting risks, and the pressure that ageing populations in these countries has brought on funding requirements (Disney, 2000). The exploration of the connections between pensions accounting and the professional public interest is based on a meta-analysis (Guthrie et al., 1991) of three different types of documents, the first of which comprised the scientific or academic literature. Here we examined roughly 120 reports, books, and papers issued by associations, think tanks, and academics and dealing with the topics of pensions governance and pensions accounting. The documents were located using online research databases (the main keywords being simply ‘pensions’, ‘accounting’, ‘employee benefits’, ‘actuarial’ and ‘fair valuation’) and the three predominant genres of informal scholarly communication on the internet, namely, mailing lists, scholarly homepages, and scholar-produced decentralised digital resources (Fry & Talja, 2007). Documents came from accounting, actuarial studies, corporate governance, demography, economics, finance, geography, legal studies, political science, public administration, and sociology.

The second type of data comprised the pronouncements made and analyses provided by the many organizations involved in private pensions. The rhetoric of pronouncements and other evidences of history are important in an account of the linkages of social practices (Partner, 1977). Organizations sourced included the International Organization of Pension Supervisors, International Organization of Securities Commissions, the Basel Committee on Banking Supervision, the so-called Lamfalussy Level 3 networks[[3]],the UK Department for Work and Pensions and Financial Services Authority, as well as others. Lobby groups and professional associations were accessed and included the International Forum of Actuarial Associations, the OECD’s International Network of Pension Regulators and Supervisors and Private Pensions Working Party, and the UK’s Pensions Policy Institute, Age Concern England, Association of British Insurers, Confederation of British Industry, National Association of Pension Funds, Trades Union Congress, The Pensions Regulator, Pensions Commission, and Institutional Shareholders Committee. Another data source used was media outlets such as Investment & Pensions Europe, and Pensions Funds Online. This second data set comprised just over 400 pages of website material, not including the reports or documents to which these organizations’ websites are linked.

A third type of data comprised the commentaries and pronouncements of major accounting and actuarial bodies. Sources included the International Accounting Standards Board, European Financial Reporting Advisory Group, International Federation of Accountants, American Society of Certified Practicing Accountants, the Institutes of Chartered Accountants in England and Wales and inAustralia, theUK’s Faculty and Institute of Actuaries, the Financial Reporting Councils of the UK and Australia, and the Australian Accounting Standards Board. Documents included proposals and exposure drafts of accounting standards and actuarial guidance notes, and articles published in professional journals and websites. This material amounted to just under 1,000 pages, not including the reports or documents to which these organizations’ websites are linked.


The public interest as a normative theory is consistent with the notion of the common good as it was originally identified in the 17th century—to enhance the common good rather than private interests. This view is consistent with the concept of the common good bound in the welfarist state (George & Wilding, 1994). Therefore according to the normative perspective, a policy or action is in the public interest if it advances the collective welfare of the public (Oppenheim, 1975, p. 265). An abolitionist view of the public interest sees no interests in the public and only diverse groups each with their own particular set of interests and goals pursued in the absence of consideration to others (Cochran, 1974). In this view, the public interest is an orientation toward the maximisation of private interests within the constraints imposed by organised society (Dellaportas & Davenport, 2008).

The ideas of retirement provision and the public interest in accounting pronouncement both reference the idea that the liberal welfarist state is the best conduit for economic and social welfare. The public interest, impartiality and integrity have been ranked with value to investors (Francis & Schipper, 1999), transparency of reporting to investors (Barth et al., 2008; Sapra, 2008) and provision of information useful in assessing the stewardship of managers (Barlev & Haddad, 2003). The relevant public in the actuarial measurement of pensions is held as ‘consulting clients, employers, lawyers, accountants, policymakers and regulators ... investors, policyholders, pension scheme members, employees and beneficiaries’ (Financial Reporting Council, 2009). Accounting’s public interest in private pensions appears more nebulous. Argument has appeared that the relevant public in pensions reporting includes investors and might extend to pensions scheme members (see, International Accounting Standards Board, 2006a; OECD, 2007b). To better specify the location of accounting’s public interest, it is helpful to sketch the institutional arrangements (Gallie, 2008) of private pension schemes. Figure 1 below gives the oversight arrangement in the US, UK and Australia.

[insert point for Figure 1]

The relative emphases placed on accounting’s core values of representational faithfulness, reliability, relevance and comparability can indicate the type of public interest being served (Willmott, 1990). The values underpinning pensions accounting have been caught up in the concept of fair valuation. A trend toward recognition of fair-valued measurements for financial items begins from 1976 in the US, following the passing of federal legislation that governed the minimum funding requirements for an employer-sponsored pension scheme and the maintenance of the ratio of plan assets to accrued liabilities. Under accounting standards[[4]], an entity offering a pension scheme of a defined benefit type must calculate how much it will have to pay in future pensions, discount those payments to the present, deduct the market value of plan investments, and report the result as either a liability or asset in its statement of financial position. Fair value applied to an asset purchased by a pension fund means a current exit price—a price referring to that relevant to a hypothetical seller of an item reported or used in the valuation of an item reported in the statement of financial position(Financial Accounting Standards Board, 2007).[[5]]

In line with the dividend-discounting valuation model which posits a connection between quoted prices and accounting numbers, accumulated benefits payable under a DB plan are discounted when the measurement date extends beyond the reporting date. The calculation uses the Projected Unit Credit Method, which uses prescribed mortality tables (as issued by national public actuaries) and discount rate, and takes into account other assumptions concerning final salaries, employee turnover and medical cost trends, possibility of future pension increases if benefits are indexed with general price changes, and any other variable that will influence the cost of the benefit. The result is the present value of the total DB obligation. A discounting requirement appeared after a Financial Accounting Standards Board-initiated review in 2005 of pensions reporting. That review pointed to two benefits of pensions reporting, namely, reporting transparency and measurement appropriateness. Some evidence then is provided of the public interest in pensions accounting being located with investors.

Representation of DB arrangement as expensive and risky and of accumulation arrangement as the only other possible alternative is claimed to supply transparency to investors. The claim is made by connecting stewardship and an assumed link between equity prices and reported performance.

[Because investors believe that] fair value is grounded in economic reality, [fair value] facilitates informed investment decisions, which ultimately strengthens our capital markets. (Financial Accounting Standards Board, 2008)

The fairness in use of values ascribed to the capital markets derives from the parity of information as used by a willing buyer and willing seller (Bradbury, 2008). The claim of measurement appropriateness is supported by argument that as the sponsoring entity will bear the actuarial and investment risks associated with a DB plan (i.e., the risk of an unfunded plan), the entity should report that risk. The funded status is measured as the difference between the fair value of plan assets and the projected DB obligation. Funding requirements calculated under the Projected Unit Credit Method are expected to maintain the pension fund assets at such a level that, with future investment income but without any future contributions, the fund will be able to pay all accrued benefits until the last plan beneficiary dies (OECD, 2007b). Due to the method of calculation, the absolute value of the gain/expense under DB arrangement might be greater than produced under an accumulation scheme of similar size and asset composition, and less predictable[[6]]. It appears then that the public interest in pensions reporting encompasses two groups. Fair valuation is relevant because (a) it brings transparency and appropriateness to a potential investor in a firm and (b) supplies information on funding adequacy to a member of a pension plan.[[7]]