By Huw Jones
LONDON (Reuters) - Britain on Wednesday played down the possibility of diverging from a globally-set accounting rule which some lawmakers blame for encouraging pension schemes to prefer low risk government bonds over stock markets.
City minister Andrew Griffith in February said a global accounting rule needed reviewing as it had become a "performance penalty" which trapped cash in pension schemes which otherwise could be invested in companies and the economy.
The so-called IAS 19 rule requires company defined benefit pension schemes to "mark to market" or adjust asset holdings to current market prices on a regular basis, with bonds typically less volatile than stocks.
"I don't think we should be departing from that at all. As in other areas, we seek to reduce friction between the UK and the rest of the world," Griffith told a parliamentary committee on Wednesday.
Defined benefit schemes pay pensions pegged to salaries, putting the payout liability on a company. They are being phased out in favour of defined contribution schemes, whose payouts depend on how markets perform.
Sharon Bowles, a committee member, said marking-to-market has been harmful to capital markets, and pension schemes should be allowed to copy insurers by applying a less volatile accounting method.
"The City kills the City. It's these things that have taken investment away from the capital market," Bowles said.
But Griffith said the move by defined benefit schemes to less risky assets was due to several factors, such as the maturity of schemes, and interplay between accounting rules, pensions regulation and a desire to reduce volatility in income statements.
"In my view it would be wrong to pick on one piece of that and say it's the accounting standard," Griffith said.
"I think it's a combination of risk appetite, detailed rules, and custom and practice among pension funds and sponsors, and what capital markets think about pension surpluses and deficits."
Pensions minister Laura Trott said mark-to-market accounting is "appropriate" given the alternative is for a pension scheme to come up with its own estimate, which could be subjective.
"I've not seen a system that works better overall," she said.
Griffith said a push in coming months to unlock "productive capital" in pensions to invest in the economy was shifting focus away from defined benefit schemes to defined contribution schemes.
"The biggest opportunity for us is in DC assets," he said, adding assets were accumulating in these schemes at a clip due to auto-enrolment of employees.
(Reporting by Huw Jones;Editing by Elaine Hardcastle)