New accounting rules in the UK could leave pension schemes for companies on the London Stock Exchange £100 billion (US$127 billion) worse off.

But the tougher rules could open up opportunities for letter of credit (L/C) providers according to a report published by actuarial consultants, Lane Clark and Peacock (LCP).

Deficit contributions

Increased payments in schemes are expected if the International Accounting Standards Board updates regulations so that firms are forced to show agreed deficit contributions on balance sheets.

Deficit contributions are payments to the scheme that are additional to the regular ongoing funding contributions.

According to LCP, the risks of increased payments could be mitigated by contingent asset arrangements, including L/Cs as well as escrow, asset-backed funding and surety bonds to give trustees the security they need.

More L/Cs

"Over 10 per cent of FTSE [Financial Times Stock Exchange] 100 companies with defined benefit pension schemes disclosed they already use these arrangements," according to the report.

"We expect this figure to grow as companies adopt new ways to support their pension commitments in the future," the report concluded.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.