To ask Her Majesty's Government further to the Written Answer by Lord Davies of Oldham on 28 October (WA 161–62), why the main reason for the increase in British Waterways’ pension costs in 2008–09 was the increase in the interest cost. [HL113]
There was a 17.8 per cent increase in the interest cost in 2008-09 over 2007-08. The interest cost is calculated as the start of year discount rate multiplied by the value of the liabilities at the start of the year (and with a small adjustment to allow for new benefits earned, and benefits paid out over the year).
The discount rate used to calculate the interest cost in 2008-09 was considerably higher than the discount rate used to calculate the interest cost in 2007-08 because corporate bond indices rose considerably (an effect of the current economic climate). This was reflected in the rise in the discount rate used in the accounts and directly resulted in the interest cost rising.
This is all prescribed by the international accounting standard IAS19 and a direct consequence of using corporate bond yields to value pension liabilities under the accounting standard.