Dark Pension Accounting Clouds Rolling In

The Trustees’ journey plan to self-sufficiency can hit company balance sheets and profits.

The 2018 White Paper on Pension Funding requires trustees to have pension scheme plans to achieve self-sufficiency. They have to report on the plan to The Pensions Regulator.   Liabilities for self-sufficiency are around 15% to 20% above the actuarial technical provision numbers. The money can only come from investment outperformance or from the sponsor.  However, for most schemes there is little asset outperformance post the recovery plan.  That means the sponsor is paying.  So if the company has to pay, why is the additional deficit not shown as a balance sheet liability and being reflected in a higher annual P&L charge?  This is an area in which accounting standards changes must come soon.
The wind has already picked up in this area.  IFRIC14 questioned what to do when the recovery plan payments to a pension scheme are larger than the deficit to be covered as set out in the accounts.  The idea was that so long as a surplus could be retrieved, then there was no additional liability.  But trustees will not let a surplus arise because they can settle liabilities.  The get out clause falls away.
The higher funding targets provide an extension to the logic flow of IFRIC14 and there may be consultations to come on this subject.
 
The clouds are dark: how to disperse them

Companies should be looking to agree to keep investment return assumptions for longer.  For trustees to agree to less derisking, they will need a rationale. The sponsor can give this rationale by having a third party insurance policy to cover the gap between assets held and the asset value that gives self-sufficiency.  Now the assumption can be that there will be less derisking and the investment returns will cover the gap.  There is no need to book the additional liabilities and related P & L impact. 
As the weather has changed Boards should address the subject of pension funding.
 
Founder of C-Suite Pension Strategies, William McGrath, has long experience as an executive director of preparing company accounts where accounting for pension schemes has been a material item.

The C-Suite team has the breadth of experience needed to optimise outcomes for all stakeholders.