Accounting standards change to hit FTSE 100 pension schemes

Impending accounting standards changes to IFRIC 14 and the limit on defined benefit asset rules could hit FTSE 100 pension schemes by up to £100bn, double previous predictions, warns LCP

Over the past year alone companies have paid out seven times as much in shareholder dividends as pension contributions, according to analysis by pensions advisory firm LCP.

Changes to accounting rules under IFRIC 14 - IAS 19 Limit on Defined Benefit Asset, which the International Accounting Standards Board (IASB) is considering, could exacerbate deficits and increase pressure on companies to accelerate contributions.

IAS 19 limits the amount of a surplus arising from a defined benefit plan that an entity can recognise as an asset. IFRIC 14 clarifies how an entity applies those requirements. Further, to protect pension plan participants, employers are required to make minimum funding payments for their pension or other employee benefit plans. 

'In some cases, rules in IFRIC 14 mean that companies must recognise an extra liability on the balance sheet, over and above the normal accounting liability, to reflect the contributions the company is committed to pay,' the LCP report states. 'Whether or not a company is hit is essentially down to a legal lottery based on the technicalities of its pension scheme’s rules.'

The potential impact could cut FTSE 100 balance sheets by up to £100bn, with more than a quarter being hit to the tune of £1bn, warns LCP, based on analysis in the firm’s 2019 Accounting for Pensions report.

LCP says that The Pensions Regulator is pushing employers to address the issue when they have the ability to pay dividends or raise capital, even though some schemes may be at risk. It also warns of a potential increase in regulatory capital requirements in the financial sector.

The report shows that FTSE 100 companies have continued to pay more in shareholder dividends than pension contributions, paying around £90bn in dividends, compared to the £13bn paid to pension schemes.

LCP also cautions that the current focus on a regulatory overhaul of the audit market, with the advent of the new regulator, the Audit, Reporting And Governance Authority (ARGA) to replace the Financial Reporting Council (FRC), and the Competition & Markets Authority (CMA) audit reform proposals means that there is likely to be more focus in future on how pension figures are audited and on an auditor’s role in cases where companies have become insolvent.

The research also highlights the continuing controversy around the size of top executives’ pensions. Analysis of the disclosed accounts for the FTSE 100 shows average CEO pension contributions of around 25%. of basic pay in 2018, despite pressure to bring executive pensions into greater alignment with those of the wider workforce.

LCP predicts this is likely to change following amendments in 2018 to the Corporate Governance Code and announcements by the Investment Association which stated that executive pension contributions should be aligned with the majority of the workforce.

Currently only 15% of the FTSE 100 pay pension contributions or cash to their CEO in line with the rates paid to their workforce. Following legal judgment in the Lloyds case relating to gender equality in guaranteed minimum pensions (GMPs), LCP calculates that the average estimated cost of correcting historic gender inequality of 0.4% in liabilities or £1.3bn in total is considerably lower than forecast. However, six FTSE 100 companies still took a hit to profits of £100m or more.

Phil Cuddeford, LCP partner, said: ‘Last year saw FTSE 100 companies in pensions accounting surplus throughout the whole year – for the first time in two decades. Large contributions and de-risking activity mean that member benefits are safer and more likely to be paid.

‘The FTSE 100 and the wider pensions industry will also have been relieved that the financial impact of GMP equalisation was significantly less than previously predicted.

‘Despite this, it seems as if FTSE 100 balance sheets aren’t out of the woods just yet.

‘With the regulator focusing on risk management and longer-term thinking, companies should be proactive in implementing long-term strategies if they are to meet the incoming regulatory requirements in the updated DB funding code, due to be consulted on later this year.’

The LCP report, Accounting for Pensions report 2019 is now in its 26th year and is available here

Pat Sweet, Sara White

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