PRAG updates pension scheme accounting guidance after Lloyds case

The Pensions Research Accountants Group (PRAG) has published guidance on how pension scheme accounts need to account for their equalisation liabilities for guaranteed minimum pensions (GMPs) following the Lloyds judgment on pension equality

The landmark case, Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank Plc & Ors [2018] EWHC 2839 (Ch), related to the disparity of treatment between male and female members of the pension scheme as a result of various legislative changes, including SERPs’ (state earning related pension) contributions and their subsequent withdrawal, which created inequalities between pension entitlements for men and women.

The Court held that the pension schemes did show disparity of benefits available to men and women, and that there was an obligation to equalise benefits as far back as 1990.

In response to the ruling, PRAG has updated its guidance on equalisation liabilities due to the impact on accounting and financial reporting.

Depending on materiality and other considerations, pension schemes will now need to disclose an estimate of the likely accounting liability or a statement that the issue will need to be allowed for in future accounting periods.

'If the scheme year end is pre 26 October 2018 and the accounts approval date post 26 October 2018 the liability for back dated benefits and related interest should be disclosed as a non-adjusting post balance sheet event if material, the PRAG guidance states.

The backdating of GMP equalisation of pension benefits and provision of interest on these backdated benefits creates an accounting liability under the pension Statement of Recommended Practice (SORP) and FRS 102 Financial Reporting Standard, which may need to be recognised in pension scheme financial statements or disclosed as a contingency.

Kevin Clark, chair of the PRAG SORP Working Party, said: The implications of the judgement for scheme administration and funding have been well flagged, however, it also needs to be considered for scheme financial reporting. This is because the Lloyds judgment clarifies a legal obligation on scheme trustees to equalise GMPs through other scheme benefits.

‘PRAG has prepared a guidance paper to help trustees and accounts preparers consider the accounting implications for these backdated benefits and related interest. The paper sets out a practical approach for determining the need to accrue or disclose based on materiality considerations and the ability to reliably measure backdated costs. The paper also provides suggested disclosures for the different scenarios schemes may face.’

PRAG recommends ‘early liaison by the trustees with the employer, scheme actuary and scheme auditor in the accounts and audit planning stage will be helpful to determine the likely materiality of any liability required (and hence the need to include in the financial statements or not), the data required, a reliable basis of estimation (if necessary) and related audit evidence requirements’.

Shona Harvie, chair of the PRAG executive, said: ‘PRAG recognises that many trustees are at an early stage of considering this issue and the actual adjustment of benefits may take some years to be put into effect.

‘PRAG welcomes feedback on schemes’ developing experiences of accounting for these costs and will keep the contents of this paper under review based on feedback received.

PRAG guidance paper on GMP equalisation and pension scheme accounting is available here

Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank Plc & Ors [2018] EWHC 2839 (Ch) published 26 October 2018

Report by Sara White

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