Spring 2019 has seen a flurry of guidance about pension accounting. The changes are ‘niche’ and will not affect all organisations but will be impactful where they do apply. Here is a summary of the important issues arising:
More changes to FRS 102?
Revisions to FRS 102 published in May 2019 affect organisations that have multi-employer defined benefit (DB) pension schemes. Under FRS 102 (2015), where an employer cannot measure their share of a DB liability it accounts for the scheme as a defined contribution (DC) scheme but accrues for any obligation that it has to make good a prior deficit based on information received from the scheme at the time of its triennial actuarial valuation.
Multi-employer DB schemes are becoming better at apportioning the real DB liability across individual employers. Where this happens the simplified DC approach (with accrual) will end and ‘proper’ DB accounting will kick in.
What do the recent FRS changes require?
The recent changes (previously exposed in FRED 71) require the employer to recognise the difference between the ‘proper’ net DB liability and any previous balance as a separate item in other comprehensive income in the year in which the new information comes to light – rather than as a prior period adjustment.
Who will this affect and when?
The changes come into effect for accounting periods beginning on or after 1 January 2020 with early adoption permitted. They could impact any employer which is a member of such a multi-employer scheme but charities and housing associations are likely to be particularly affected.
Is early adoption likely?
Where circumstances change for relevant employers, early adoption is indeed likely as there is no existing guidance in this area. Registered social landlords (RSLs) which are member of the Social Housing Pension Scheme (SHPS) are moving to a ‘proper’ DB accounting model for 31 March 2019 year ends using an approach which is totally consistent with that outlined above.
Are there any benefits of the new approach?
Although it seems likely that a ‘proper’ DB accounting approach will make pension liabilities larger rather than smaller, any pension liability will be properly rebalanced annually going forward, rather than as a result of a triennial scheme valuation, which is expected to reduce profit volatility.
Is this anything to do with GMP equalisation?
No – guaranteed minimum payment (GMP) equalisation, is a different issue. Recent guidance in this area follows a judgement in the case of Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank Plc & Ors, which was published on 26 October 2018.
Female members of three Lloyds Bank pension schemes took action to enforce what they argued were their rights to equality of treatment in relation to pension benefits. In essence, a disparity of treatment between male and female members of the scheme arose as a consequence of historical legislative change. The female scheme members won.
The result is that the pension liabilities of some DB schemes in employer financial statements are understated and will need to be increased. There will also be implications for pension scheme accounts.
When will the liabilities need to be increased?
For accounting periods ending on or after 25 October subject to any increased liability being measurable. Measurability may be a problem in the short term as this is a complicated area.
How will any increase be accounted for?
As with the changes outlined above, any increase in liability will not be recorded as a prior period adjustment. Where a pension scheme liability already includes an estimate for the effects of equalisation (many will), any rebalancing of the provision will be recognised through ‘Other Comprehensive Income’ (OCI) as a change in actuarial assumptions.
Where a pension scheme liability does not already include an estimate for the effects of equalisation, it will be treated as a ‘plan amendment’ and accounted for as a past service cost (i.e. recognised in the profit and loss account).
Where can I find more?
The May 2019 revision to FRS 102 can be downloaded from https://www.frc.org.uk/news
The National Housing Federation has produced an excellent guide on the change from DC to DB accounting for RSLs which can be downloaded from https://www.housing.org.uk/latest-updates/pensions-accounting-guidance-for-housing-associations/
Also check out Jo-Anne Haulkham’s blog on the impact of GMP equalisation on pension scheme accounts at https://www.krestonreeves.com/news-and-events/26/03/2019/gmp-equalisation-pension-scheme-accounting-treatment-now-clarified
Peter Herbert, Insight Training