The accounting standard for pensions, FRS17, has ramped up the scrutiny of company pension liabilities, and while many groups have already taken steps to deal with their deficits, a great deal of work remains to be done.

Link: Access IFRS - PwC’s IFRS resource centre

One key area that listed companies will have to focus on, in the coming months, is managing their transition from FRS17 to the IAS19 standard for pensions accounting.

Although the two new standards are similar, Brian Peters, human resources services partner at PricewaterhouseCoopers, points out that they are different and need to be handled accordingly.

‘In terms of measuring liabilities, the two standards use similar calculations, but differ when it comes to reflecting the impact of experience, known as actuarial gains and losses,’ Peters says.

‘For example, FRS17 does not allow for changes in the deficit to be deferred, and they have to go directly through equity in the statement of total recognised gains.’

In addition to financial assumptions, IAS19 requires disclosure of material actuarial assumptions such as mortality. This is not a requirement of FRS17. Furthermore, the IASB standard extends beyond pensions, including all employee benefits
from holiday benefits to long-service awards.

Research by PwC suggests that business still needs to make this transition. The firm surveyed the interim reports of 32 companies in the UK and found that all but six were recognising actuarial gains and losses in the statement of recognised income and expense.

Another issue companies will need to keep an eye on are possible changes to pensions accounting which may emerge from the IASB’s convergence project with the Financial Accounting Standards Board in the US.

‘The IASB and FASB will be talking about the pension accounting standards again,’ Peters says. ‘We are waiting to hear something, although there is a while to go before we reach global consensus.’

As matters stand, though, companies still have plenty to keep them busy. Since the introduction of FRS17 on 1 January 2005, actuarial firm Punter Southall has estimated that the combined pension deficit of the FTSE100 alone is £37bn while PwC has found that over 90% of the FTSE350’s pension schemes are in deficit.

Companies with large pension deficits will be weighed down even further next year when the pension protection fund, the state’s safety net for the pension plans of failed companies, is expected to raise the levies it receives from businesses.

Across the board, companies have begun taking steps to manage their deficits with a variety of plans and instruments.

High-profile examples include telecoms giant BT, which is believed to have overhauled its asset allocation; BAE Systems, which is undertaking a painstaking consultation with employees; Royal & Sun Alliance, which has changed the method for calculating its obligations; and WH Smith, which has introduced a complex liability-driven investment that aims to match assets to the size of a liability.

Peters says companies need to consider all the options available to them and choose a solution that best supports their situation.

‘Some companies have looked into changing their benefits plans, others have made one-off cash payments, while certain groups are identifying assets which can be used by trustees as security against their deficits in the event of insolvency,’ he says. ‘Each company has a specific situation and needs a strategy to deal with all the issues.’

But for all the headaches it has caused, FRS17 has improved transparency and played a leading role in the pensions debate, with the pensions regulator adopting the methods of the accounting standard as its benchmark in draft consultations.

‘FRS17 has raised the bar when it comes to the corporate disclosure of pensions and improved comparability between companies,’ Peters says.

Link: For the latest news and analysis on IFRS, updated every week, register for Access IFRS – PwC’s IFRS resource centre