The transparency of company statements has been a tricky issue and pensions
accounting is no different.
Recently companies with defined benefit schemes have found themselves in a
crisis. On the one hand, pension liabilities are growing as life expectancy
rises; and on the other, the bond yields that fund pension benefits are falling.
Because companies disclose so little about the longevity assumptions they
use, investors find it difficult to gain a true understanding of the risks
inherent in any particular scheme, and whether cash contributions, or other
actions, may be needed in future to fill a funding gap.
To address the problem, the Accounting
Standards Board is reviewing the level of disclosures, and has published a
financial reporting exposure draft, which proposes to amend the FRS17 standard,
which deals with retirement benefits.
The ASB’s proposal is that any company that operates or sponsors a defined
benefit scheme should have to issue a reporting statement, with a ‘buy-out’
value for deficits.
The amendment is set to incorporate disclosures about the relationship
between companies and trustees, the principal assumptions used to measure scheme
liabilities, how the liabilities arising from defined benefit schemes are
measured, the nature and extent of the risks arising from the assets held by the
defined benefit scheme, and even the future funding requirements for the scheme.
The responses to the ASB’s proposals show no clear consensus about whether
the reporting statement should go ahead.
Preparers of statements as well as audit professionals are opposed to the
idea of scheme liabilities being revealed by virtue of calculating their
‘buy-out’ values. This is because such different figures are bandied about for
buying out a pension scheme’s liabilities, ranging from the amount an insurance
company may want in order to settle, to the varied figure calculated for
Investors, however, would be keen to know the latter figure as the buy-out
amount is generally accepted as the liability ceiling.
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