Can the Big Four deliver on pensions?

In recent years, the pensions row has become more important to all areas of
business, and Lord Turner’s report has been eagerly awaited.

These days pensions are so important that the Big Four, more used to
providing assurance and tax advice amongst other things, now have pensions
specialists advising clients.

They will be examining the detail of the Turner report for indications of
which way the government will go in its attempts to reform pensions.

But even while they are advising on such issues for high-profile clients, the
Big Four have their own pension problems.

Ernst & Young disclosed earlier this month that its pension deficit had
grown by £60m to £230m. Deloitte’s most recent figures show that its pension
deficit stands at £182m, and PwC’s is at £298m.

KPMG has a particular, and better-known pension issue. It is involved in a
court row over whether or not it even has a defined benefit scheme, the pension
arrangements that throw up such deficits.

If it is embarrassing for the Big Four to have deficits, it is doubly
embarrassing for KPMG. Its deficit on the scheme would be £58m under the most
recent calculation, taking the total for the Big Four to £764m.

So do such deficits matter? There are some who argue that the pensions
problem would disappear tomorrow if it were not for overly strict accounting.

The FRS17 standard, the argument runs, is too stringent and should be
relaxed. ‘That is just saying, “if I close my eyes I can’t see the monsters,”’
says Tom McPhail, an independent financial adviser at Hargreaves Lansdown.

The previous accounting standard, the minimum finding requirement, was
certainly too lax, he argues, but whether or not the current regime is too
strict is a difficult one to answer.

The real question, he says, is to query the specific assumptions behind the
schemes: ‘Are the accounting measures used to assess the deficits appropriate?’
he asks.

If the schemes assume 7% growth in the assets, for instance, you might need
to be worried. PwC’s scheme says it uses assumptions of 7.3% growth for its
pre-retirement return on investments.

‘That’s on the high side,’ says McPhail: ‘If I as an IFA was promising
clients that growth rate, I think the FSA would want to speak to me.’

Deloitte assumes a 5.94% return on its scheme. E&Y assumes a rate of
return of 4.6% on bonds and 6.3% on equities.

Not everyone thinks that these statistics are particularly bad. The
assumptions in the PwC report come from 2002, and the three-yearly actuarial
review is currently underway.

If it did reduce the discount rate used, a one per cent change would result
in a movement in the liabilities of up to 20%, says Fraser Smart of Hymans
Robertson. If that happened, PwC’s deficit would balloon.

So what are the actual risks?

There are the obvious risks to employees’ pensions if one of the Big Four
went under, not exactly a remote possibility given the summer KPMG and E&Y
have had.

The Pension Protection Fund (PPF) was set up to provide a cushion for those
who lose their pensions in such a way, but not everyone is confident it would
pick up the slack.

Its supporters also concede that it will not pay out all of a lost pension.
Ros Altmann, the pensions expert and adviser to 10 Downing Street, has said:
‘Although individuals will not receive the entire amount they were expecting,
this is so much better than the 80,000 or more people whose company schemes have
wound up in the past, and many of whom are facing the loss of most or all of
their pension.’

Whatever happens there, the Big Four will face steeply higher levies from the
PPF as a result of their deficits. Estimates prepared by actuarial consultants
Hymans Robertson for Accountancy Age suggest the Big Four may have to pay £2m a
year to the PPF in total – as part of the risk-based levy.

Most experts would not describe the Big Four’s deficits as giving too much
cause for concern. E&Y’s deficit is roughly equivalent to one year’s
profits, a figure that, generically, the pensions regulator does not describe as
unduly high. ‘A pension deficit equal to a company’s annual profit is by no
means unusual in the UK,’ a spokeswoman said.

It will have to be dealt with, though. The Big Four will have to pay down
their deficits, or face intervention from the pensions regulator if it should
get that far.

When asked about its scheme, E&Y said: ‘The figures are based on FRS17
accounting rules and while asset returns have been relatively good in the last
year, the increase in deficits reflects the impact of the fall in corporate bond
rates which are used to value the liabilities. The calculation of a pension
deficit is not an exact science, being dependent upon assumptions about
mortality, increase in salary rates and investment returns.’

E&Y, like the rest of the Big Four, says it is committed to funding its

Some reassurance for those in the Big Four may come from the story of
Andersen’s demise. Its pensions were taken on by Deloitte when the latter bought
Andersen in 2002.

If all else fails, someone else might pick up the pieces. Whether that is the
attitude at the Big Four, it’s probably not what they are advising clients.

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