Balance sheet volatility caused by FRS 17
Volatility prompted by FRS 17 - the controversial accounting standard for company pensions - poses a 'siginificant risk' to balance sheets even if a scheme is in surplus, according to a new survey.
Figures compiled show that so extreme is the movement from surplus to deficit caused by FRS 17 that in mid-July FTSE-100 company pension schemes had a combined deficit of around £25bn. Two months earlier the combined schemes had a surplus of £5bn.
Lane, Clark & Peacock, the actuaries that produced the report, warned users of company accounts against becoming ‘perversely concerned’ when they see such ‘volatile’ numbers on balance sheets.
Alex Waite, partner at the actuaries, said: ‘To date most attention has been focused on which company pension funds are in surplus or in deficit, with large and apparently frightening numbers quoted regularly. Certainly persistent large deficits cannot be interpreted as anything but bad news.
‘But this misses the fundamental feature of FRS 17. The inherent volatility of the new standard for companies with pension schemes that invest in equities means that schemes may regularly lurch from large FRS 17 surplus to deficit.’
One of the implications is that share holders and investors will have to deepen their understanding of pension schemes to ensure they can see beyond any FRS 17 difficulties to the true position of the company.
Investors will have to learn which companies are particularly prone to the volatility produced by FRS 17.
Lane, Clark & Peacock identify several companies that are could suffer as a result of FRS 17 because their pension funds are particularly large in relation to the size of the company.
Allied Domecq, Daily Mail, Smith Industries, Rolls Royce and Prudential are named by the report which notes that Allied Domecq’s pension fund is almost five times bigger than the company.