FRS 17 creates £70bn hole in UK plc accounts

Link: GKN profits threatened by FRS 17
Link: Follow our FRS 17 special

The full extent of the impact of FRS 17 is shown in analysis published today by Watson Wyatt. As well as revealing the full effects of the controversial accounting standard on UK plc, the actuarial adviser also reports that around half of the total deficit is accounted for by FTSE 100 companies.

‘This is the most comprehensive analysis yet of the FRS 17 position of UK companies,’ said John Ball, a partner at Watson Wyatt. ‘We have found that the combined deficits for FTSE 100 companies alone are £35bn, and the total for all UK companies could easily be twice that much, £70bn. Approaching 90% of companies will currently have an FRS 17 deficit.’

News of the massive deficits came as ratings agencies Standard & Poor’s and Fitch said they would monitor carefully the size of corporate pension deficits.Watson Wyatt blamed the massive deficits on UK companies’ reluctance to invest outside of the equity market.

The average equity allocation was 64% at latest company year-ends. Only around 10% of companies had less than 50% of their pension scheme invested in equities and some are maintaining an equity allocation as high as 90% or more.

But the adviser said that future dividend yields and anticipated capital growth in the equity market could see the FRS 17 deficit wiped out over a period of around 10 years, without the need for additional contributions having to be made.

Ball said that for this reason companies should not rush to switch investments from equities to bonds without careful consideration.

‘A switch by FTSE 100 companies of 20% from equities to bonds could reduce their disclosed annual profits by around £1bn in total. It is therefore vital that all companies consider very carefully their reaction to the current market conditions, having fully analysed and understood the risk/reward trade-off for each possible course of action,’ he said.

The new accounting standard FRS17 will force companies to disclose the liabilities, although its full introduction has been deferred by the Accounting Standards Board. However companies must disclose the liabilities in the notes to their accounts.

Related reading