At the FRC’s Financial
Reporting Review Panel, we take an active interest in pension scheme
disclosures in company accounts. We recently reviewed the December 2006 accounts
of 20 listed groups, whose accounts we had reviewed last year as part of a wider
survey, to see if there was any improvement in the areas we had thought could be
Companies had worked hard to improve the clarity of their disclosures,
particularly about the liabilities of their schemes. More information was
provided this year about mortality assumptions and about the potential
volatility of liabilities to relatively small movements in major assumptions,
for example mortality, discount rates and inflation.
The panel hopes to see continued convergence around best practice, which
should develop as companies become more familiar with the international
requirements. In seeking further improvement we know that it is important to
consider the materiality of pension schemes to each company. Unnecessary
proliferation of immaterial disclosures can cloud key issues.
However, in some areas, like the area of pension assets and expected returns,
we saw little improvement. Assets are typically disclosed in wide bandings
equities, bonds, property, cash and the like with little further disclosure of
what lies behind these headings. Little information could be found about the
extent to which derivatives or structured products were held within the
portfolios nor information on bond maturities.
The maturity of defined benefit schemes is another area of interest. With the
majority of schemes now closed to new members and an increasing number also
closed to further accruals by existing members, it is becoming possible to
estimate an end date for these schemes and to project, in general terms, the
pattern of cash flows throughout their remaining lives. As the schemes mature
and the conversion of the liabilities into cash payments out of the scheme
comes closer, this information becomes more pertinent.
To state the obvious, a scheme where the bulk of its members will not reach
retirement age for another 20 years or so is in a very different position in
terms of cash flow from one where the bulk of its members are already
Providing a graphical representation of projected cash flows and disclosing
the duration of a scheme would provide users with useful information about how
the future cash flows of the scheme might fall.
Kathleen Stevenson is FRRP case officer
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