Pension changes could result in a £260bn Accounting Gap

XPS Pensions Group (XPS) today reveals results from its second annual accounting for pensions report which shows the targets that UK pensions schemes need to be managing could be £260 billion more than what is shown in company accounts.

Every pension scheme will be different and the actions to consider to manage cost and risk will depend on specific scheme and sponsor circumstances, but with a new funding code of practice and expected changes to pensions law, this accounting gap is only going to get wider.

Read the full report here

Wayne Segers, Principal, XPS Pensions Group said: “The Pensions Regulator (TPR) is already expecting trustees and employers to set long term funding targets (LTFT) which will drive a greater difference between accounting and the cost of pensions, “the accounting gap”. Accounting disclosures will be an ever more important window in helping to explain this gap and good pension disclosures can help allay concerns around pension contributions and set out a clear path for managing pension risk.”

We have already seen FRC reviews call for clearer explanation of the difference between accounting and funding. XPS urges companies to take action now, and ensure their disclosures clearly communicate pension risk and funding by:

  • Deciding on their long term funding target for pensions together with trustees, explaining why this was chosen and describing how it can help reduce dependence of the scheme on the company over time to the benefit of all stakeholders
  • Ensuring they are clearly communicating the actions they are taking to manage pension cost and risk; and
  • Clearly setting out the difference between cash funding and accounting.

Wayne Segers continued: “The accounting gap for UK pension schemes already exists but there is potential for this to now become materially larger as regulatory changes are introduced. It is therefore essential that annual accounts set out how the numbers in the balance sheet interact with cash and risk management actions. If users of accounts understand risk, then the company will get credit for managing it.”

In addition, XPS have updated their accounting survey to look at current market practice, the highlights of which are as follows:

  • Discount rates: there is a significant range in discount rates used across UK pension schemes (over 0.5%), driving just under a 10% difference in pension liabilities
  • Life expectancy: average life expectancies on updated assumptions have fallen by a quarter of a year compared to last year, reflecting the trends in national data
  • GMP equalisation: the majority of schemes had GMP equalisation costs of less than 1% of liabilities and all but a minority recorded this as a charge through P&L.

XPS’s accounting for pensions report covers 150 pension schemes with assets ranging in size from £10m to over £1bn.

Read the full report here

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