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XPS has released its third annual pensions accounting survey and calls for a new approach to the year-end accounting for pensions process.

XPS has released its third annual pensions accounting survey and calls for a new approach to the year-end accounting for pensions process.

30 Jun 2020

XPS Pensions Group has today released its third annual pensions accounting survey and calls for a new approach to the year-end accounting for pensions process.

Accounting for defined benefit pensions is becoming more complex and time-consuming for companies in a number of ways.

The process of preparing accounts and getting auditor approval has become more complicated, typically involving considerably more auditor testing and information gathering. XPS are exploring a better way for this to work, calling for wider cooperation between advisory firms and auditors to establish an online tool to streamline the process.

Simon Reddish, Head of Accounting for Pensions at XPS Pensions Group, said:

“Too often I see clients frustrated with the steps required to complete their annual reporting for pensions exercise. While the increased auditor testing is welcome, and will increase the quality of reporting, lots of this process need not directly involve the client’s senior finance team. We believe that the industry should be working closely with auditors to create an agreed, centralised process that puts clients first and meets the FRC’s requirements - this is the real key to a seamless year-end.”

At the same time, the recent market reaction to the COVID-19 outbreak has led to unprecedented volatility, meaning that value of pension obligations reported in companies’ accounts have generally diverged further away from the long-term funding strategies that drive the cash demands and risk profile of pension schemes – the Accounting Gap. This often means that clients need to spend more time managing the expectations of shareholders, who could be seeing large cash demands at the same time as accounting surpluses.

Vicky Randhawa, Senior Consultant at XPS Pensions Group, said:

“Recent market disruption has highlighted how volatile accounting positions can be. An accounting surplus emerging at 31 March 2020 could have easily turned into a deficit over the following weeks in April. At the same time, funding positions have moved in the opposite direction to accounting, exacerbating the Accounting Gap.”

XPS’ 2020 Accounting for Pensions report includes a comprehensive survey of assumptions used by a wide range of over 150 of XPS clients ranging in size from £10m to over £2bn by asset size. XPS looks in detail at the assumptions that have been evolving over the last year, including the RPI – CPI gap and future mortality improvements.

Over the year to 31 December 2019, discount rates continued to fall, pushing up accounting liabilities. At the same time the range of discount assumptions adopted narrowed compared to previous years.  While flexibility to vary discount rate methodology remains, the different rates derived by these methods also narrowed.

XPS saw more variation in setting longevity assumptions as market and auditor views have continued to evolve. Complexity in this area continues to increase, and could be affected by the COVID-19 outbreak in the short to medium term. XPS has produced a range of research and tools, such as a member profiling service and the COVID-19 Tracker, to help clients better understand how changing mortality trends affect their pension schemes.

For a full copy of the report click here