Changes in Accounting For Pensions

After getting component accounting out of the way, you may have thought that you could forget about accounting changes for a while. Unfortunately,the Financial Reporting Council (FRC) has issued a proposed amendment that will have a significant impact on many Housing Associations.

The FRC have issued an amendment to their proposals for new accounting standard (FRS 102) that will replace all existing UK Accounting Standards. In the previous version of the proposed standard the accounting for Multi-Employer Pensions Schemes was largely unchanged. The proposed amendment changes this.

Under the proposals employers that particpate in a Defined Benefit Multi-Employer Scheme that is accounted for as a defined contribution plan (e.g. the SHAPS Scheme) have to “recognise a liability to make payments to fund a deficit relating to past service where they have entered into an agreement to make those payments” .

This liability will measured at its present value of the amounts payable using an appropriate discount rate (which should be in reference to the market yields on high quality corporate bonds). The unwinding of the discount as payments are made will be treated as a finance cost. Although, it should be noted that this should be shown as ‘Other Finance Costs’ not interest.

For those Associations that are members of the SHAPS Scheme this is likely to result in a significant liability being recognised and may in some cases cause covenant compliance issues – particularly if covenants are linked to net assets or gearing.

Overall, what is proposed is a change from a system that states that if the full liability can’t be measured reliably then nothing should be recognised, to a system that states that you must account for that part of the liability that you have agreed to pay – irrespective of what the liability is.

To give an example of the impact of this change:

An Association has pensionable salaries of £750,000 at 30th September 2009. The Association will pay deficit contributions of 10.4% of this figure from 1 April 2011 for a period of 13 years 6 months. The amount payable will increase annually by 4.5%.

The amendment would apply for accounting periods beginning on or after 1 January 2015, meaning that the Association would have to bring the liability into its 2015/16 accounts. However, comparative figures for 2014/15 will also be required.

The opening liability based on a discount rate of 4% (based on the current yield on a high quality corporate bond) would be £966,065.  At 31st March 2016, the liability would be £919,529. The current liability would be £81,902.

The FRC are seeking views by 3 December 2012 on whether respondents agree with the proposed amendments, and they are hoping to finalise the Standard in early 2013.

There are a number of issues to consider with regard to this amendment. In its favour it is difficult to argue that when an Association agrees to pay sums that can be realistically measured as a result of past events – that this is a liability. Also, those Associations that are members of local authority pension schemes are having to account for their liabilities (or assets) in full under FRS 17. This amendment will therefore lead to an element of comparability.

Also, depending on your loan covenants there may be an advantage for the Association. When these payments are made they will no longer be operating costs which means that operating surpluses will increase, which may help with complying with interest cover covenants.

The arguments against this amendment are that it accounts for the agreed payments as liabilities and bearing in mind how these payments were calculated these are unlikely to be an accurate representation of what an Association’s actual pension liability is. Therefore, readers of the accounts may be misled into thinking that these liabilities represent the pension liability – which may ultimately be smaller or larger than this.

If you make an agreed monthly payment for gas or electricity – then the amount paid is not necessarily what your ultimate bill will be.

Is it better to account for a guess at the past service liability that you have agreed to pay- than include nothing at all?

We will be responding the amendment in due course – but would welcome any comments.


About Phil Morrice

Phil is a Partner at Alexander Sloan. He specialises in providing services to RSLs and commercial businesses and divides his time between our Glasgow and Edinburgh Offices.
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1 Response to Changes in Accounting For Pensions

  1. Phil Morrice says:

    I have updated the figures above (26/10/12). Thanks to Helen at Barrhead for pointing out the calculation error.

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