Most RSLs are members of the Scottish Housing Association Pension Scheme (SHAPS). SHAPS recently provided its members with a tool to calculate the liability that will have to be incorporated into the accounts when the new SORP is adopted next year.

This is not the RSL’s share of the deficit on the pension scheme, or the ‘buy out’ liability if you chose to leave the scheme. This is the liability for the payments the RSL is making towards the past service deficit as part of the recovery plan.

FRS 102 and the SORP requires that this liability be discounted at a rate equivalent to the yield on a high quality corporate bond with a similar term as the liability. Why a straightforward agreement to make annual payments requires to be discounted to its net present value is not explained.

The effect of this is that the liability that you will show in your accounts will not be the amount that you have agreed to pay – but will be an amount less than that. The higher the discount rate used the lower the liability in the balance sheet (or Statement of Financial Position if you prefer the new terminology). The other side of this is that as each year passes the total discount will ‘unwind’ (i.e. reduce) and be charged to income and expenditure account.

To add to the complexity of this – the discount factor is not a constant. Yields on high quality corporate bonds are likely to vary over time and this may mean having to recalculate the liability based on a new discount factor.

The SHAPS tool for calculating this liability illustrates this issue. The tool suggests using a rate of 3.42% for discounting the liability at 31 March 2014 and a rate of 2.22% for discounting the liability in 2015. These rates were supplied to the Pensions Trust by Bank of America Merrill Lynch.

The impact of this is that the liability has to be remeasured using the new discount rate. For those RSLs in the SHAPS scheme this means that when the 2015 accounts are re-stated for compliance with the SORP there will be extra costs of around 36% of the annual payment towards the past service deficit to be accounted for. It will also mean that the liability will increase from 2014 to 2015 – despite the payments made to reduce it.

The fact that this liability will have be remeasured each year means that there is an added volatility to RSL accounts. Potentially, this could have an impact on covenant compliance. We would therefore suggest that RSLs carry out sensitivity analyses on changes in this discount rate to assess whether or not this represents a risk.

It should be noted when calculating the liability that will appear in the accounts,  the annual amount that you are paying is not entirely a contribution towards the deficit. If you look at the amount that has been advised to you and compare it to the amount of ‘contributions paid’ per SHAPS online calculator (the reconciliation on the second page) you will note that the amount in the calculator is different. In the sample we checked the amount was 3.5% less than the amount due to be paid. The difference is ‘scheme expenses’.

How these ‘scheme expenses’ will accounted for will be determined by the substance of the transaction, but they will either be provided for as a separate liability, or will be treated as an additional pension cost each year. We will, of course, research the nature of the transaction and get back to you.

If anyone has any queries regarding this issue please feel free to contact us.

rsl@alexandersloan.co.uk