TT18: Financial Reporting Standards and Pensions

March 22, 2002

Startling headlines have appeared in the press about the effect of new accounting rules upon some companies. These rules force certain companies to recognise deficits in their company “final salary” pension schemes on their balance sheets i.e. they must show any under-funding within the pension schemes as a liability against the company’s assets. The new rule is called Financial Reporting Standard 17.

The new rule has been introduced by the UK Accounting Standards Board – their pronouncements are compulsory for companies reporting under the UK Companies Act 1985. The rule was revised due to concerns that UK companies had too many accounting options, hence producing inconsistency across different companies and allowing flexibility to adjust companies’ results on a short-term basis.
A freeze on dividends?
Financial observers are now waiting for the fireworks! It is rumoured that some very significant companies may be insolvent, or at least unable to pay dividends, if they are forced to recognise the full extent of their pension scheme deficit.
“Final salary”pension schemes – an expensive option
Whilst the new rules are getting most of the blame for the decision to cancel “final salary” pension schemes, it should be noted that for some time these schemes have been regarded as the most expensive option for companies. Given the poor outlook for investments within the schemes, the Chancellor cutting the dividend tax credit available to the schemes and the increase in life expectancy after retirement, the on-going cost to a company is excessive.

Contrast this to the 1990’s when strong stock market performance allowed many companies to take contribution holidays and you can see why employees within “final salary” schemes now have cause for complaint.

Barnes Roffe Topical Tips

  • Which companies do the new rules apply to? Medium and large companies that cannot use the accounting rules for small companies – generally companies that cannot file fully abbreviated accounts.
  • What types of pensions are involved? Defined benefit or “final salary” style pension schemes. This only covers certain company pension schemes and not personal or stakeholder schemes.
  • When do the new rules come into force? The first set of accounts affected will be for periods ending after 22 June 2001
  • What are companies switching to? Some companies have stopped new entrants to the company “final salary” scheme and others have stopped the scheme altogether. In its place companies are providing defined contribution or money purchase schemes. Under these only the company’s contribution is defined – the investment performance risk is the employee’s.
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