We’ve been being asked a lot recently to confirm in what circumstances charities and not for profit organisations with final salary pension funds need to provide full FRS17 disclosures in their company accounts.
The first requirement is to establish if the company is a “stand alone” scheme or is part of a “multi-employer” scheme. If the body has its own pension fund in which it is the only participating employer and which has separately identifiable assets and liabilities then there seems little doubt that full disclosure will now be required.
Where the body is a member of a “multi-employer” scheme, namely that it is one of a number of employers who participate in the arrangement, then the position is considered in details in Section 38 of Practice Note 22 – ‘ The Auditors’ consideration of FRS17 ‘Retirement Benefits’ – Defined Benefits Schemes which states:-
Where more than one employer participates in a defined benefit scheme, it is known as a ‘multi-employer scheme.’ In some cases the scheme assets are not clearly allocated to specific employers and it may be difficult to identify the share of the underlying assets and liabilities attributable to each participant on a consistent and reasonable basis. In such circumstances, FRS17 requires the contributions to be accounted for as if the scheme were a defined contribution scheme, provided that there is disclosure in the financial statements of:
- the fact that the scheme is a defined benefit scheme but that the reporting entity is unable to identify its share of the scheme assets and liabilities; and
- any available information about the existence of a surplus or deficit in the scheme and the implications of that surplus or deficit for the reporting entity.
- the quantity and quality of other available relevant audit evidence.
The crucial element therefore appears to be whether the body is able to separately identify their share of the scheme assets and liabilities. Clearly if their specific details cannot be identified then the accounts will reflect contributions as if they were to a money purchase arrangement and should include the additional information specified above.
However this is not always the case. Increasingly companies participating in multi-employer funds are having their share of assets and liabilities specifically itemised and in these circumstances it would appear that full disclosure will be necessary.
Gillian Donald, Charity Partner at Accountants Scott Moncrieff said “pensions are becoming a significant concern for many of these organisations, however there are still many bodies who are unaware just how critical the issue is.”
Undoubtedly it is those organisations who have been forced to disclose the extent of their increasing pension liabilities in their company accounts who have become most aware of the issues arising as the financials are striking. However the risks are ultimately the same regardless of disclosure, or indeed non-disclosure.
In a report published at the end of 2004 by the Association of Chief Executives of Voluntary Organisations (Acevo) they identified 4 main problems within the voluntary sector, one of which was that “risk and uncertainty is badly managed.” In the 2004 Charity Finance Directors Group (CFDG) Report “The Charity Pensions Maze” the authors suggested that “Pension investment performance..is now a live and real risk issue for charity trustees and directors.”
The report goes on to say “trustees and directors urgently need to think about the implications and legal liability issues…, and to work out how to manage the risks that result.” So even if the figures themselves do not need to be formally disclosed in the accounts it can only be good corporate governance to review the level of legal and risk issues associated with pension provision and identify ways of controlling this risk.
There is on-going evidence that pension scheme deficits are continuing to rise, in spite of a rally in the investment markets in 2004. Charities, unlike large private companies do not have the option of going to their shareholders to fund these deficits and in many cases the only route for additional funding would be from charitable donations and there must be a concern that potential or current donors will be discouraged by this.
This issue requires review and as soon as possible to avoid, or at least begin to minimise, potentially significant additional liabilities building up in the future.
Published in CA Magazine in June 2005