What are the key themes for 2022 Accounting disclosures?

by David Lucas   •  
Blog

The last 12 months have been yet another turbulent period for pension schemes. Just when it felt that we were emerging from the global pandemic, crisis struck in eastern Europe, sending shockwaves across the world – politically and financially. Many LGPS participants will now be turning their attention to their upcoming 31 March 2022 FRS102 disclosures, and here we consider the key themes which are likely to influence the results.

The good and the bad

First the good news. Discount rates, which are used to convert future projected benefits into a current value, have increased significantly since March 2021. The higher the discount rate the lower the value placed on the liabilities. Under FRS102, the discount rate must be set using high quality corporate bonds; the yields on these bonds have increased, thereby placing a lower value on the liabilities. At the time of writing, corporate bond yields have increased by around 0.6% since 31 March 2021, which, all else being equal, could lead to a reduction in liabilities of around 12% (depending on the profile of your members).

The bad news, however, is that we’ve also witnessed a significant increase in the expected level of future inflation over the same period. Benefits built up in the LGPS are increased in line with inflation to maintain purchasing power, and future levels of inflation are also often used to assess the assumed rate of future salary increases. Higher inflation, therefore, leads to higher projected future benefits resulting in a larger value placed on the liabilities. The increase in inflation has been in the order of 0.5%, which could lead to an increase in liabilities of around 10%. Overall, the impact on your accounting liabilities could be finely balanced.

On the asset side, the significant increases in bond yields mentioned above have resulted in a fall in the value of these fixed income assets, particularly those where the returns are not linked to inflation. Returns over the period on certain assets classes (in particular growth assets) had been strong up until February, with many equity funds showing double digit growth. However, the volatile economic conditions arising from the war in Ukraine has wiped out much of this growth.

Overall, there is still significant uncertainty over how the 2022 disclosures will unfold. The final position will be influenced by developments over the coming weeks as we approach the year-end (potentially to a significant extent). However, we would not be surprised if many participants experienced a deterioration in their position since last year.

Changing assumptions can have a material impact

Whilst there may be little that can be done to influence the asset valuations used in the disclosures, most Directors /Charity Trustees don’t realise that it is they, not the Fund Actuary, who have ultimate control over the assumptions used, subject to any required actuarial advice having been taken and subject to the agreement of their auditors.

The charity can, therefore, choose to use a different set of assumptions if those are more suitable and bearing in mind that one set of global assumptions issued by the Fund Actuary can’t be specific to each employer. You may be surprised how small changes can have a material impact, an example illustration of which is shown below.

Change in assumption       Change in liability
+ 0.1% p.a. discount rate                  -2%
- 0.1% p.a. inflation                          -2%

A small change in the assumption for future salary increases can also lead to a material change in the overall liability, depending on the profile of your membership.

Even if you have already received your results when you are reading this blog, it’s not too late to take action if your balance sheet position is important. You can consider an alternative set of assumptions and have your report updated. This may incur some additional costs but they can be minor in relation to the overall improvement in the funding position you might achieve.

We provide this service for many of our clients so please don’t hesitate to contact us to discuss your position or for more information.

If you want to read the most recent Pensions Accounting Update click here.

Further reading

What are the key take-aways for trustees and sponsors from TPR’s Annual Funding Statement?

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