If you’re one of the lucky admitted bodies who benefit from a council or other guarantee for your LGPS membership then this is likely to mean that you are currently disclosing a much more negative position on your balance sheet than actually should be the case.
In most cases transferee admitted bodies, and community admission bodies with guarantees, benefit from preferential exit terms should they leave the Fund, with the debt payable on exit calculated on an on-going basis (as per that used to calculate Fund contributions) rather than the more stringent cessation basis. This is good news of course as it means the likelihood of having a large debt on exit is much lower.
However, there is no correlation between the assumptions used in the calculation of the on-going funding position and those used when compiling the FRS 102 disclosures for company accounts. Under FRS 102 the discount rate must be set in line with the yield available on high quality corporate bonds. At the moment, corporate bond yields are low and so the discount rate used in the FRS 102 calculations is likely to be much lower than that used for the on-going funding basis, resulting in higher liabilities and a much larger deficit (all other things being equal), which therefore reduces balance sheet value.
I recently witnessed an example of this where, on an on-going basis, the organisation was in surplus but on the FRS 102 basis the organisation had a £100,000 deficit. The organisation had a guarantor and so was able to exit the Fund at any point paying off any on-going funding deficit (which in this case was nil). The FRS 102 deficit cannot be correct in this case as the worst case scenario is the on-going position. This meant that the charities balance sheet was £100,000 worse than it should have been, which, for the charity in question, was very material.
A further difficulty from a disclosure perspective are the recent changes to UK wide LGPS Regulation which now permit the return of surplus on exit from schemes. To date where a surplus has existed this has been discounted and a net neutral position assumed as any surplus could not be recovered. This however is no longer the case and the position will vary depending upon whether the organisation has a guarantee and whether their ultimate exit position is based upon an on-going or cessation position.
The disclosure position has therefore become much more complex and employers need to be considering their position well in advance of their company year end to leave enough time to take any remedial steps necessary. So if you have a guarantee or are very well funded on your exit basis, discuss this with your auditor. It may be possible to add a note to the accounts to provide greater clarity or better still, update your accounts with disclosures on a basis more consistent with the value of the liabilities actually owned.