Posts Tagged ‘FRS102’

David Davison

On the 8th May the Ministry of Housing, Communities & Local Government issued a policy consultation entitled “Local Government Pension Scheme: Changes to the Local Valuation Cycle and the Management of Employer Risk.” This comes following the publication in September of the “Tier 3 employers in the LGPS” research findings. The consultation closes on the 31 July 2019.

The first proposal is to change the actuarial valuation cycle in LGPS, from every 3 years to every 4 years, to coincide with the 4 yearly valuations of LGPS as a whole. I do have some concerns that for admitted bodies in the Schemes this will mean that they receive less information and ultimately the information provided will have to have a much longer shelf life. I suspect this is driven more by the inefficiencies in administration and a drive for cost savings than it is for any drive for valuation consistency.

I think to make this change work Schemes should be supplying annual updates on the funding and cessation position (perhaps linked to the provision of FRS102 information) which would allow organisations to be better informed about their position and options.

Of greater importance to charity participants are a series of proposals primarily aimed at looking to help employers better manage exits from the Schemes.

The document recognises that “for some employers a significant issue is the cost of exiting the scheme which can be prohibitive.” The consultation seeks views on two alternative approaches:-

  • To introduce a ‘deferred employer’ status that would allow funds to defer the triggering of an exit payment for certain employers who have a sufficiently strong covenant. Whilst this arrangement remains in place, deferred employers would continue to pay contributions to the fund on an on-going basis. This is looking to broadly replicate the ‘deferred debt arrangements’ (‘DDA’) brought in by DWP to deal with Section 75 debts in multi-employer schemes and the suspension arrangements implemented in Scottish LGPS in 2018;
  • To allow an exit payment calculated on a full buyout basis to be recovered flexibly – i.e. over a period of time providing this is deemed to be in the interests of the Fund and other employers. This is designed to put in to regulation a framework to provide flexibilities on a more formal and consistent basis to those being utilised ‘informally’ by some funds via alternative arrangements.

Whilst I welcome the sentiment and the objective to formalise any additional flexibilities offered the consultation proposals stop well short of fully recognising the issues and finding a full range of workable solutions to deal with them.

  • The DDA legislation and the changes to the cessation position in LGPS in Scotland brought in in 2018 have both been damp squibs with schemes choosing to ignore the changes and to continue to plough their own furrow. The fundamental issue seems to be that schemes are using any request to use the new regulations as an opportunity to re-negotiate security arrangements with the participant. This is hugely short-sighted as it ignores the lack of security on the benefits already built up and that it cannot be in the interests of the organisation, or indeed the other organisations participating, to build further liabilities. This stance in most cases therefore forces organisations to stay in the Scheme which is exactly the result the changes were looking to avoid! The proposals in this Consultation just seem re-inforce this issue referring to employers who are “sufficiently strong” being the only ones who avail of the proposed funding flexibilities – exactly the employers who can probably afford to exit or even potentially continue in the Scheme;
  • The proposals need to consider what options are available for less “sufficiently strong” employers. It cannot be sensible to force employers in to insolvency as a result of their pension liabilities but instead find a better way to manage these. In the interests of the impacted employer and others in the Scheme it would seem more productive to identify methods where the fund can obtain the maximum possible amount, even if this amount is less than the full cessation position. Some LGPS have already pioneered work in this area and the proposed changes are well behind the curve in terms of effective solutions;
  • The gilts based cessation methodology is flawed. Over the past 10 years gilt yields have fallen from over 5% to well below 2% which means that exiting employers are subjected to something of a lottery in exit terms. Currently high cessation values based on low gilt yields make exits less affordable keeping employers tied to the scheme – again counter-productive. Funds feel their hands are tied in investment terms forcing them to either invest very long term liabilities in poorly performing gilt assets or some funds remaining invested in the same way effectively just taking the cross subsidy benefit from their charity participant to help fund public sector liabilities. A more equitable system could be to look at the rolling average gilt value over a period or based upon the expected local authority borrowing costs;
  • There continues to be no recognition of the issue of legacy liabilities within LGPS. It is wholly inequitable for public sector bodies to expect admitted bodies in their Funds, often charities, to cross subsidise the public entity for benefits built up by staff while working for them. These liabilities should continue to be held by the public body in the same way as they were pre a transfer and new employers should be fully protected from these. Benefits reverting back to a prior employer for service linked to that employer just means that they continue to be dealt with on an on-going’ valuation basis (as they were initially) and not converted to a cessation basis. This is a solution which is also likely to make exits more affordable.
  • The suggestion that the steps proposed are linked to protecting the remaining employers in the Funds and this is repeated here. This whole issue of residual risk has been over-egged. The risk is already there and rising – what is needed is an affordable way to minimise the associated risk with the accrued liability and limit any future accrual. How can it be sensible to have 2 employers where one has one active member and one has no active members and yet they are both treated in vastly different ways.

The proposals in this consultation paper are a hugely disappointing response to the issues and in my view provide a wholly inadequate range of options to address the major issues faced. You’d have thought having sat on its hands over this issue for such a long time that the response would have been more comprehensive and considered.

I will be preparing a more detailed response to the consultation which I will share in a future Bulletin. I would also suggest that if you are a charity affected by these issues that you also respond to the Consultation.

Angela Burns

This guide is intended to be a useful reference for companies preparing their 30 September 2018 pensions accounting disclosures, whether under FRS 102 or IAS 19.

In this guide, we will review the changes in the investment markets over the last 12 months and consider the impact these will have had on a typical pension scheme. We will also review recent developments in the area of pensions accounting, highlighting issues that you should be aware of.

Pensions Accounting Newsletter Quarterly Update – Q3 2018

To discuss these topics further, please contact Spence through your usual contact or connect with our Corporate Advisory practice associate, Angela Burns, or by telephone on 0141 331 9984.

David Davison

It’s coming up to that time of year when participants in LGPS will be preparing for their year end accounting disclosures under FRS 102. The norm is that the Fund advisers provide an indicative set of assumptions, these receive a cursory glance, you await the results of your report at some time around May and then have this incorporated in your accounts.

Simple….but wait!

Did you realise that it is the Directors /Charity Trustees who have responsibility for these disclosure assumptions and not the Fund actuary?  You can therefore chose to use a different set of assumptions if those are more suitable for you and bearing in mind that one set of global assumptions issued by the Fund actuary can’t be specific to each employer, this is probably something worth considering, especially if your balance sheet position is important.

You may well be surprised by just how much of a difference small changes in the assumptions can make to your liabilities and therefore your deficit and balance sheet position.

I would therefore encourage employers already disclosing an LGPS pension liability to consider the assumptions used and whether or not they are appropriate.

The table below shows the potential impact of varying the assumptions used to calculate the FRS 102 liability.  Please note this will vary for each scheme and the figures below are provided as an example only.

Change in assumption Change in liability
+0.1% p.a. discount rate -2%
-0.1% p.a. inflation -2%
-0.5% p.a. salary increases -1%

Indicative results showing the impact on deficit and balance sheet position are shown below.

‘Standard’ assumptions
£000
Organisation specific assumptions
£000
Assets 2,000 2,000
Liabilities 3,000 2,850
Deficit 1,000 850

So a small change of 2% in liabilities as in this case could reduce the deficit by 15% and improve the balance sheet position by £159,000.

As you can see therefore, for organisations participating in LGPS, it is well worth considering the use of bespoke assumptions, particularly if you are looking to manage your balance sheet. If you would like an indication of how changes could have impacted your 2017 disclosures we would be happy to provide these.

If you are considering a change, you need to consider this now as Funds usually require some advance notice that a different process will be used. We provide this service for many of our clients so don’t hesitate to contact us if you need more information.

Alan Collins

2016 – A year in review

Wow – what a year 2016 has been.  Brexit, President Trump, Hibs winning the Scottish Cup – who saw that coming?  Seriously, Hibs won the Scottish Cup.

What have we learned?  The dictionary definition of “pollster” might have to change to “people who predict things and always get it wrong”, said the actuary throwing stones from his glass-house.  My lesson to the pollsters is to quote a much bigger margin of error and include lots of caveats.

At least when it comes to 2017, it is now a reasonable stance to say that I’ve got no idea what’s going to happen. Read more »

Neil Buchanan

Our latest report details market movements over the 3 month period to 30 June 2016, and how this impacts the key financial assumptions required for determining pension liabilities under FRS102 or IAS19.

Major asset classes have had a relatively strong performance over the 3 month period to 30 June 2016. This strong performance follows on from the similar growth experienced in the Q1 of 2016. However, these asset classes have had their value distorted somewhat by ‘Brexit’ in the final week of the quarter. Furthermore, it is likely that any investment gains will be more than offset by increases in schemes’ liabilities (as a result of lower bond yields due to investors’ “flight to quality”), resulting in lower funding levels. To help draw attention to the practical implications, the effect of these market conditions have been illustrated on a typical pension scheme.

Finally, we also review the recent Brexit vote and how this will likely impact upcoming FRS 102 or IAS19 valuations.

Download your report now
Neil Buchanan

Our latest report details market movements over the 3 month period to 31 December 2015, and how this impacts the key financial assumptions required for determining pension liabilities under FRS102 or IAS19.

Major asset classes have had a mixed performance during Q4 of 2015. While equities and corporate bonds have bounced back from previous lows in Q3, gilts have not enjoyed this resurgence. To help draw attention to the practical implications, the effect of these market conditions have been illustrated on a typical pension scheme.

In addition, many scheme sponsors could be concerned as pension costs charged through the P&L will continue to rise due to the changes in the pensions accounting standards. (Further details on these changes can be found here ).

Finally, we also review recent developments in the arena of pensions accounting, highlighting issues that may be of interest.

Click here to download your Pensions Accounting Update.

Richard Smith

FRS102 An Employers Guide

FRS 102 – a quick recap

You may think I am a bit late to the party to be releasing a guide for Financial Reporting Standard 102 (FRS102) and its effect on accounting for pension costs, given that the first edition of the new standard was released in March 2013, and subsequently updated in August 2014.

However, as FRS102 only came into play from 1 January 2015 and we are now approaching the end of the transition year in which companies are required to restate the prior year’s disclosure under this new standard, many companies will only now be thinking about this in earnest for the first time, and so I believe there is no better time to consider the similarities and differences with the previous standard, FRS17. Read more »

Angela Burns

With the introduction of new UK Generally Accepted Accounting Practice (UK GAAP), and subsequently, the introduction of Financial Reporting Standard 102 (which replaces Financial Reporting Standard 17 as the financial reporting standard in the UK and Ireland) we ask employers to consider the impact this may have on their P&L and balance sheet, and note some actions employers can take to limit this impact.

The most significant change under new UK GAAP for defined benefit pension schemes is in relation to non-segregated multi-employer arrangements where employers are unable to identify their share of the assets and liabilities in the Scheme. Under old UK GAAP (and hence FRS 17) there was a exemption that allowed employers in this position to account for their pension costs on a defined contribution basis, by recording the contributions paid to the scheme in the profit and loss account. No account had to be taken of any pension deficit that may have existed at that date. Read more »

Neil Buchanan

Our latest special report details market movements over the 6 month period to 30 September 2015, and how this impacts the key financial assumptions required for determining pension liabilities under FRS17, FRS102 or IAS19.

Major asset classes have performed poorly over the 6 month period to 30 September 2015. However, depending on your schemes’ investment strategies, any loses from investment returns may well have been more than offset by decreased balance sheet liabilities, resulting from higher bond yields. To help draw attention to the practical implications, the effect on a typical scheme is illustrated.

We also review recent developments in the arena of pensions accounting, highlighting issues that may be of interest.

Click here to download your Pensions Accounting Update.

Andrew Kitchen

Having witnessed strong returns on assets over the last 12 months, many scheme sponsors could be, optimistically, looking forward to reporting improved balance sheet positions in 2015. Unfortunately, record low bond yields are likely to have more than offset these gains for most schemes due to their effect on liability valuations. Pension costs charged through the P&L will continue to rise, with further increased charges likely next year as a result of forthcoming changes in pensions accounting standards.

In this Spence Special Report on Pensions Accounting, we describe the asset/liability balancing act in light of market movements over the past year. To help draw attention to the practical implications, the effect on a typical scheme is illustrated.

We also review recent developments in the arena of pensions accounting, highlighting issues that may be of interest.

Click here to download your Pensions Accounting Update.

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