This is according to a new report* – Give us a Clue 2: A further call for greater corporate transparency around defined benefit pension risk – from Lincoln Pensions, the UK’s largest specialist covenant advisory firm and part of the Cardano Group (Cardano).
Since Lincoln Pensions issued its first Give us a Clue report in 2016, significant improvements have been made in a number of areas of disclosure: 74% of FTSE 350 companies now disclose the length of the recovery plan, compared to 46% in 2016; 81% disclose the amount of deficit repair contributions agreed with the trustees, compared to 48% in 2016; and 79% of companies disclosed their deficit (or surplus positions), compared to 33% last time.
However, despite these improvements, Lincoln Pensions’ research found that:
• None of the companies disclosed a Value at Risk (VaR) estimate, which would provide stakeholders with important insights into the level of investment risk being run by a scheme. VaR also takes into account the scheme’s investment strategy and how well the investment strategy mitigates the risks which are inherent within the scheme’s liabilities.
• With the exception of 5** FTSE 350 companies (with DB obligations), no one disclosed their pension scheme’s funding position on any alternative valuation basis, which, if disclosed, would give stakeholders a complete picture of the size of sponsor’s obligations to the pension scheme. For example, cases like BHS and Carillion, demonstrate that the current accounting disclosures, e.g. IAS 19, do not give a true reflection of potential underlying pension issues.
At present, IAS 19 falls short of providing clarity around scheme funding requirements and risk. Therefore, to enable investors and other stakeholders to make more informed judgements on the future of DB pension schemes, Lincoln Pensions calls for the following disclosures to be made:
1. The Technical Provisions (TP) funding position and details of the associated recovery plan durations and contributions agreed. This will show the actual cash funding commitments to the scheme as well as point towards those who need longer to pay.
2. A standard basis for disclosure of pension scheme volatility. Whilst VaR has many detractors, Lincoln believes it can be useful if modelled correctly and understood appropriately by its users, to understand the inherent risks of both the assets and the liabilities.
3. A more prudent and comparable funding target (e.g. self-sufficiency, risk free or solvency) to enable comparisons between companies and provide a clearer sense of longer term funding targets as well as revealing the full reliance being placed upon the employer covenant by the DB scheme.
Richard Farr, Managing Director, Lincoln Pensions, said: “Since we issued the first iteration of this research, we have seen the demise of several high-profile brands including BHS and Carillion. BHS was seen as the slow lingering death of a faded retail formula, whereas, Carillion was seen as the new face of Government outsourcing. We believe that many of the issues associated with cases of this nature could have been identified much earlier through greater transparency in the accounts.
“Defined benefit pension schemes are often one of, if not, the largest obligations for a corporate sponsor. Whilst there have been significant improvements made in basic disclosures over the past 18 months, we believe that a continued push is absolutely necessary. As anyone experienced in financial refinancing and restructuring will tell you, denial is the biggest obstacle to an effective and efficient solution for all stakeholders. Full disclosure of significant pension risks is essential. Without full disclosure, how can financial statements ever be true and fair?”
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* The analysis was done on the latest released annual report of every FTSE 350 company with UK pension obligations as at 20 June 2018.
** The 5 companies are: HSBC, Meggitt plc, Vesuvius plc, Aggreko plc, and Paragon Banking Group plc.
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