UK companies with material defined benefit (DB) pension plans should review their plan rules and the accounting standard under which they report for UK tax purposes in 2015, says Mercer. The advice comes following moves to clarify how pension scheme deficits and surpluses should be recognised on company balance sheets under both International Accounting Standards (which must be followed by UK listed companies) and UK Accounting Standards (which are generally used for UK tax purposes).
Current rules allow companies to recognise surpluses in their pension schemes as assets on their balance sheets, where the surplus could give rise to an economic benefit. The International Accounting Standards Board (IASB) is reviewing whether this should be permitted in cases where the Company may not have access to the funds due to the powers of UK pension trustees who govern defined benefit plans.
At their meeting of 16 September 2014, the IASB’s interpretations committee clarified that in most UK cases a pension surplus can continue to be recognised as an asset. However, no asset should be recognised if, unusually, the trustees have powers to unilaterally spend the surplus by improving member benefits or by winding up the plan with an insurance company. Furthermore, where trustees have these unusual powers, if the company agrees to make prudent contributions to the plan that exceeds the expected cost of providing the benefits then these extra contributions should be recognised as a liability on the balance sheet.
“It is important for employers to understand the impact of trustee powers on a UK company’s balance sheet. The case identified by the IASB, although unusual, could increase pension liabilities on the balance sheet by over 25%,” says Warren Singer, Mercer’s UK Head of Pensions Accounting. “Employers should review their DB plan rules to ensure that no unusual trustee powers exist. If the trustees do have these powers then there will be a number of options to consider, including using funding mechanisms that are external to the scheme, such as escrow accounts, to improve benefit security, negotiating an amendment to the rules, or, where possible, adopting a new UK Accounting Standard that may mitigate the issue.”
In 2015, with the UK aligning itself more closely with international standards, UK companies will generally be able to report for statutory and tax purposes under one of two new accounting standards, FRS101 or FRS102, issued by the UK’s Financial Reporting Council (FRC). The former is more aligned with international standards while the latter takes a simplified approach.
“For a UK company choosing to report under the simplified approach of FRS102, there may be a significant difference in how defined benefit pension plans are shown on the balance sheet. The FRS 102 liability is based on the expected cost of providing the pension benefits and the FRC proposes that additional deficit contributions agreed with the trustees for prudence do not need to be added to the balance sheet. For those companies managing a large pension deficit, FRS102 looks like an attractive reporting standard, particularly if scheme rules give trustees unusually strong powers to spend surplus. As the treatment of pensions on the balance sheet is clarified, such companies should review which accounting standard they will be using for UK statutory and tax purposes from 2015”.
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