• Defined benefit pension schemes are often the longest-term and most volatile liability on the balance sheet
• Investors are typically having to guess or interpolate the actual funding commitment that a business has made to its pension scheme from limited IAS19 disclosure
• Review of the FTSE 350 shows that relatively few make voluntary ‘best practice’ additional disclosures which help understand the pensions risks supported by a given business
• Better information would, in Lincoln Pensions’ view, assist stakeholders in monitoring the sponsor covenant standing behind schemes and help prevent more BHS-type situations
• Lincoln Pensions believe the new ‘long-term viability statement’ required from all listed companies provides the ideal catalyst and justification for obligatory additional disclosure in relation to pension obligations
This is critical as, for many companies, they are the longest-term and most volatile liability on their balance sheet.
Lincoln Pensions’ research* found that disclosure in relation to the actual cash funding of DB pension schemes is highly variable:
• Around two-thirds (67%) of companies within the FTSE 350, with DB pension scheme assets totalling circa £332bn, do not disclose the deficit or surplus position of their DB schemes relative to the actual funding target which drives company funding contributions; and
• More than half (54%) of companies do not disclose the length of deficit recovery plans they are committed to in order to clear the funding deficit.
In terms of the risk dynamics and volatility associated with pension scheme exposure, Lincoln found:
• Not one FTSE 350 company provided a measure of future funding risk volatility, such as Value at Risk (“VaR”); and
• Only around a third (37%) referenced the DB pension scheme’s hedging strategy, either quantitatively or qualitatively.
In light of this variability, Lincoln Pensions is calling for all listed companies to enhance and standardise pension disclosure to allow investors and other readers of annual reports and accounts to better understand cash flow and funding risks associated with company pension schemes arrangements.
In particular, Lincoln Pensions calls for the following disclosures to be made:
1. The technical provisions funding target (including key assumptions) and details of the associated recovery plan including its duration and the level of contributions agreed;
2. A standard basis for disclosure of pension scheme funding volatility; and
3. A more prudent and comparable funding target (e.g. self-sufficiency or solvency) to enable comparisons between companies and provide a clearer sense of longer term funding targets.
Darren Redmayne, CEO, Lincoln Pensions, said: “The fact that a majority of the FTSE 350 neither disclose the size of their technical provisions deficit - the key figure for setting funding contributions - or the length of recovery plans to fund their deficits leaves members and stakeholders in the dark, having to guess the level of commitment a business has made to its pension scheme.
“In a world where scheme funding and risk dynamics are driven by scheme specific factors, the limited accounting disclosures can give a very false picture to readers. That’s why we feel strongly that there should be greater transparency around DB pension scheme risks. The Pensions Regulator is driving greater integrated risk management by sponsors and schemes and better information is critical to meeting this objective.
“Directors of listed companies are already required to make a ‘long-term viability statement’ which, under the new version of the FRC’s UK Corporate Governance Code, requires a robust assessment of longer term risks. We believe that this new requirement provides the ideal catalyst and justification for obligatory additional disclosure in relation to pension obligations.
“Over time, our view is that this best practice should be extended to all company disclosures, listed and non-listed. We believe that many of the issues associated with recent high profile cases, such as BHS and Tata Steel, could have been highlighted much earlier through greater transparency in the accounts.”
“As pension deficits grow and the spotlight falls on DB pension scheme risk, it is becoming increasingly untenable for the one-size-fits-all IAS19 disclosure to appropriately reflect the commercial reality of many situations.”
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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 12 October 2016.
To view the full report pleas click on the ocument belwo
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