How accounting changes hit your balance sheet

The changes, which came into effect on January 1, have toughened requirements on how much employers disclose about their pension schemes. The new requirements move away from a checklist approach to one that is more principles-based, with an emphasis on risk.

Raj Mody, partner at the consultancy said employers must now do the following:

1. Explain the characteristics of and risks associated with the scheme.
2. Identify and explain the amounts in the financial statements arising from the scheme.
3. Explain how the DB plan may affect future cash flows in regards to timing, amount and uncertainty.

“Some companies will see it as a pain but some may see it as an opportunity to improve their pension situation,” said Mody.

The new standards could lead to a greater awareness by the chief financial officer of the risks posed by the scheme and could encourage derisking. 

“This is bringing pensions more to the forefront of [the mind of] the finance manager,” said Neil Crombie, senior consultant at Towers Watson.

The biggest change for sponsors with the revised accounting standard will be to the discount rate used to calculate the expected return on the scheme’s assets, he added.

Sponsors will now have to use the yield of a high-quality corporate bond that is consistent with the duration of the scheme’s liabilities. As most schemes in the past used a rate that was higher than the new discount rate, this could have a major impact on the sponsor’s profits.

This could lead to derisking among schemes that were invested in riskier assets to increase the credit on the balance sheet, said Crombie. But this is likely to be in the minority as derisking has been commonplace for DB schemes.

Mark Jones, director in consultancy Deloitte’s pension team, pointed to the treatment of the operating expenses of running the pension, which include adviser fees and administration costs.

These will now have to go through operating profits, rather than in a separate finance charge, which could lead to a reduction in that figure.
“For larger schemes this could be several million pounds a year,” he said.

“So far there has been a lot of focus on funding the deficit but perhaps there has not been as much focus on how much it actually costs to run a DB pension scheme and this will make it a very visible figure to CFOs.”