Companies need to provide more information on their defined benefit pension obligations, experts have said, after a study by Lincoln Pensions revealed a lack of clarity on many key issues.
DB funding is a prominent issue due to the problems associated with high-profile schemes such as Tata Steel and BHS, but the relatively light requirements for companies to provide details about their schemes mean the issue is not well understood.
Standardisation has taken precedence over actually disclosing the commercial reality of the pension situation
Matthew Harrison, Lincoln Pensions
Lincoln has today released a report titled ‘Defined benefit pension schemes: Give us a clue’, highlighting the level of disclosure by many FTSE 350 companies.
It found that while as many as 92 per cent disclose sensitivity analyses and 86 per cent reveal their valuation date, only 33 per cent mention their technical provisions funding level and none disclose a “holistic measure of the investment risk being run by pension schemes, which is typically expressed as a value at risk estimate”.
Matthew Harrison, managing director at Lincoln, said the accounting deficit figure companies are required to disclose can do little to help outsiders understand the position of a scheme.
“Looking to standardise the disclosure actually in a number of cases doesn’t allow us as readers of the accounts to actually see the commercial reality. Standardisation has taken precedence over actually disclosing the commercial reality of the pension situation.”
The report recommends three disclosures to be added to company accounts:
Technical provisions funding target, including assumptions and details of recovery plan length and contributions
A standard basis for disclosure of pension scheme funding volatility
A more prudent and comparable funding target, such as self-sufficiency or solvency to facilitate comparisons between companies
These points were echoed by others in the industry. Lynda Whitney, partner at consultancy Aon Hewitt, said: “The sort of thing you could consider including would be what is the recovery plan agreed? At the moment you have the IAS19 and the service cost on the cash side… the simple addition could be a couple of sentences.”
Compulsion may be necessary
Some element of compulsion from government or regulators could be beneficial, as voluntary disclosures can skew towards information that reflects well on the company.
“When it comes to their accounts, companies tend to do what they’re told by the accounting standards board,” Whitney said. “Where they do include other information it tends to be good news.”
Roger Mattingly, managing director at professional trustee company Pan Trustees, said the call for more comprehensive disclosure was “not before time”.
“The risks in terms of the deficits or funding of the scheme are not just about what’s disclosed in the accounts,” he said.
He added that a number of factors could mean a scheme with an ostensibly high deficit according to company accounts could be in a far better position than it appears.
“The deficit could be huge but [if] the scheme has a contingent asset it might not be a problem,” he said. “A lot of the data that’s flying around in terms of DB deficits doesn’t show you who has other arrangements and who hasn’t.”
The IAS19 is calculated based on AA-rated corporate bond yields, even where schemes do not hold any such bonds.
