On the go: UK companies could be understating their pension liabilities by as much as £260bn, according to XPS Pensions.
In its second annual Accounting for Pensions report, XPS assessed the impact of new funding requirements from the Pensions Regulator, using data from the watchdog’s Purple Book 2018.
It found that the accounting gap, which results from the difference between accounting balance sheets and future long-term targets, could be £260bn across all UK companies.
The regulator is preparing to consult on a new cash funding code of practice, and proposed changes to pensions law will mean that companies will have to agree to a long-term objective for pensions.
The accounting gap for UK schemes already exists, but it could become materially larger as regulatory changes are introduced, according to Wayne Segers, principal at XPS.
“It is therefore essential that annual accounts set out how the numbers in the balance sheet interact with cash and risk management actions. If users of accounts understand risk, then the company will get credit for managing it,” Mr Segers added.
The survey also highlights the significant range in discount rates used across UK pension schemes (more than 0.5 per cent), driving just under a 10 per cent difference in pension liabilities.
It also points out that average life expectancies on updated assumptions have fallen by a quarter of a year compared with last year, reflecting the trends in national data.
On the thorny topic of guaranteed minimum pension equalisation, XPS found that the majority of schemes had GMP equalisation costs of less than 1 per cent of liabilities, and all but a minority recorded this as a charge through their profit and loss statements. One scheme had a maximum uplift of 9.6 per cent.
XPS’s report covers 150 pension schemes with assets ranging in size from £10m to more than £1bn.
