IASB proposal could hit sponsor-scheme funding strategies

Under the International Accounting Standards Board’s proposal to alter the guidance supporting the IAS19 standard, companies with a pension scheme surplus would no longer be able to recognise it as an asset on their balance sheet, unless there is a realistic expectation that they will be able to access it. 

Any change would not take effect until January 2017 at the earliest, but the IASB’s interpretations committee has been asked for further clarification. 

Chris Hurry, partner at consultancy Hymans Robertson, said the committee is only considering cases in which trustees “had specific discretions to use [the] surplus by changing benefits or by winding up the plan via an annuity purchase”. As such the majority of scheme actions could be accounted for in the usual way. 

But Alex Burton, pensions actuary at KPMG, said the committee might extend the revision to cover any pensions surplus, where the employer is unable to reclaim it from the scheme. 

If you’re paying money into a pension scheme where you can’t recognise a surplus, you’re effectively giving money away

Martin Hooper, Barnett Waddingham

“There’s a suggestion that if the interpretations committee were looking at this more widely, and if they actually start to dissect UK trustee powers more closely, then they might actually go further. And then it would have a much bigger impact,” he said. 

Consultancy Aon Hewitt estimated the move could wipe over £25bn off FTSE 350 companies’ balance sheets and hit their profit and loss statements. Around a quarter of FTSE 350 companies currently have an accounting surplus, and there is a concern that this could affect employers’ attitudes towards pension scheme contributions. 

Martin Hooper, actuary at consultancy Barnett Waddingham, said the move could make employers reluctant to contribute more cash into their pension schemes. 

“If you’re paying money into a pension scheme where you can’t recognise a surplus, you’re effectively giving money away,” he said. 

Consultants agreed that if the proposals were widened to address all pensions accounting surpluses, employers would still be likely to pursue closing DB scheme deficits. But they also believed employers with cash surpluses would probably look for alternative sources of pension funding.

Alternative funding structures

“About half of schemes have something that’s non-cash today,” said Lynda Whitney, partner at Aon Hewitt. Several forms of non-cash funding are available to pension schemes, including escrow accounts, special purpose vehicles and parent-company guarantees. 

Parent-company guarantees, while the most popular method of alternative funding, are ineffective as a protection from these changes, according to Whitney. She said contingent assets “can be quite complex vehicles and unless you’re putting in a certain size of asset, it doesn’t make it worthwhile”, adding that smaller schemes might prefer a simpler escrow account or surety bond. 

However, Hurry said they must ensure such contingent assets are deemed ‘non-transferable’ in order to benefit under the new proposals. 

Any shift towards non-cash funding brought about as a result of the proposals are likely to affect the relationship between trustees and employers. Trustees prefer the security of cash, said Hooper, but argued that “the trustee can’t ignore the corporate’s position”. 

As such, trustees may have to renegotiate their funding agreements with employers and this could have mixed consequences for schemes. 

Burton said employers will “have to think carefully about having cash funding commitments” such as minimum-contribution agreements, as this could lead to a surplus later. 

However, he added that a shift in control could come with benefits for schemes, possibly leading to better overall funding. “There will have to be a quid pro quo somewhere if employers want more power,” he said.