Johnston Press longevity study cuts deficit by £53m

Corporate reporting measures on pension scheme funding obligations are a divisive issue, and IAS 19 has been criticised as inaccurate, but many employers continue to aim to optimise the accounting figure.

The liability is still exactly the same, in the sense of it will depend on how long the members actually live rather than what assumption you make about it

Alan Collins, Spence & Partners

Johnston Press’s latest annual results showed that changes in the mortality assumptions across the scheme membership accounted for £53m of its £63m deficit reduction on an IAS 19 basis.

During the reporting period, the group conducted a review of the demographic assumptions, assessing the proportion of male and female scheme members, the number of members with spouses, and the age and health of members.

A medically underwritten study was carried out by consultancy KPMG to identify the current health of a statistical sample group of existing members, who were assessed via telephone interviews targeted towards members with the most significant liabilities.

The results were interpreted by underwriters, analysed alongside the results from a postcode analysis performed in 2014, then used to calculate the IAS 19 scheme liabilities.

Following the study, at January 2 2016, the IAS 19 accounting deficit stood at £27m – a 70 per cent reduction from the £90m gap recorded at the start of 2015.

Alan Collins, director at consultancy Spence & Partners, said even a small change to assumptions can make a “big difference” to scheme deficits, adding that a reduction of one year in aggregate life expectancy could account for as much as a 3 per cent reduction in liabilities.

“It can be very material,” he said. “Employers should be looking at each and every estimate.”

But despite shifts in assumptions, Collins said schemes’ underlying liabilities remain unchanged.

“The liability is still exactly the same, in the sense of it will depend on how long the members actually live rather than what assumption you make about it.”

Rule revision

Scheme rules were also revised during 2015, imbuing Johnston Press with an unconditional right to any surplus in the event of scheme wind-up, whereas last year the company reported a £3m IFRIC 14 liability.

Phil Wadsworth, director at consultancy JLT, said restrictions on the return of surpluses to employers raises the spectre of stranded surpluses in funding discussions between trustees and corporate sponsors.

“If you prevented a surplus going back to an employer, trustees found it extremely hard to get the employer to fund anything like enough money,” he said.

Under the Pensions Act 2004, trustees must pass a section 251 resolution allowing repayments of surplus to employers before April 6 2016, after which date the power to do so will fall away.

Three months’ notice must be given to the employer and members before the resolution is passed, meaning all schemes planning the resolution will have done so before January 6 this year.

Tamara Calvert, partner at law firm DLA Piper, said the Johnston scheme had either passed a section 251 resolution or similarly amended their rules to permit refund of any surplus.

Calvert said the adjustment was a “bit smoke and mirrors” because under scheme rules and law, employers can only get a refund of surplus when schemes reach full funding on a buyout basis.

“If you have got a right to repayment you can recognise it on your balance sheet even though, actually, you’ll never get that money. That’s the problem with IAS 19,” she said.

“Even if they have an IAS 19 surplus that doesn’t mean they could get money out of the scheme.”