One-fifth of FTSE 350 companies do not declare DB funding positions

Twenty-one per cent of FTSE 350 companies with a DB scheme do not disclose their funding positions at all, according to Lincoln Pensions research.

High-profile collapses at BHS and Carillion have exposed the inadequacy of disclosing funding positions on an accounting basis, said Richard Farr, managing director at the covenant specialists.

How can the accounts be a true and fair view if these numbers aren’t disclosed?

Richard Farr, Lincoln Pensions

The technical provisions calculation is an estimate made using actuarial principles of the assets required at any particular point to fund benefits already deemed accrued under the scheme using assumptions adopted by the trustees.

Actuaries adhere to standards upheld by a system of self-regulation, carried out by the Institute and Faculty of Actuaries with independent oversight from the Financial Reporting Council. The FRC has set technical standards and enforced a disciplinary regime since 2005.

Last month, it was announced that an advisory group to the government review of the FRC will examine the extent to which actuaries should be subject to formal regulatory standards.

While a sizeable proportion of FTSE 350 employers remain opaque about their funding positions, Lincoln research shows that the landscape has improved markedly since 2016, when 67 per cent did not disclose their deficits or surpluses.

Corporate disasters could have been avoided

The technical provisions valuation of pension liabilities was incorporated into UK law by the Pensions Act 2004.

“I want the FRC to first of all insist that it comes into play,” Farr said. "How can the accounts be a true and fair view if these numbers aren’t disclosed? It’s a travesty."

Farr argued that the BHS and Carillion disasters might have been averted had there been a fuller understanding of the extent of their pension obligations.

Around 28,000 DB Carillion members fell into the Pension Protection Fund following the company’s demise.

“If this had been disclosed years ago, properly, you wouldn’t have had shareholders getting dividends. The money that was being paid out to dividends would have gone to the scheme instead,” he said.

According to Farr, the Employer Covenant Working Group, of which Lincoln is a member, has submitted its view to the FRC.

“Being an ex-auditor myself, I’m ashamed of our profession, quite frankly,” he said.

A spokesperson for the FRC pointed to its 2017 corporate reporting thematic review, which states that it is helpful for companies to explain the difference between the funding deficit and IAS 19. "We don’t say that we expect companies to do this as there is currently no requirement in IFRS [International Financial Reporting Standards]," the spokesperson said.

Avoid excessive levels of disclosure

Employers may currently have the liabilities of a DB scheme valued via a number of means, including technical provisions, the IAS 19 accounting measure, and the value of its buyout deficit.

Jacqui Woodward, senior consultant at XPS Pensions, agreed that pensions risk is “poorly understood” but warned against overcomplicating disclosure in the company accounts. At the top end, notes can often run into “more than half a dozen pages”, she said.

“There needs to be a balance between providing pages of notes in the accounting disclosures… and providing information that really is meaningful, able to be used, and understood,” she said.

She added that disclosure reform would be more useful for investors and stakeholders rather than scheme trustees.

“It wasn’t pensions that pushed over BHS and Carillion. Businesses do fail and the protections that are in place there are provided by the PPF, and they’re often overlooked,” she said.

What about smaller companies?

Following the publication of the Department for Work and Pensions' DB white paper, the Pensions Regulator has promised to take a more proactive approach, pledging greater oversight of scheme funding positions.

Andy Agathangelou, founding chair of the Transparency Task Force, expressed his disappointment at the proportion of companies that are failing to disclose their funding positions.

“As a general rule of thumb, wherever and whenever there is useful information that is not being disclosed, it makes you immediately suspicious as to why the information isn’t being disclosed,” he said.

He suggested that the picture may be just as bad at smaller companies.

“We can assume that if this is the level of non disclosure in relation to FTSE 350 companies, then we can probably assume that similar but smaller organisations further down the scale are also not disclosing this information,” he said.