Aon shows concerns over FRS 17 volatility

UK – The most likely impact on pension funds of the introduction of the new FRS17 accounting principle is volatile accounting figures, warns Aon consulting.

Says Donald Duval, head of actuaries and benefits practice at Aon: “there are a number of ways that the impact of FRS17 on a company’s accounts can be mitigated. However, the choice is dependent on the scheme’s circumstances, and each method will have its own advantages and disadvantages.”

Duval adds that the ways to mitigate the impact of FRS17 are not the same as the existing ones used to mitigate the impact of SSAP24 and this could lead to differences in the balance sheet.

FRS17 specifies how companies must report the cost of providing pensions and other post-retirement benefits, such as healthcare, for their employees. It will replace the existing SSAP 24, and should be fully operational for company accounting periods ending in or after June next year.

Aon suggests one solution to balance sheet volatility caused by FRS17 is a change of investment strategy, such as greater asset allocations to fixed income. But it notes that this could lead to increases in pension expenses and charges, since bonds are unlikely to generate the same high level of returns as equities.

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