IAS19 standard will have major impact on FTSE 100 companies, report shows
UK - The largest companies in the UK will still hold £400bn (€456bn) of pension scheme liabilities even if they manage to bring their deficits to zero under the new IAS19 accounting standard, LCP has said.
The consultancy went on to predict that IAS19 would have a major impact on UK companies.
According to LCP, the fact FTSE 100 companies have cut their deficits significantly this year - from £51bn in June 2010 to £19bn in June 2011 - will not necessarily help them to reduce their liabilities.
The consultancy also claimed that while some FTSE 100 have started to pay for insurance contracts to take over part of their liabilities, most of them will still hold those liabilities on their books.
Bob Scott, senior partner at LCP, said: "Companies have over recent years pumped huge amounts into their pension schemes, which helps to bring the funding level up to the point where they can consider securing those liabilities with insurance companies or other arrangements.
"However, with £400bn of liabilities, the market is not big enough to absorb that in one go.
"As a result, trustees will see long-term plans to de-risk their pension scheme and gradually to secure them independently of the company."
Earlier this year, the International Accounting Standards Board (IASB) published a revised version of the pensions accounting standard IAS19, which aims to reduce subjectivity in setting assumptions and increase flexibility in providing appropriate disclosures.
The new standard, which will be implemented as early as 2013, will have several effects on companies, Scott said.
"One of the impacts will lead to lower profits for most FTSE 100 companies, which could be £3bn lower, while companies' balance sheets could be hit by £30bn," he said.
This would be explained by the fact the return a company currently expects to earn on its investments is credited to profit.
With the new standard, the credit to profit will be calculated using the discount rate, which is based on the yields on AA-rated corporate bonds and is usually lower.
LCP said Royal Dutch Shell, BT and BP were among those companies facing the biggest drops in profits - of £395m, £345m and £310m, respectively - under the new IAS19 standard.
However, its report also estimated that the new standard would help companies improve their risk approach and emphasise the need to "beef up" their pensions disclosure.