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​KPMG survey sees UK DB schemes facing battle over deficits

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Persistently low yields and growth have dogged efforts by UK defined benefit (DB) schemes to improve their funding position, a new survey by KPMG has shown.

According to the consultancy’s 2016 Pensions Accounting Survey, sponsors are continuing to grapple with major balance-sheet deficits, having made little progress to plug the funding gap during 2015.

The report’s lead author, Narayan Peralta, told IPE: “Accounting numbers are fairly stable at the moment, but the underlying position with cash outflows is starting to emerge.

“It may not be a pretty picture unless a scheme has been quite well hedged against rate movements,” Peralta added.

The survey looked at trends in best-estimate assumptions among around 250 of KPMG’s clients with UK defined-benefit schemes at 31 December 2015.

The schemes featured in the study report under International Financial Reporting Standards (IFRS), UK and US generally accepted accounting principles (GAAP) found broadly static assumptions and flat yields have offered little respite to pension schemes over the past year.

Peralta said 2015 only saw a small increase in discount rates, and that investment returns were “fairly flat” across main asset classes.

“The extent to which deficit contributions are being paid into a pension scheme, and in particular the extent to which these exceed interest cost on the liabilities, will have a big influence on the change in the pension balance sheet over the year,” Peralta added.

One other key finding to emerge from the survey is the potential variance between accounting outcomes and funding valuations.

Peralta expected deficits for companies who carried out a valuation in 2015 to be significantly higher than at the previous valuation cycle in 2012.

“Between 5 April 2012 and 5 April 2015, 20-year gilt yields fell by around 1 percentage point, which in itself would increase a typical scheme’s liability measure by 20 percent for a gilts based discount rate.

“So whilst the balance sheet may be fairly benign,” he added, “some corporates will be revealing significant funding deficits over the course of 2016 interim and year end reporting, as they complete 2015 valuation negotiations.”

Meanwhile, the question of IFRIC 14, the IASB’s asset-ceiling guidance, continues to weigh heavily on UK DB sponsors.

In June 2015, the IFRS Interpretations Committee issued an exposure draft proposing changes to the way sponsors account for trustee powers to vary benefits.

Despite pausing the project while the board considered its future work on pensions accounting as part of its agenda consultation, the proposed changes have drawn interest.

That interest spiked when lender Royal Bank of Scotland stunned the markets in January with the announcement that the change would “result in the accelerated recognition of £4.2bn (€5.3bn) of already committed future contributions in respect of past service.”

RBS said the IFRC 14 ED had “provided additional clarity on the role of trustees’ rights in an assessment of the recoverability of a surplus in an employee pension fund.”

The move followed the announcement in November by the UK financial reporting watchdog, the FRC, that it expected UK-listed companies to pay heed to the IFRIC 14 proposals in the run-up to the year’s annual reporting season.

The move raised eyebrows among some in the advisory community who noted that the IFRS IC had yet to finalise the changes in its exposure draft.

Many corporates last analysed their IFRIC 14 position in 2007/8 when the interpretation first emerged.

Since then, auditor views have developed, while actions by the FRC and the Financial Reporting Review Panel have clarified that a recovery plan is a minimum funding commitment.

Paralta said: “A lot of schemes will have had rule amendments in the meantime, which may be of no consequence, but still need to be considered as part of a fresh analysis. Clients may also have changed auditor.”

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