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IPE special report May 2018

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Pensions risk could lead to use of 'EBITDAP' - LCP

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  • Pensions risk could lead to use of 'EBITDAP' - LCP

UK - Pensions consultancy firm Lane, Clark & Peacock has predicted companies might in future adapt their accounting reports to carry financial results which list pensions activity as an extension of their ‘EBITDA' calculations.

An annual study of the FTSE 100 defined benefit pension plans by the firm - entitled Acccounting for Pensions 2009 - found just 17 FTSE 100 companies disclosed their policy for mitigating their pensions responsibilities going forward, even though 46 firms see pensions as a key risk to their business.

Speaking at the launch of this year's report, Bob Scott, partner at LCP, acknowledged companies may not be paying sufficient attention to their pensions risks at present, but suggested they may feel they need to in the near future as deficits are unlikely to recover at least in the short-term.

Accounting changes could also require them to be cited as contributing to their earnings per share - a key part of a company's performance indicator, he noted.

"What the standard-setters propose to do is make companies' accounts carry pension gains and losses on the profit and loss. [Pensions] are non-cash items but it will be important to understand them. [In the future] we will perhaps see EBITDAP'," said Scott.

At present, Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) is adopted as part of the headline data companies present on their financial results, to demonstrate the company's financial status once non-cash issues are taken into account.

However, that could change thanks to proposals from the International Accounting Standards Board (IASB) which state companies will in future have to place pension plan remeasurements directly in their profit and loss, rather than as the side note currently applied. (See earlier IPE story: Flawed IASB pensions measure to go in P&L)
http://www.ipe.com/news/flawed-iasb-pensions-measure-to-go-in-p-l_30704.php

Were this to happen, a company with significant defined benefit liabilities - and a subsequent deficit - might see their profit and loss data affected by the addition of pension liabilities, so LCP has predicted the EBITDA could in future become ‘EBITDAP' with pensions on the end.

His comments followed presentation of analysis revealing the FTSE 100 companies had a collective pensions deficit of £96bn (€113bn) by mid-July as a result of recent financial market turmoil - double the deficit estimated this time last year.

This shortfall in pensions funding is technically an accounting shortfall driven by the value of a corporate bond discount rate and until now has been paid less attention by analysts because it is not listed within the income statement.

However, had company accounts been calculated to follow the new requirement to include pensions-related losses and gains within income statements, the aggregated report profits of firms reporting in December 2008 would have been "slashed by 70%", according to LCP, from £46bn to £13bn, largely because of the fall in equity markets.

Similarly, corporate bond rates have in recent months lowered and brought the true value of pensions liabilities and assets closer to the IAS19 valuation presented in company reports, so the true deficit levels are now becoming clearer.

Scott has predicted further bad news is likely to be on the horizon for some time - estimating deficits will at best be £20bn in 12 months' time or £100bn depending on market movements.

"Companies reporting this year may have some fairly uncomfortable news to show," said Scott. Companies like ITV are reporting significantly higher deficits, along with BT. Companies are treating these pensions risks fairly, but they are not disclosing them adequately.

Further analysis included within the report showed just three FTSE 100 companies said they still provide access to DB schemes - Cadbury, Diageo and Tesco.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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