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IPE special report May 2018

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UK roundup: Aon Hewitt on IAS19, LGPS 2014 proposals

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  • UK roundup: Aon Hewitt on IAS19, LGPS 2014 proposals

UK - Aon Hewitt has called on UK companies to review their accounting assumptions in light of the revised IAS19 standards, expected to come into force in January 2013.

According to the consultancy, the changes to IAS19 mean companies will be unable to record a profit on the expected return on their pension scheme investments.

Aon Hewitt warned that, even though the changes are unlikely to have a major effect on the accounting deficits of UK defined benefit (DB) schemes, they will have a "significant" impact on the profit and loss charge of individual companies.

These changes will increase profit and loss charges annually for UK businesses by £10bn (€12.6bn) in total, according to the consultancy, which is now recommending companies review their accounting assumptions, as this can help lower their P&L charge and balance sheet liability.

Simon Robinson, principal, said: "While the majority of companies will make a reasonable best estimate for the key assumptions such as life expectancy, there are a number of ancillary assumptions such as retirement patterns, or the proportion of members with spouses, on which they may unintentionally be taking a 'prudent' view."

As an example, Aon Hewitt cited the case of a DB pension scheme with liabilities of £1m and assets of £975,000 undertaking a review of its demographic assumptions.

"Assuming those assumptions lead to a 5% overstatement of the liabilities, removing the 'prudence' could result in the liabilities reducing to £950k," it said.

"So the balance sheet item would change from a deficit of £25,000 to a surplus of £25,000. The net interest item in profit and losses would change from a charge to a source of profit."

In other news, changes to the local government pension scheme (LGPS) have received widespread approval from affected unions and employers following "tough" negotiations.

Speaking of the "great anger and frustration" caused by initial government proposals that would have seen contribution rates increase above the level agreed in late summer, national secretary for public services at union GMB, Brian Strutton, said his members had spoken "loud and clear" by accepting the new scheme with 95% of the vote.

"The new LGPS 2014 proposals represent a fair and balanced outcome, which means the pensions scheme will remain affordable and sustainable," he said.

"GMB members have recognised this as shown by the overwhelming vote in favour."

The two other main public sector unions, Unison and Unite, representing around 2.7m workers, saw their membership accept the changes by 90% and 84%, respectively, while 93% of employers voted in favour of the change.

Strutton added that, following the "unique" agreement, it was important to develop better governance within the public sector's funded pillar.

This would "ensure value for money, performance improvement and cost stability going forward," he said.

The chairman of local authority umbrella group LGA, Sir Merrick Cockell, added that the scheme now had a "viable long-term future".

"The overwhelming level of support for these proposals is very encouraging, and demonstrates the commitment among employers in local government to a manageable scheme that gives staff a decent pension when they retire," he said.

The new, post-2014 pension scheme was agreed in July, with contribution increases only affecting those on a salary above £21,000 and a new, half-price option that allows members to pay half the contributions for half the benefits.

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