While dramatic events unfold on the world stage an interesting skirmish has been developing between the actuarial and accounting professions in the UK.
PRAG (The Pensions Research Accounting Group) has published a consultation paper on whether occupational pension plan financial statements should in future include actuarial liabilities. At present, they relate only to assets but are published along with a trustee report which may give some liability information and with copies of specific statutory funding certificates.
The drivers for this move appears to be an unresolved inconsistency between pension scheme accounting and generally accepted accounting practice and a desire for convergence with international standards. The real issue however is what information should be conveyed to members and how best it can be provided. So far, as the security of the members’ benefits is concerned, the key questions for members are in my view:
o Are the assets sufficient in relation to my benefits and if not, what is being done to improve the position?
o How am I affected if assets are insufficient?
o What confidence can I have that the assets will be sufficient to meet my benefit when it eventually falls due?
These are obviously complex questions that demand a detailed and helpful answer. The actuarial profession recognises there is scope for improvement in trustee awareness and are already reviewing guidance for actuaries accordingly.
Even if the principle of inclusion is accepted, it is far from clear what information should be put in the financial statement to deliver a true and fair view. The minimum funding requirement (MFR) standard is an obvious candidate as this will in many cases but not all define the limit of an employer’s liability to the plan. Alternatively, should the financial statements reflect the position on winding up at the accounting date or possibly reflect (as does FRS17 and its requirements for company accounts) the fact the scheme is continuing and liabilities are linked to future salary growth. There are practical difficulties with each approach. MFR is due to be scrapped. Many schemes are quite possibly incapable of being wound-up as the capacity for securing the benefits just does not exist and cannot be determined with precision. The costs of preparing and auditing a full set of figures on valuation funding assumptions and annual reconciliations would clearly be quite significant.
We are all expecting, with the abolition of MFR, a new statutory requirement for the adoption and implementation of a scheme specific funding standard set out in a document at least available if not issued to all members. This would seem to offer an ideal opportunity and challenge to give members a rounded appraisal of the funding position, the funding strategy and the broad implications for individual members in a far more accessible form than will ever be delivered by financial statements.
So which approach will prevail? The consultation period has concluded, many of us would say the way forward should be determined on the basis of an honest cost benefit analysis. We shall see.
Rodney Jagelman is director of corporate affairs at Gissings in London. He represents Gissings on the management board of the ASINTA network