Consulting Actuaries

FRS102 impact on DB schemes

Royal London Consulting Actuaries

3 March 2014

In Summary

  • FRS17 will be replaced by Section 28 of FRS102, for accounting periods beginning on or after 1 January 2015.
  • Potentially higher Profit & Loss charge, so a reduction in company profits, for schemes investing in equity and property type assets.
  • New pension disclosures are shorter for the majority of companies.
  • Surpluses may be easier to recognise as an asset in the company accounts.
  • Recovery plan contribution commitments may need to be recognised.
  • Potentially fundamental accounting changes for pension schemes with several participating employers.

The Financial Reporting Council has completely rewritten the UK financial reporting standards and will be removing FRS17, along with all of the other current FRS’, for accounting periods beginning on or after 1 January 2015. They will be replaced by only three standards; the relevant part for defined benefit pension schemes is Section 28 of FRS102. The new standard will more closely mirror the International FRS and more specifically IAS19.

The new standards will first appear in your company financial statements for years ending on or after 31 December 2015 (although earlier adoption is permitted). The prior year results will also need to be restated in the new format. It is therefore necessary to consider how changes to the standards will affect your company sooner rather than later.

Impact on Profit & Loss

A change to the finance cost may mean higher charges go through the Profit & Loss account.

The finance cost in the FRS17 disclosure is currently split between interest on the liabilities and an expected return on assets. The interest on the liabilities is derived using the discount rate and the expected return on assets uses a long term expected rate of return based on the asset allocation of your scheme, which tends to be higher than the discount rate. In future this will be changed so that both items are calculated using the discount rate, which is based on corporate bond yields.

For a typical scheme with a reasonable proportion of return seeking assets, like equity and property, this will tend to push up the cost going through the Profit & Loss account. The potentially larger gain on assets would be recognised through Other Comprehensive Income (the new name for the ‘Statement of Total Recognised Gains and Losses’).

Changes in approach

For schemes that are closed to future accrual, or have only a few active members left, it can be difficult to recognise a current surplus under FRS17. If your scheme rules give the company an unfettered right to a refund of any surplus then you may now be able to recognise some, or all, of your surplus on the balance sheet. You may need to seek legal advice to understand if the company has such an unfettered right.

It is looking increasingly likely that the new standard will require recognition of future commitments made by the Company to pay recovery plans contributions agreed with the Trustees. This could mean putting an additional liability into your financial statements to recognise these future payments.

Click to read more on IFRIC 14.

Group Schemes

Where a company is part of a wider corporate Group, the individual companies participating in their Group pension scheme may for the first time need to recognise a cost in their financial statements.

  • If there is a recognised agreement or policy on how to allocate the costs of a defined benefit scheme between the individual entities, then these costs should be recognised in the accounts of each individual entity.
  • If there is no legal agreement or policy, and all participating individual entities are under the common control of a Group entity, then the cost of the defined benefit Scheme should be recognised in the financial statements of the Group entity which is legally responsible for the Scheme. The other individual entities then recognise only the contributions payable in the financial period.

Multi-Employer Schemes

Where the individual companies participating in a pension scheme are unrelated, each company can continue to account for pension costs on a defined contribution basis. However, if the company has committed to fund contributions towards a deficit in the scheme then the current value of all future deficit contributions should be recognised as a liability on the balance sheet.

So for example if your company participates in the Local Government Pension Scheme and you have signed up to a recovery plan to address a deficit then you will now need to recognise this in your company accounts.

Find out more

If you would like to find out more detail on any of the above topics or if you have any questions please contact us.

We are also able to provide you with an example of how the new standard may affect your company accounts.