This bulletin looks at (i) changes to accounting standards coming into force in 2013 which could result in greater pension deficit liabilities for companies operating defined benefit schemes, (ii) potential reliefs which could arise from the Chancellor's Autumn Statement announcement that there will be a consultation on the methods used by The Pensions Regulator to measure the financial health of pensions schemes, and (iii) a quick summary of some further key points arising from the Chancellor's Statement
Changes to pensions schemes: the end of the "corridor approach" and Chancellor's Relief
Revisals to IAS 19 and the end of the "corridor approach"
The International Accounting Standards Board (IASB) has announced amendments to IAS 19 which will have an effect on European companies reporting under International Financial Reporting Standards (IFRS). From 2013, companies reporting under IFRS, in the UK being those listed companies having their securities traded on an EU regulated market or AIM, will no longer be able to defer recognition in their group accounts of actuarial gains and losses associated with defined benefit schemes.
The revisions will bring an end to the "corridor approach". Recognising that, in the long-term, actuarial gains and losses could offset each other, IAS 19 presently legislates that companies do not have to recognise all such gains and losses immediately. Currently, accumulated unrecognised gains and losses can go unrecognised unless they exceed 10% of the defined benefit obligation or the fair value of plan assets, whichever is greater.
From 2013, however, all changes in the value of defined benefits plans must be recognised immediately as they occur. Companies will be obliged to provide enhanced disclosures about defined benefits and the way in which termination benefits are accounted for will be modified. This includes distinguishing benefits provided in exchange for service from those provided in exchange for the termination of employment.
The end of the "corridor approach" is expected to impact on senior executive compensation which is based on profit and loss results as well as on the investment strategies of defined benefit pension schemes, which companies may want to, for example, remove volatility in order to reduce the gains and losses they have to recognise on an annual basis.
Autumn Statement - Chancellor's Relief
In response to regulatory changes (including the above revisions to IAS 19) which have the potential to increase company deficits, the Chancellor of the Exchequer, in his Autumn Statement issued last week, has provided some relief for companies, announcing that The Department for Work and Pensions is to undertake a consultation in 2013 on the methods used by The Pensions Regulator to measure the financial health of pensions schemes.
The consultation will consider whether to enable companies undergoing valuation to smooth asset and liability values, taking a longer term approach to projected returns than under the current methods. Allowing a company to smooth asset and liability values potentially will show pension shortfall deficits at a lower value than using current valuation methods, resulting ultimately in a reduced employer contribution liability.
The Government's stated intended outcome of the consultation is to ensure that defined benefit pensions regulation does not act as a brake on investment and growth. Such smoothing of asset and liability values and any subsequent reduction in employer contribution liabilities would be expected to remove some of the volatility in the measurement of pensions scheme deficits. This volatility can create difficulties for companies in managing their investment plans and attracting external funding.
Brodies comment
We are hopeful that the consultation will result in the provision of some deficit relief for company accounts not only experienced as a result of the ending of the "corridor approach" for those UK companies reporting under IFRS but for all in the private sector and will also, looking towards anticipated legislative change, provide some relief in the future to those in the charity sector. We agree that, in the current economic climate, smoothing of deficits is sensible and reflects the long term nature of pension schemes and their viabilities.
Other pension changes...
In his Autumn Statement, the Chancellor made further pensions announcements, including:
- A reduction in the lifetime allowance for pension saving from £1.5m to £1.25m and the annual allowance from £50,000 to £40,000, both from April 2014. A fixed protection regime will be offered to individuals to prevent any retrospective tax charges from reducing the lifetime allowance.
- An increase in the capped drawdown limit for pensioners of all ages with these arrangements from 100% to 120% of the value of an equivalent annuity.
- An increase in the basic state pension by 2.5% from April 2013.
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