Pension freedoms could add £25bn to accounting costs
Pension freedoms could add £25bn to the accounting costs of UK companies if no action is taken, a Xafinity Punter Southall study reveals.
The consultancy's accounting for pensions report, published today, analysed the accounting assumptions of 155 pension schemes ranging in size from £10m to £5bn as at 31 December 2017.
The report found that accounting assumptions do not reflect the impact of members leaving defined benefit (DB) schemes to take advantage of the new pension freedoms - noting these transfers can increase a typical pension scheme's liabilities but warning that most companies did not reflect this in their assumptions.
Xafinity Punter Southall principal Wayne Segars explained: "Transfer values remain high and this is an attractive proposition for members, but these values are typically worth more than the accounting cost.
"A £500m scheme even a small proportion of members leaving could add £7m to their accounting liabilities."
However, the report also found that recent changes to life expectancy projections could reduce pension accounting liabilities - noting the latest study on life expectancy published by the Continuous Mortality Investigation unit of the Institute and Faculty of Actuaries in March, provided further evidence that the low level of recent improvements in longevity may be due to medium or long term influences, rather than being a "short-term blip."
Segars added: "We may no longer be expected to live as long as we had hoped and the CMI has given companies a method to refine assumptions on life expectancy. This may offset the cost of member options."
He concluded that small changes in approach could substantially change pension scheme deficits and urged finance directors to act now - engaging with scheme trustees to "understand the impact on members and the pension scheme funding," and make an "informed decision" on whether or not to reflect new information on the changes to life expectancy.
Segars said: "We would suggest that more information on the impact of discount rate methods needs to be disclosed in financial statements.
"This will be very important to help shareholders understand and compare pension risks, especially if there are further legislative changes in the future, for example changes to funding as suggested in the government's recent White Paper on DB pensions."
More on Defined Benefit
Phoenix launches ESG DC default solution
Phoenix Group will launch an ESG defined contribution (DC) default solution for pension fund clients of its Standard Life Assurance business and their scheme members.
Industry Voice: Beyond the pandemic
Newton’s Curt Custard considers the investment outlook for 2021 and the implications for DC schemes
Trustees have 'false confidence' in their scheme strategies
Nearly every trustee is confident of the next stage in their scheme’s strategy, despite almost an equal number being forced to consider replacing plans within the prior 12 months, according to research by Barnett Waddingham.
Master trust investments 'more sophisticated' but 'growing pains' hinder progress
Master trusts’ investment strategies have grown and become more sophisticated over the last three years, but “growing pains” are hindering progress, according to the Defined Contribution Investment Forum (DCIF).
Companies overstate liabilities by £60bn amid Covid deaths
Companies could be overstating their pension liabilities by up to £60bn due to their life expectancy assumptions, according to XPS Pensions Group.
