According to global HR consulting firm Aon Hewitt, the changes to pensions accounting standards currently proposed by the International Accounting Standards Board (IASB) could take more than £25 billion off the balance sheets of FTSE 350 companies. In addition, they risk ‘losing’ up to £1 billion from their annual profits.
About 25% of FTSE 350 companies have an accounting surplus in relation to their pension scheme that is recognised on their balance sheet. Under the proposed changes to the IFRIC14 guidance that supports the international accounting standard IAS19, this surplus would no longer be recognised unless there is a realistic expectation that the company will eventually be able to have access to the surplus. This would have a significant impact on balance sheet calculations. Simon Robinson, principal consultant at Aon Hewitt, explains: “The big change being proposed, is that in the future, when assessing the funding position of a pension scheme, companies will have to take into account the expected behaviour of the trustees. This means that they will need to recognise trustees’ potential future actions, such as de-risking exercises, that might reduce the calculated accounting surplus.”
If the reform is accepted, the impact on FTSE 350 companies could be massive, warns Robinson. “We expect that most companies with schemes which already have a surplus, will not be able to recognise it under the new proposal – which would reduce the balance sheets by £8 billion. However, the proposal also affects companies committed to ongoing deficit contributions that are currently expected to deliver an accounting surplus in the future. These contributions would now need to be recognised as liabilities on corporate balance sheets which would amount to a further £20 billion hit for FTSE 350 companies.”
The impact will not be confined to balance sheets. It will also negatively affect the P&L account of companies by increasing the finance charges relating to pension schemes – “these will rise by more than £1 billion each year across the FTSE 350,” says Robinson.
Although the proposal still is in an early stage – implementation is not expected to commence prior to at least 1 January 2017 – Aon Hewitt recommends organisations to bear them in mind in current funding discussions. “Companies should already start looking for ways to manage this,” concludes Robinson.