I already disclose my defined benefit pension obligations under FRS 17
If you already disclose under FRS 17, there are two main areas that will affect you on a move to FRS 102:
- Your pension cost may increase, as you are no longer permitted to take advance recognition of asset returns;
- If you are part of a Group, with other employers that have not disclosed under FRS 17, you may wish to consider consistency of disclosure across the Group.
Under FRS 102, you are no longer permitted to take advance recognition of asset returns. Depending on your investment strategy, you may therefore see an increase in your pension cost.
Have a look at our case study 1 to see an example of how this may work in practice.
How can I reduce the impact?
You can reduce your pension cost by reducing the deficit in the Scheme. Your deficit can be reduced by:
- Paying additional contributions
- Obtaining higher investment returns
- Using ‘bespoke’ assumptions to value the liabilities. Adopting ‘bespoke’ assumptions that better reflect the characteristics of your scheme can often result in a significant reduction in liabilities.
Under FRS 17, there is an exemption that allows employers in non-associated multi-employer arrangements to account for their schemes on a defined contribution basis by recording the contributions paid to the Scheme in the P&L account – no allowance is made for any liability that may exist in the balance sheet.
Under FRS 102 this is no longer an option and employers will have to disclose any liability that may exist. There are two options:
- Prepare a full accounting disclosure;
- Record the present value of any future deficit contributions payable to the Scheme in the balance sheet, and allow for interest accruing on the deficit over the year in the P&L.
For employers participating in a Group, consistency between organisations is important and can often streamline the annual accounting process. Employers should therefore consider implementing an agreed practice across the Group.
This may involve:
- Agreeing one set of ‘bespoke’ assumptions to be used consistently across the Group;
- Applying the same accounting practice across the Group i.e. full disclosure or present value method
Have a look at our case study 2 to see a recent example where we helped a client achieve consistency across the Group.
If you would like to discuss any of these options please do not hesitate to get in touch.