Accounting for Pensions Survey 2001
FRS17 to replace SSAP24


  Over the coming three years, SSAP24 will be progressively replaced by the new accounting standard FRS17. The initial requirement, to include a specific balance sheet related disclosure in the notes to the company accounts, is compulsory for the next set of accounts to be published.

No FTSE 100 company has adopted FRS17 for its 2000 accounts, which is hardly unexpected. However, Lattice have provided some FRS17 results. Subsequently, Boots and BAA (with year ends of 31st March) have published their 2001 accounts and these included some details of the impact of the new standard. Each of these disclosures is discussed below.

The initial FRS17 disclosures, which are required for any company year end from June 2001, will be analysed in next year's survey. This will be a key change, not least because a fuller disclosure is anticipated under FRS17 than was ever envisaged under SSAP24.
Lattice Lattice provided a separate note to their accounts regarding FRS17. It states that a discount rate of 5.4% has been adopted and that the surplus would be "in the range of £1.2bn to £1.4bn". Whilst such a range appears vague, it highlights the fact that actuarial results are only point estimates in a spectrum of possible figures and no one figure should be given credence to the exclusion of all others. Whilst actual FRS17 disclosures may not be expressed in such ranges, perhaps a sensitivity analysis would be beneficial - for example, reporting the effect on the balance sheet of a small change in discount rate.
BAA Even the initial requirements of FRS17 did not have to be implemented for an accounting year end before 23rd June 2001. BAA, however, have chosen to take a slightly accelerated approach for their 31st March 2001 accounts. They are adopting the three-year phased implementation of the new rules, but one year earlier than required. For BAA, the balance sheet figure under SSAP24 was nil, but it would have been almost £400m under FRS17. Whilst this improvement in the disclosed position would have been known at the time the decision to early adopt was taken, who knows where the stock markets, and hence the balance sheet, will be next year?
Boots Boots have provided some details in their 31st March 2001 accounts. They state in the main section of their report that the balance sheet surplus would have been £250m under FRS17 and we note that this is almost identical to the existing balance sheet figure elsewhere in their accounts. However, Boots gave no details of the actuarial assumptions used to arrive at either this figure or the pension cost. We note that the impact of FRS17, based on their figures, would have been to reduce operating profit by £65m. We wonder whether the market would have reacted to the publication of Boots' results in the same way if the FRS17 pension cost had been included in the headline totals, rather than simply disclosed.

As typically applies for UK funds, under FRS17 there would be a moderate credit for net investment returns further down the Profit and Loss account. This amounts to £20m to mitigate the £65m hit to operating profit. Therefore, in aggregate, total disclosed profit would decrease by £45m and yet, fundamentally, there is no change to the profitability of the company. Opinions will vary as to which figure is closer to the true cost - however, whilst few actuaries endorse all of FRS17, the extensive disclosures will allow them to better understand the pension commitments of a company from their published accounts.
Impact of
FRS17		 We expect that the pattern of results illustrated by Boots will be mirrored in many other FTSE 100 companies. General observations include:
  • operating profits will be hit hard - as they are charged a potential overstatement of the true cost of pensions;

  • these will be mitigated by credits in the interest line of the Profit and Loss account;

  • large items will appear in the Statement of Total Recognised Gains and Losses ("STRGL");

  • balance sheet figures will be volatile from year to year and, depending on market conditions on the balance sheet date, may be similar to or wildly different from the previous SSAP24 item.
The importance of this balance sheet item must not be underestimated. A sufficiently large FRS17 deficit could lead to a company being unable to distribute a dividend. In such circumstances the directors may well feel that the final salary pension scheme was simply too much of a thorn in the side. We discuss in section 5 the steps already being taken to find alternatives to the traditional pension scheme and FRS17 will only accelerate that trend.

Below we have estimated the potential impact of FRS17 for two companies based on the figures published under the US accounting standard, FAS132. There are limitations to this approach, outlined in Appendix 3 along with a comparison of FAS132 and FRS17, but we believe the figures give insight into the magnitude of the figures to come.
BT At 31st March 2000, under SSAP24, BT held a balance sheet provision of £629m in respect of pensions. This represented an accumulation of SSAP24 pension costs over actual contributions to the pension scheme.

Under FRS17, the balance sheet item is a snapshot of the surplus at the balance sheet measured under prevailing market conditions. Many actuaries argue that the market value of the scheme's assets on a particular day is not an appropriate measure for comparison with the long term liabilities. However, in these particular circumstances, the FRS17 deficit implied by BT's disclosure would be a provision of around £1bn, which for a company the size of BT's is not a significantly larger balance sheet provision than the corresponding SSAP24 figure.

BT's reported pension cost under SSAP24 was £167m in 2000. Under FRS17, the corresponding pension cost might comprise an annual service cost of around £500m plus costs of termination benefits of around £260m, mitigated by around £140m of net investment income; a total charge to profit of £620m, which is over three times the SSAP24 cost.
Glaxo-SmithKline The story for GlaxoSmithKline starts similarly. They showed a balance sheet liability of approximately £900m at 31st December 2000. However, the effect is very different. Under FRS17, this could become a surplus of more than £300m! This would be directly represented as a balance sheet asset and hence a balance sheet movement of well over £1bn.