Accounting for Pensions Survey 2001
Introduction and main findings


  This is our eighth annual survey in which we analyse the pension cost disclosures in the companies comprising the FTSE 100 index as at 1st January 2001, looking at accounting periods ending in 2000.

The companies making up the FTSE 100 index change over time - sixteen companies were new in 2000. Comparisons must, therefore, be handled with care, but general trends are still evident.
The aim of SSAP24 SSAP24 has been in existence for thirteen years. It is supposed to ensure accounting for pension costs on a systematic and rational basis over the employees' careers with sufficient disclosure of the assumptions used to allow informed readers of the accounts to understand the accounting treatment.

The assumptions used should in all cases be a "best estimate" by an actuary. However, a number of scenarios may be considered reasonable, and our surveys have shown that in practice actuaries have used a wide range of assumptions to determine cost. Different assumptions can dramatically affect pension cost. For example a 1% reduction in the assumed investment return on its own could increase the pension cost by typically 20-30%, yet our survey shows a range of over 2½% for the assumed investment return!

It follows that full disclosure of the assumptions used to calculate the pension cost is essential if accounts are to be of any help to the users. Our survey reveals the extent to which this has happened.
FRS17 A new accounting standard, FRS17, will gradually replace SSAP24 over the period 2001 to 2003.

FRS17 is expected to:
  • fundamentally change the way pension assets are represented on the company balance sheet;

  • greatly improve the level and consistency of disclosure regarding company sponsored retirement benefits;

  • significantly reduce the operating profits of some FTSE 100 companies by charging a potential overstatement of the pension cost; and

  • severely reduce the opportunity for companies to use pension surplus to pay for benefit improvements.
Market value
methods		 Typically, very different sets of assumptions are used under a market value method, relative to a traditional valuation. Our examples, shown in section 4, show that the discount rate is generally lower for a market-based valuation. One consequence of this is an increase in the value of the regular cost - the value placed on benefits currently being earned by employees.

Moving to a market value method also brings with it an increase in the volatility of the pension scheme surplus (or deficit) from one valuation date to the next. Whilst this volatility is currently tempered by the smoothing mechanisms inherent in SSAP24, it will flow directly through to the accounts under FRS17.

Twenty seven companies now use a "market value" method to determine their pension cost under SSAP24. This is an increase over previous years, and might be taken to reflect the move towards market values inherent in the new accounting standard, FRS17. However, there is a wide variety of market value approaches, and many are not consistent with FRS17 in the way they measure the liabilities.
Significance
of pension
cost		 The average pension cost for all companies was 5% of pre-tax profit. However, the pension cost as a proportion of pre-tax profit can be very high for those companies declaring a low level of profit; relatively small changes in terms of the pension scheme can then severely impact on profitability. In some cases pension costs can be very low, or even an addition to profits; for example BG (British Gas) and Exel showed pension credits (additions to profits) of over 5% of total profits.
Continued improvements Our eighth survey shows another significant improvement in disclosure, which is encouraging. Whereas a year ago thirteen companies disclosed every item we believe to be necessary (up from nine the year before that), this year twenty five companies did so.

Abbey National, Royal & Sun Alliance and Scottish Power all improved their scores from 11 last year to the maximum of 20 this year.

We are pleased to see these continued improvements, even in the dying days of SSAP24, but this level of disclosure has come too late to save it.
Some
persistent
poor
disclosures		 Nevertheless, a small number of FTSE 100 companies continue to make inadequate disclosure of pension cost assumptions. We believe that a minimum disclosure level is that represented by a score of "16" on our ranking. Eight of the relevant companies scored lower rankings than this: BAT, Celltech, ICI, Land Securities, Marconi, Powergen, Spirent and Vodafone. Whilst mitigating circumstances apply for some of these companies, we look forward to finding out more about these pension arrangements under the extensive new disclosure requirements of FRS17.
Balance sheet entries The pension cost under SSAP24 and the actual company contributions to the pension arrangement can differ considerably. Any excess of cost over contributions accumulates to form a provision in the balance sheet; conversely, any excess of contributions over cost gives rise to a prepayment. Most companies disclosed some provision or prepayment; in a few cases they were very substantial.
Prepayments Large prepayments, ie an asset in the balance sheet, appear for Lloyds TSB (£768 million) and ICI (£475 million).
Provisions Large provisions in respect of retirement benefits were held by Unilever (£678 million), GlaxoSmithKline (£896 million), HSBC ($832 million) and BT (£629 million). These provisions can move in either direction under the new standard. For example, a comparable FRS17 figure for BT might be a larger provision of over £1bn, whereas GlaxoSmithKline might have switched to an asset of over £300m. The source of these figures, and discussion of their limitations, is provided in section 3 of this report.