Accounting for Pensions Survey 2002
Detailed analysis of SSAP24 disclosures


Although much attention is inevitably focused on FRS17, it is the SSAP24 numbers that are generally still being booked in company accounts. Adequate disclosure therefore remains essential. Disclosures We analysed and scored the disclosures of 83 companies, as listed in Appendix 1.

For this purpose, we excluded the following:

  • eight FTSE 100 companies who had no evidence of significant defined benefit provision;
  • one company that did not report pension costs under UK generally accepted accounting principles (Shell);
  • Billiton, Brambles Industries, Old Mutual and South African Breweries, which are essentially overseas companies who have chosen to be quoted on the London Stock Exchange;
  • Lattice, mm02 and Powergen, who did not produce a report in 2001; and
  • WPP, as they followed the ASB's encouraged practice by fully adopting the requirements of FRS17 in their 2001 annual report. Their FRS17 disclosure provided all of the items expected.
We have analysed the disclosures in a similar way to previous years.

All companies have earned a starting score of 10 for the basic items of disclosure. We believe that there are four key additional items that have to be disclosed for a full understanding. We set these out below, with an explanation of the attaching “score”.
  Disclosure required

 Score
Asset
valuation method		 Assets may be taken into account in two ways.

The traditional method in the UK has been to discount future income. We refer to this as the “discounted income” method.

The alternative is to take the assets at market value, or sometimes at a smoothed market value. We refer to such methods as “market value” methods.

For companies using a discounted income method, we were looking for disclosure of the dividend growth assumption, as this has a very important impact on the results. Better still is disclosure of the actual value placed on the assets.

For companies using a market value method, we were looking for a statement that the assets were indeed taken at market value, or if not, what market-related value of assets was used.

A market value method looks quite different to a discounted income method. Where it appeared that a market value method was used, but we were unable to draw a firm conclusion, we awarded 3 rather than a full score of 5. This reflects a failure to comply with the SSAP24 requirement (in paragraph 88h) to state the actuarial method used.

 5 or 3
Pension increases The assumed rate of pension increases is necessary for a full understanding, but there is less variability of cost from this assumption. 93% of companies disclosed this item, which is comparable to last year's survey (94%).

 1
Split of
regular cost
and variation		 The regular cost is the ongoing cost to the company of providing the benefits of the pension scheme ignoring surplus or deficit. Disclosure of this item is, therefore, very helpful and it is notable that a split is required under FRS17. 54% of companies separately included this compared with 47% who did so last year. This is a slight increase on last year, even though it remains disappointingly low.

 2
Method of spreading The actual pension cost will be lower or higher than the regular cost, on account of spreading the surplus or deficit. There are a number of ways this can be done, and each spreading method gives a different pattern for future pension costs.

45% of companies disclosed the spreading method compared to 57% last year, which is a disappointing decrease.

This gives an aggregate score from 10 to 20. A full list of each company's score is set out in Appendix 1. The spread of scores is set out below.

 2
Scores Chart: Scores
The top score (20) was achieved by an impressive 26 companies this year; their details are listed in Appendix 1.

Of the companies included in last year's survey, eight improved their score this year whilst nine achieved a lower score this year. (The scores for the remainder were unchanged.)

Four companies achieved a score of only 11 this year. These are: British Land Company, Compass, International Power and Man Group.

Whilst these disclosures were disappointing, there are perhaps mitigating circumstances. We note that the pension schemes of Compass and International Power are very small relative to the size of the sponsoring company (details in Appendix 3). Furthermore, British Land Company and Man Group have now produced clear and informative FRS17 disclosures as at 31st March 2002.
Celltech Celltech, the only company to score 11 last year, improved their disclosure considerably to score the maximum 20 this year. Whether this was a direct response to our survey or not, we were struck by the marked improvement.
Impact on Profits 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 Allied Domecq showed a pension credit (addition to profit) of over 5% of total profits.
Standards
slipping under
SSAP24		 The average score this year was slightly lower than last year. This is possibly due to the fact that attention has perhaps inevitably been focused on FRS17 this year and is also partly attributable to the new entrants to the FTSE 100 providing, on average, less full disclosure than the “old hands”.

For example, Daily Mail, who scored 20 in last year's survey, slipped to 18 this year because they omitted one key sentence breaking down the expense components - perhaps in order to create space for their comprehensive FRS17 disclosure.

However, others provided expansive notes. For example, BAT dedicated no fewer than four pages of their accounts to pensions.

While SSAP24 continues to form the basis of the primary statements we would expect to see at least the same level of attention paid to the SSAP24 disclosures as in previous years.