Accounting for Pensions Survey 2002
Introduction and main findings


  In this survey we analyse the pension cost disclosures in the companies comprising the FTSE 100 index as at 1st January 2002, looking at accounting periods ending in 2001.

The companies making up the FTSE 100 index change over time - eighteen companies were new in 2001. Comparisons must be handled with care, but general trends are still evident.
Average cost The average pension cost disclosed in 2001 (under SSAP24) for all companies was a little under 6% of pre-tax profit. Their annual pension cost of just under £3½ billion equates to less than £900 pa for each employee.
SSAP24 vs FRS17 The existing accounting rules, set out in SSAP24, continue to form the basis of the figures included in the primary statements. Its replacement, FRS17, remains in its transitional phase and merely requires additional items of information to be disclosed in the notes to the accounts.

For the first time in the nine year history of the LCP survey, the average standard of disclosure under SSAP24 has slipped, albeit only slightly. This may be because companies have devoted more time to the new FRS17 figures. In addition, the average score has been reduced slightly by those entering the FTSE 100 index in the year and the continued shift towards market-based valuation methods has not, in many cases, been well explained.
Accounting aims SSAP24 has been in existence for fourteen 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. In practice, insufficient disclosure has left UK pension accounting shrouded in a veil of mystery.

For those who understand the new FRS17 disclosures, this veil is now being lifted. FRS17 aims to give “adequate” disclosure. It is certainly adequate by volume, but concerns remain that undue credence will be given to the effect of incorporating FRS17 figures into the financial statements.

Under SSAP24, the assumptions adopted merely dictate the pace at which cost is recognised in the company’s profit & loss account. Any variation between experience and the assumptions is charged against profit in subsequent years.

This contrasts sharply with FRS17, under which the cost to be charged to the profit & loss account is directly determined by the assumptions made. If experience turns out to be more favourable than assumed (for example through high investment returns) this creates a gain. Conversely, poor experience creates a loss. Under FRS17, gains and losses feed into the Statement of Total Recognised Gains and Losses (“STRGL”), rather than impacting on the profit & loss account.
Interpreting FRS17 disclosures Under FRS17, a measure of the surplus or deficit in the pension scheme appears directly on the balance sheet for the first time.

In our interim 2002 survey, published in May, we noted that the FTSE 100 companies reporting in 2001 had disclosed an overall surplus of some £5 billion under FRS17. We estimate that if these companies had all reported in mid-July 2002 they would have disclosed a combined deficit of around £25 billion. However, to put this figure into context, the total net asset value of the same companies is of the order of £300 billion.

This change, due primarily to the fall in equity markets, looks alarming and if pension funds had to liquidate all their assets tomorrow it would represent a major issue. Realistically, however, pension funds are long-term commitments and the snapshot value of the position by reference to current market values is of limited importance. Indeed, if the assumed future equity returns are actually achieved then the deficit may never materialise.

Snapshot figures may be of interest to shareholders and analysts. However, for the members of pension schemes the FRS17 disclosures will, all too often, generate confusion. Of far greater importance for the members of schemes is the sponsoring company’s commitment to continue supporting their scheme, which cannot be ascertained from bare statistics.
Variations in assumptions The assumptions used for SSAP24 should, overall, represent a “best estimate”. However, a number of scenarios may be considered reasonable, and this and previous surveys show that in practice companies use a wide range of assumptions to determine cost.

FRS17 goes further than SSAP24 in requiring that each individual assumption should be a best estimate. We have found that best estimates still vary from company to company, particularly the estimate of the future return from equities. This is discussed in Section 6.
Some poor disclosures Some FTSE 100 companies still make inadequate disclosure under SSAP24. The lowest scores were obtained by British Land Company, Compass, International Power and Man Group.

However, the additional FRS17 disclosure information means that SSAP24 disclosure is less critical than it used to be. Moreover, for some of these companies the pension commitment is small relative to the size of the company, meaning that the pension disclosure is of limited importance.
Balance sheet entries The pension cost under SSAP24 and the actual company contributions can differ considerably. Any excess of cost over contributions accumulates to form a provision in the balance sheet; any excess of contributions gives rise to a prepayment.

Large prepayments, or assets in the balance sheet, appear for BP Amoco (£1,235 million) and Lloyds TSB (£768 million). Conversely, Unilever (£750 million) and British American Tobacco (£581 million) held large provisions, or balance sheet liabilities, in respect of retirement benefits.
Winners and losers under FRS17 If implemented, FRS17 will affect balance sheets in different ways for different companies. BP Amoco’s balance sheet asset under SSAP24 of over £1.2 billion would have been replaced by an FRS17 asset of almost £1.5 billion, a substantial increase in overall balance sheet value.

ICI disclose an asset under SSAP24 of £320 million. Under FRS17 this would have become a liability of £355m, a net decrease in balance sheet value of £675m. Whilst the numbers are not huge in the context of the pension scheme, this cannot be good news for ICI’s balance sheet.

Next year, when many companies have produced their second disclosures under FRS17, we will also be able to analyse its impact on the profit & loss account.
Early adoption FRS17 was originally brought in during 2001 to replace SSAP24 over the period to 2003. However full implementation now looks set to be delayed or even scrapped, which is discussed in Section 3.

Companies have been able, if they wish, to adopt the provisions of FRS17 in full before 2003. Only one of the FTSE 100, WPP, did so in 2001. (BAA have now done so in 2002.)
A heavy
burden		 A volatile FRS17 result can severely impact on balance sheet values and reported profits, particularly where the pension scheme is large in relation to the size of the sponsoring company. We discuss this in more detail in Section 6.

Industry responses to FRS17 have been mixed. The disclosure is clearly valuable and some believe that the FRS17 numbers are more representative of the true position than the SSAP24 numbers. However, it has been touted by some as the last straw for defined benefit pension schemes and many companies have already switched to defined contribution arrangements, although not solely on account of FRS17.