Changes to IAS 19 rules threaten some companies with significant extra balance sheet liabilities

A consultation paper, published on 18 June by the International Accounting Standards Board, proposing amendments to the IAS 19 pensions accounting rules, may result in some companies having to place significant extra pension liabilities on their balance sheet whilst making the prediction of pension costs more complex and unpredictable.

The IASB proposes to amend “IFRIC Interpretation 14” – a document setting out additional rules on IAS 19 – and IAS 19 itself.  Each is examined in turn below.  Consultation closes on 19 October 2015.

The IFRIC 14 proposals are intended to clarify and tighten up complex rules, which in some circumstances require companies to reflect the funding contributions agreed with pension scheme trustees as a liability on the company balance sheet.  These liabilities can be much bigger than the normal IAS 19 deficit figure, causing problems for those companies caught by these rules.

Whether or not a company must show this extra notional liability on the balance sheet depends on the specific circumstances.  Some companies who previously escaped showing these “extra liabilities” (which in practice may be no more than a margin for prudence rather than a genuine liability) could have to show them in future.  Conversely, other companies might benefit from the proposed rules.

Comment

IFRIC 14 is one of the most controversial areas of pensions accounting, which has been identified by the FRC as a key area of focus for company boards.  Whether or not companies show extra liabilities under IFRIC 14 can be a “legal lottery” depending on the detail of pension scheme rules.  The proposed amendments clarify some areas but introduce new uncertainty in others.  Specific advice on the impact will be required for each company in relation to each of their pension schemes.

The proposed changes to IAS 19 itself change the calculation of the pension cost when there has been a special event such as a benefit change, closure to accrual, or buyout.  Specifically, the new rules would require that where one of these events has occurred, triggering a past service cost or settlement, the pension cost from that point in the year onwards should be calculated using actuarial assumptions, including the discount rate, based on financial conditions at the time of the event.

This is sometimes known as the “stop and restart” approach to calculating the annual service cost and interest cost, and is a change from current practice, when assumptions at the start of the financial year, rather than the time of the special event, are generally used.

Comment

The proposed changes to IAS 19 are unlikely to have a materially positive or negative effect and look like unnecessary tinkering with the rules.  They will make the prediction of pension costs more complex and budgeting unpredictable.  We will be urging the IASB to reconsider going ahead with these amendments.

Secondary annuity market – respondents to the consultation highlight many challenges

The deadline for responses to the Government’s call for evidence on a secondary annuity market (see Pensions Bulletin 2015/12) has now passed.  The responses of some of the representative and professional bodies are now available, showing that this policy initiative faces many challenges – particularly in the areas of consumer protection and value for money.

• The Association of Consulting Actuaries spells out a number of concerns, including consumer protection (such as the possibility that vulnerable older people will be pressured into selling up) and that what is intended to be permissive may end up being enforced if annuity providers refuse to allow assignment
• The Institute and Faculty of Actuaries points out the numerous risks of widening the pension freedoms in this manner asking amongst other things that a robust consumer protection regime is put in place and expressing concern as to whether the terms offered by third party annuity purchasers will offer good value for money
• The National Association of Pension Funds is concerned that key structural issues will make it extremely challenging for a fair and balanced market to develop.  In particular, the numbers of sellers is uncertain and is likely to be time-limited, buyers will be wary of adverse selection and will compensate in such a way so as to reduce the value to sellers.  Sellers need protection in the form of independent advice and this will come at a cost, removing further value and the cost of building the infrastructure needed to package and sell such contracts to institutional investors will erode value further.  Even if all these challenges can be overcome it is not clear who will wish to buy annuities and the NAPF’s own membership survey suggests a very limited appetite among pension schemes.  The NAPF also worries that consumer expectations are being set up for a fall
• The Society of Pension Professionals, echoes the comments of others, saying that it considers the proposals for creating a secondary annuity market carry considerable potential risk and costs for potential sellers and for the reputation of retirement provision more generally.  If they are to go ahead at all, they should be done in a cautious way, with robust safeguards and not be given high priority given the resource pressures at HM Treasury and DWP

Comment

From the responses above, it would seem that the Government should think again, but as it has probably already set its heart on delivering it in this year’s second Finance Bill in order that the facility is available from April 2016, it would seem highly likely that the Chancellor will announce a response to the consultation on 8 July (Budget day) with legislation following days later.

DC providers put the ball back into the Government’s court

The Association of British Insurers has written to George Osborne and Martin Wheatley, CEO of the FCA, outlining an action plan to tackle the implementation challenges with the new pension freedoms.

It asks the Government, FCA and related regulatory bodies to take urgent action in nine areas, whilst for its part promising to take action in five.

The key new idea is a proposal to create a ”customer control” mechanism that will allow individuals to access their DC pots without having to pay for advice.  This would take the place of the legislative requirement to pay for regulated advice by an FCA-authorised adviser in one case of “safeguarded benefits” valued at £30,000 or more – where individuals have DC savings with guaranteed annuity rates.

Comment

That the ABI has felt compelled to respond publicly, with a long shopping list, to recently expressed concerns voiced by the Government as to how its DC pension revolution is being delivered, speaks volumes for the hurt that the ABI feels.  Whether anything will come of the ABI’s suggestions for action from Government (some of which have very ambitious timescales) remains to be seen.

Regulator’s survey of DC quality features shows smaller schemes lagging behind the larger ones

The Pensions Regulator’s first survey of the DC quality features amongst trust-based schemes shows that most master trusts and large DC schemes (90% and 86% respectively) have reviewed their governance processes against the Regulator’s 31 quality features set out in its Code of Practice (see  Pensions Bulletin 2013/49), whilst much smaller proportions of medium and small DC schemes (59% and 39%) have done so.

Every master trust and 88% of large schemes surveyed displayed a good knowledge of the quality features.  In contrast, 74% of small DC schemes and 48% of medium ones have little or no knowledge of the quality features.

The survey also shows a similar pattern relating to the April 2015 introduction of new minimum legislative governance standards, with master trusts and large schemes showing the highest awareness of the changes.

The Code came into force in November 2013.  The Regulator has now begun the process of updating it to take account of April 2015 changes in the law and is discussing with its stakeholders how it can make the Code shorter and simpler to apply.

Comment

If the Regulator wishes to see greater engagement with its Code from smaller DC schemes it has to make it much more digestible.  We hope that its plans to shorten and simplify it will bear fruit.

Nine months to go until the end of contracting out

This is the headline in HMRC’s latest countdown bulletin, which amongst other things also warns schemes that they must register to use the Scheme Reconciliation Service before 5 April 2016 if they expect to be able to use it.

Furthermore, HMRC states that it does not have any plans to extend the December 2018 deadline for resolving GMP queries and that it will stop accepting queries in October 2018.  There is also news on the GMP Micro Service, which is planned to go live in April 2016, allowing schemes to request GMP calculations on a self-service basis as well as requesting contracted-out contributions and earnings information to confirm the GMP amount.

There is no further news on the format and information that will be provided on the GMP statement that will be sent to individuals from December 2018.  A similar holding statement is made in relation to the GMP inequalities and conversion issue.

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.