14 November 2017
Pensions accounting figures are often seen as a ‘handle-turning‘ or compliance exercise and so are not given the highest profile internally.
In my view this is a mistake. In the current low yield environment, legacy DB pension schemes are becoming an increasing burden on companies. Without action, they can have material, detrimental and far-reaching effects. Here I look at six areas that can be impacted.
- Large pension deficits can clearly be a concern for investors. This impacts not just the ongoing share price, but can also impact on transactions, where large or volatile pensions liabilities can be a deal breaker.
- A higher deficit can mean problems paying dividends. For a company to pay dividends, directors must be satisfied that it has enough distributable reserves on the balance sheet. A higher pensions accounting deficit generally means lower distributable reserves.
- In the financial sector, companies need to hold regulatory capital to cover their pensions risks. In current market conditions, pension risk has become increasingly important as small changes to pensions figures or assumptions can have a large impact on a company.
- Pensions deficits can hit banking covenants and credit ratings. In addition, they could also have a bearing on ratings used by the Pension Protection Fund to determine PPF levies, which are often used by pension scheme Trustees as an indicator of covenant strength.
- Increases in both cash and P&L costs will need to be built into budgets and budget forecasts for management.
- Increasing balance sheet deficits and profit charges can affect management’s short and long term pension strategy for dealing with pensions and remuneration for the workforce.
By taking a proactive approach to your pensions accounting, you can enhance your financial reporting. It is never too late to act and there are easy things you can do to make sure you are getting the best performance from your pensions accounts and that you are aligned with best practice.
Discover how to get the best performance from your pensions accounting with our guide – click here.