23 February 2018
Currently, multi-employer schemes such as SHPS are recognised under a special easement to the accounting standards which effectively treats the scheme as a defined contribution arrangement, but this could be coming to an end. The proposed changes might seem sensible – but is it all good news?
The current approach
Under the current accounting rules, an employer who was required to pay extra deficit contributions would recognise these additional contributions as a balance sheet liability. So, for example, an employer who was required to pay an extra £1m pa for 10 years would have to put the additional £10m through their Income & Expenditure (I&E) account in the year the increased contributions are agreed.
Under the current approach this could have serious implications for some associations. Even if pensions have been carved out from loan covenants, it could affect the perception of investors and hence the association’s future borrowing ability.
The Housing Sector SORP Working Party (who set guidance on how housing associations should compile their financial statements) has announced they are considering how multi-employer pension schemes, such as SHPS and a number of other schemes run by The Pensions Trust, are accounted for in the housing sector.
The principle behind the current approach is that individual housing associations do not have the necessary information to identify their share of the assets and liabilities in the multi-employer schemes. The SORP working party is considering whether it would be possible for methodology to be developed such that each association could be provided with an estimate of its share of the assets and liabilities.
With that information, it would be possible for associations to recognise their pension obligations in line with the rules for other defined benefit schemes. That would mean that changes to the funding position due to market conditions and other assumptions would be recognised gradually each year, and there would be no immediate impact on the I&E account of increasing deficit contributions.
Importantly, changes to the obligations due to changes in market conditions would be recognised in the Statement of Other Comprehensive Income, so only the interest on the notional deficit would be recognised as a cost in the I&E account.
These changes could come in from April 2019.
What does this mean for employers?
If the change to the accounting treatment goes ahead, there would be no direct impact on the balance sheet of the increased contributions discussed in the example above. The net liability recognised would be the employer’s share of the total SHPS deficit measured on an FRS basis.
Generally this would mean an increase in the net liability recognised on the balance sheet, compared with the current approach, but as discussed above the impact on the I&E account each year will be more stable.
I think the proposals are generally sensible and would mean a more realistic representation of the employer’s pension obligation is recognised in the financial statements.
Many of our clients are already modelling the impact of these changes so that they can consider any impacts on their covenant agreements, borrowing facilities and key performance indicators. If you want more information on the impact for you get in touch with one of the social housing team or your usual adviser at LCP.