PENSIONS ON THE FRONT PAGE Nicola Paul Aon

PENSIONS ON THE FRONT PAGE Nicola Paul Aon Consulting

INTRODUCTION • Is FRS 17 the final nail in the coffin for Final Salary Pension Schemes? – Publicity – Member appreciation

OVERVIEW • Why FRS 17 was introduced • Method and Assumptions • Comparison to other standards • Effect on Company finances • Investment policy • The Future

WHY WAS FRS 17 INTRODUCED? • (Perceived? ) Problems with SSAP 24 – Too much discretion – Weak Disclosure – Actuarial profession to blame? • International trends • Move towards use of market value of assets

METHOD AND ASSUMPTIONS (1) Liabilities • Discounted using corporate bond yield • Inflation determined by comparing yield on fixed interest and index linked gilts • Discretion with salary increase and demographic assumptions

METHOD AND ASSUMPTIONS (2) Assets • Market Value • Expected Return on Assets

METHOD AND ASSUMPTIONS (3) Balance Sheet • Full value of surplus/deficit recognised • Surplus restricted to recoverable value

METHOD AND ASSUMPTIONS (4) Profit and Loss Account • Service Cost – Projected Unit Method • Financing Cost – Interest Cost – Expected Return on Assets • STRGL – Balancing items

DIFFERENCES FROM SSAP 24 has: • Cumulative balance sheet entry • Discounted Income Asset Valuation • Less prescription with method and assumptions • Triennial valuations • Amortisation of actuarial gains and losses • Spreading of benefit improvement costs

DIFFERENCES FROM FAS 87 uses: • Smoothing • Actuarial gains and losses spread forward • Spreads prior service costs

EFFECT ON COMPANY FINANCES • Direct impact on retained profits… and hence on – – dividend policy bank covenants performance criteria executive bonus schemes

EFFECT ON COMPANY FINANCES • Analysts may change their view • Comparative size of pension fund and Company • Not many have adopted early!

INVESTMENT POLICY • Move towards corporate bonds • Myners review => demise of managed fund? • Conflict between Trustees and Company?

IMPLEMENTATION • Delayed until 2005 • Negative publicity • Will it still be introduced?

SOME THOUGHTS • Companies have closed final salary schemes – many in the last year or so – despite “riding out” the MFR • Too much legislation… or too generous a benefit? • FRS 17 does not force Companies to increase contributions – MFR does

SOME MORE THOUGHTS • Education rather than abolition? • Is it just an excuse to put in place cheaper, less generous pension provision? • Has FRS 17 just forced companies to face the reality of increasing pension costs?

CONCLUSIONS • Indications are that FRS 17 is here to stay • Differences of opinion as to whether it is a good or bad thing • Accounting standards do not change the economic reality • Tell it how it is!