The DB Pension Scheme and the Challenges Boards Face – Lincoln Pensions

The demise of several high-profile brands including BHS, led our partners, Lincoln Pensions, to analyse the corporate disclosures made across the FTSE 350. Read more

09-04-2019

Executive

The demise of several high-profile brands including BHS, led us to analyse the corporate disclosures made across the FTSE 350.

Our Analysis

We carried out two studies – one in 2016 and the second in August 2018 ‘Give us a clue 2’. Our analysis shows that defined benefit (DB) pension scheme corporate disclosures in FTSE 350 companies continue to lack transparency of the real position. Although there has been some improvement in terms of disclosures, overall, concerns remain.

Key Findings

Our findings reveal that further action is required to provide shareholders (and other stakeholders) with better information to make more informed investment decisions, and to allow Boards to ensure they are protecting the pensions of their former employees. Only by going further than the limited accounting standards require, can NEDs be sure that the investors they represent are getting the full picture.

Since our first study, significant improvements have been made in several areas of disclosure:

• 74% of FTSE 350 companies now disclose the length of the recovery plan – compared to 46% in 2016

• 81% disclose the amount of deficit repair contributions agreed with the trustees –compared to 48% in 2016

• 79% of companies disclosed their deficit (or surplus positions) – compared to 33% in 2016.

Despite these improvements, further changes are needed. Our research found that:

• None of the companies disclosed a meaningful measure of investment risk, which would provide stakeholders with important insights into the risk that increased funding may be required in the future. An appropriate risk measure should consider the scheme’s invest-ment strategy and how well the investment strategy mitigates the risks which are inherent within the scheme’s liabilities.

• Only five FTSE 350 companies (with DB obligations) disclosed their pension scheme’s funding position on any alternative valuation basis, which, if disclosed, would give stakeholders a better picture of the size of sponsor’s obligations to the pension scheme (which are often much greater than currently disclosed).

We call for IAS 19 changes that would give corporates more clarity

At present, IAS 19 falls short of providing clarity around scheme funding requirements and risk. We believe that this needs to be addressed, not least to ensure consistency with the disclosures now required for other financial instruments. Therefore, to enable investors and other stakeholders to make more informed judgements on the future of DB pension schemes, we call for the following disclosures to become mandatory:

1. The Technical Provisions (TP) funding position and details of the associated recovery plan lengths and contributions agreed. This will show the actual cash funding commitments to the scheme.

2. A standard basis for disclosure of pension scheme volatility. Whilst Value-at-Risk has many detractors, we believe it can be useful if modelled consistently and understood appropriately by its users, to understand the inherent risks of both the assets and the liabilities.

3. A more prudent and comparable funding target (e.g. self-sufficiency, risk free or solvency) to enable a common understanding of pension risk across companies and provide a clearer sense of the longer-term funding targets. The Pensions Regulator has indicated it will require companies to target.

Whether our call for action is heeded, corporates could take these considerations on board so that they can have greater transparency in the accounts to allow their stakeholders to make better informed decisions.

“DB pension schemes are often one of, if not, the largest obligations for a corporate sponsor. Our study shows there have been significant improvements made in basic disclosures. However, we believe that a continued push is absolutely necessary.

As anyone experienced in financial refinancing and restructuring will tell you, a lack of understanding is the biggest obstacle to an effective and efficient solution for all stakeholders. Full disclosure of significant pension risks is essential. Without full disclosure, how can financial statements ever be true and fair?” Richard Farr, MD, Lincoln Pensions.

Read the full report

Contact Richard Farr to discuss how we can help you and your Board.

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