LONDON - U.K. corporate disclosure on pension costs is inadequate and confusing, according to a survey by London-based actuaries Lane Clark & Peacock.
The upshot is that corporate profits can vary widely, depending on pension costs. Investors cannot make valid comparisons between U.K. companies without more complete disclosures, the report said. The study examined annual reports of Financial Times-Stock Exchange 100 companies.
"Companies have not been full and frank on disclosures in their accounts," said Bob Scott, partner.
The impact of pension costs on corporate profits can be significant. Pension costs last year were on average nearly 10% of after-tax profits. At British Gas PLC, with the highest proportion of pension cost to profits, pension cost represented 146% of their after-tax profits.
But small changes in the actuarial assumptions underlying pension disclosures can generate a huge difference in the size of costs, Lane Clark & Peacock actuaries noted. Investors often lack adequate information to analyze pension cost data, said David Lane, partner.
In addition, even where disclosure is provided, notes often are scattered throughout the report and the language is often confusing and laden with jargon, making comprehension difficult, the report said. Lane Clark & Peacock actuaries called for an overhaul on how British companies disclose their pension costs.
One key omission by 42% of the companies surveyed is disclosure of the dividend growth assumption. Unlike under U.S. accounting standards, where assets are valued at market, U.K. pension assets are valued based on expected dividend growth.
The differences in asset valuation can be striking under the U.K.'s actuarial method. For example, if a corporate pension fund held an overseas equity portfolio with a market value of 10 million, and valued the assets assuming dividend growth of four percentage points below the expected investment return, the portfolio would have an actuarial value of 10 million.
But Enterprise Oil PLC, which had the most optimistic dividend growth assumption of 2.5 percentage points below the expected investment return, would have valued the same portfolio at 16 million, the survey said.
In comparison, Reuters Holdings PLC, which assumed a very conservative dividend growth rate of five points below the investment return, would have valued the same assets at 8 million - only half Enterprise Oil's valuation.
Pension costs, the survey said, are affected by four key assumptions: investment returns, salary growth, benefit increases and dividend growth. While 100% of companies surveyed revealed the salary growth assumption, only 80% revealed expected benefits increases, two thirds disclosed the expected investment return and 58% reported the dividend growth assumption.
Inadequate disclosure also leaves investors wondering why pension costs may change radically from year to year. For example, British Aerospace PLC's 1994 accounts showed a funding level 121%; the pension surplus enabled the company to take a 15 million pension credit that year.
The company's 1995 accounts, based on a more recent valuation and revised assumptions, revealed a funding level of only 102% and a pension cost of 49 million, the report said. "It is not clear from the accounts why the funding level should have changed so significantly," the report said.
British Aerospace officials were unavailable for comment.
In addition, some companies do not report their assumptions on an absolute basis, but in relation to another assumption.
For example, Kingfisher PLC's annual report said the expected investment returns is 2.3 percentage points higher than its salary growth assumption and 4.8 points higher than benefit increases for existing retirees. The Lane Clark & Peacock report said Kingfisher's pension cost could vary by as much as 30 million a year, depending on which absolute values are applied.
Another key issue is that companies provide inadequate disclosure of how they amortize pension surpluses or deficits. SSAP 24, the accounting standard governing pension costs, requires that surpluses or deficits are spread over the average remaining worklife of current employees.
But SSAP 24 does not require companies to disclose which of three main spreading methods they use, how new surpluses or deficits are treated, or the period used to represent the average remaining worklife, the report said.
The Accounting Standards Board, which is the midst of rewriting SSAP 24, plans to adopt a single method for spreading surpluses.
But the ASB is not expected to adopt a market-valuation approach, despite a move in that direction by international accounting standards-setters. U.S. generally accepted accounting principles use a modified market-value approach. Separately, the International Accounting Standards Committee is developing a pension accounting standard based on market values.
In a discussion paper issued last summer, a minority of ASB board members had favored adoption of a market-value approach. But industry experts have overwhelmingly favored retaining the actuarial method. An ASB exposure draft, expected to be released in the fourth quarter, is expected to keep the actuarial approach, though it will note that Britain is out of step with international trends.
Anne McGeachin, an ASB project manager, said the draft exposure will ask pension industry officials if they want to stick with the current approach.
In the long run, there will have to be some give, experts said. "I don't think there's any doubt that there has to be a move toward international harmonization one way or another," said Ken Wild, technical partner at Deloitte Touche Tohmatsu International, London, and a member of the ASB's board.
However, he questioned whether the average investor - or even the typical financial analyst - would understand the significance of actuarial assumptions sought by Lane Clark & Peacock. Rather, he said it's more important to have comprehensible and stable figures going into corporate accounts.
