Proposed changes to pensions accounting standards could wipe more than £25 billion ($42 billion) from FTSE 350 company balance sheets, and £1 billion from their annual profits.
The potential changes relate to an accounting surplus that is recognized on U.K. company balance sheets.
Currently, U.K. companies declare a pension fund surplus on their balance sheets. It is accepted as a surplus since there is a theoretical point where the company will be refunded that surplus, once the last member of a defined benefit plan is paid.
However, under changes that have been proposed by the IFRIC14 — a subcommittee of a branch of the International Accounting Standards Board — this surplus would no longer be recognized unless there is a realistic expectation that the company would have access to that surplus in the future.
Companies would therefore have to take into account the expected behavior of plan trustees, such as derisking plans, which could reduce the calculated accounting surplus.
“If the changes are made as we interpret them, companies will no longer be able to recognize the surplus on their balance sheets,” Simon Robinson, principal consultant at Aon Hewitt, said in a telephone interview. “That accounts for about £8 billion of the £25 billion.”
Further, companies that commit to ongoing deficit contributions, which are expected to deliver an accounting surplus in the future, would have to recognize those contributions as liabilities on corporate balance sheets. This could amount to as much as £20 billion for FTSE 350 firms, he said. The finance charges relating to pension plans would also rise by more than £1 billion each year.
“It is a nightmare as to how it may change behavior,” said Lynda Whitney, partner at Aon Hewitt. “This is almost as big a change as having to recognize pension funds on the balance sheet in the first place.”
Ms. Whitney expects that, as a result of the potential changes — which could come into play as early as 2017 — “we are likely to see contingent funding routes, which give trustees security but don’t require a company to lock away cash into a scheme, will become more popular — and in some cases may be used instead of cash.”
Separately, consultant Barnett Waddingham said Monday that 37% of every £1 paid spent on pension provisions was used to reduce existing defined benefit deficits for the 2013 fiscal year.
However, the consultant’s fourth annual report also found that FTSE 350 firms’ pension deficit contributions are now at their lowest level for five years.
The aggregate deficit for fiscal 2013 was £55.6 billion, a decrease of 12% compared with the aggregate shortfall for the 2012 fiscal year.