FTSE 350 companies are not providing sufficient information in their financial statements to allow investors, pension fund participants and employees to properly understand defined benefit risks run by the business.
Research by advisory business Lincoln Pensions found that while defined benefit funds are often the longest term and most volatile liability on company balance sheets, investors have to guess or interpolate the actual funding commitment that businesses have made.
The firm analyzed FTSE 350 companies and found that 67% with DB plans, representing assets of about £332 billion ($404.6 billion), do not disclose the deficit or surplus position of their pension fund relative to the actual funding target that drives company cash contributions. More than half — 54% — of companies do not publish the tenure of their deficit recovery plans.
Darren Redmayne, CEO at Lincoln Pensions, at a press briefing, highlighted recent problems in the U.K. DB market as examples of why this information is important. “Is there sufficient information in the accounts to allow readers — be they investors or members of pension schemes or employees — to properly understand the pensions risks that are going on in these businesses? When you have situations like BHS and Tata (Steel) and others, always the question is, could it have been seen earlier? Was it missed? What could have been done?” Mr. Redmayne said.
Lincoln Pensions is calling for all public companies to enhance and standardize disclosure around pension funds, allowing a better understanding of cash flow and funding risks associated with obligations. The firm in particular wants disclosure of the technical provisions funding target, including key assumptions, and details of an associated recovery plan; a standard basis for disclosure of volatility of pension funding; and a more prudent and comparable funding target, such as self-sufficiency or solvency, which would allow for comparisons between companies.
“We feel quite strongly that if you are going to monitor the (funding obligation of a plan sponsor, known as the covenant) and these businesses, you are going to need … appropriate information to do that,” Mr. Redmayne added. He said that leads to the question of whether there is sufficient information about companies’ pension obligations to potentially spot problems earlier, and do something “proactive” to mitigate those risks.