FRC clamps down on asset-backed contributions

THE FINANCIAL REPORTING COUNCIL has launched a crackdown on companies using asset-backed contribution structures (ABCs) that reclassify pension obligations as equity instruments in their accounts.

The watchdog said it had intervened with several companies which had structured ABCs in this way, and in each case the company had revised either the structure or the valuation of the arrangements, Financial Director’s sister publication Professional Pensions reports.

It said it was most concerned about arrangements that enabled the sponsor to defer contributions while ring-fencing the cash that would otherwise have been paid.

FRC conduct committee chairman Richard Fleck (pictured) said: “The Financial Reporting Review Panel (FRRP) believes it is important that companies and their advisers are aware that the FRRP will ordinarily open an enquiry into the financial reporting of any company in which material pension liabilities are reclassified from debt to equity.”

ABCs involve companies putting assets into a special purpose vehicle (SPV) which will provide a steady income for its scheme over a set period.

This often allows sponsors to reduce contributions and increase the length of recovery plans, as well as reducing the risk of over-funding as the assets generally revert to the sponsor if the scheme is fully funded at the end of the period.

The FRRP said it recognised the genuine commercial reasons for establishing such arrangements and had focused its enquiries on companies that had reclassified pension liabilities as equity instruments.

It said: “Specifically, some of these arrangements, usually involving the establishment of a Scottish Limited Partnership (SLP), which holds the collateral, have included additional features which appear to have been introduced in order to achieve an accounting outcome whereby the company’s obligation to make future payments to its pension scheme is transformed into an equity instrument in the company’s consolidated accounts.”

This has a favourable impact on financial solvency, gearing and reported comprehensive income.

The FRRP said it has considered several reports and accounts of companies that had put in place such arrangements and in each case the company involved had made changes that addressed its concerns.

This comes as the number of companies implementing ABCs has increased significantly and after The Pensions Regulator has warned trustees to think carefully before entering into such an agreement (PP Online, 19 November 2013).