The good news is that nobody is very much worried about FRS17 anymore.
The bad news is that investment returns have been so dreadful that FDs and pension fund managers are much more concerned about the actual cash costs of final salary pension schemes than about what an accounting standard makes them disclose in the annual report. In short, the issue has moved from being one of how to report a theoretical long-term liability to coping with immediate gaping holes in the staff pension scheme.
This is the key finding from the second survey by consulting actuaries Hazell Carr and Financial Director. One hundred telephone interviews were conducted in March this year with senior managers from companies with up to 1,000 companies. Nearly half the respondents have already closed their final salary pension schemes to new members – and most of those have done so since the beginning of 2001. In fact, 43% have closed over 2002-03.
And there’s more to come: almost a fifth of those schemes that are still open are likely to be closed to new members or (less likely) new service in the coming year. Managers even report that 11% of those schemes that are already closed to new members may also soon be closed to new service.
It’s hardly surprising. About one third of schemes appear to be below water with a minimum funding requirement (MFR) level at the last valuation of 100% or less. One scheme in nine has an MFR funding level of no more than 50%. The average MFR is just 91%, or an average of £6.7m in cash terms. In last year’s survey, the average MFR was 99%. No prizes for guessing that the schemes that closed to new service had an MFR of just 81%. Those that remained open were more comfortably positioned at 102%.
But the picture may be somewhat worse than that as 21% of managers didn’t know what their scheme’s MFR was and another 9% declined to share that information with us. Moreover, because of the time lag since the last MFR valuation, 44% believe that their fund is now in deficit; only 12% felt sure it was still in surplus.
Still, there may be some encouragement from the fact that at least two-thirds of the dwindling number of final salary schemes are likely to remain in place at least over the coming year. This is despite the fact that more than half have been encouraged by their actuaries to close their schemes to new members, and many (around 40%) have been advised to close to future service or even to wind up their final salary schemes. Moreover, half the schemes that are now closed have been advised by their actuaries to wind up.
But most respondents didn’t think that winding up their schemes was a practical option, either because it was too expensive, too complex or because it would cause a negative reaction amongst employees. In fact, 94% said that an open final salary scheme help recruit and retain staff, while 40% said that, over the last five years, the final salary scheme had been helpful during redundancy exercises. Publicity surrounding final salary schemes has resulted in a very sharp increase in the number of senior managers who believe that their employees have a good understanding of the value of their pension scheme. Only a few said that there was any “them and us” resentment amongst employees where some are members of a final salary scheme and others are not.
So for those who have closed their final salary schemes, what’s been put in their place? About half of schemes that are closed or are planning to close look to defined contribution schemes, with a smaller proportion offering stakeholder pensions. About three-quarters of companies are contributing even less to the new DC/stakeholder schemes than they were to their final salary schemes, with only 17% making contributions at the same level as before. Given the state of final salary schemes at the old funding rate it seems an inescapable conclusion that more problems for employees are being stocked up for the future. As it is, only two-thirds of companies are paying close to the standard contribution rate to their schemes and most expect the recommended rate to rise.
The survey, SMEs and Pensions: Which way now?, was conducted by Wheeler Associates on behalf of Hazell Carr and Financial Director.