One of the more interesting findings to come out of the 2007
Accounting for Pensions survey by actuaries Lane Clark and Peacock (LCP) is that
while FTSE-100 companies in the UK have made great strides in disclosing the
assumptions behind their pension deficit calculations, their European peers, by
and large, haven’t.
The report also shows that fund deficits have achieved “record improvements”
under the influence of a benign economic climate, to the point where there is
now a “fragile surplus”. FTSE-100 companies had a net surplus of £12bn as at
mid-July 2007, as compared to a total deficit of £36bn in 2006. Favourable
investment returns are cited by LCP as the main factor behind the record
As Alex Waite, LCP partner and one of the authors of the report says that the
difference between the average European FTSE equivalent company and UK FTSE
companies on pension disclosure is now stark. “They [the European players]
disclose deficits, but without disclosing the underlying assumptions, it is
impossible to know what the figures mean.”
Waite points out, however, that not all European FTSE-100 equivalents are
hopeless when it comes to disclosing information. There are a few outstanding
exceptions. He cites Philips as the pre-eminent “good egg” when it comes to
disclosure and praises the level of detail in Philips published accounts.
A handful of other European companies do almost as well. Waite lists
Unilever, Siemens and Sony Ericsson as examples. But that said, the rest lag
behind. “Philips is exceptional in that it goes even further than the levels of
disclosure required by IFRS 19. In particular, it has highlighted such things as
the sensitivity of the fund deficit to market movements such as the fall in
equities in global markets that we experienced in mid-August. We would like to
see this kind of reporting becoming the norm across Europe,” he says.
Until this happens, UK FTSE companies will be streets ahead of their European
competitors. The question is, will this greater disclosure buy them anything or
is it simply compliance for compliance’s sake?
Stephen Acheson, head of global client services and business management at
Standard Life Investments believes that, from an analyst’s perspective, greater
disclosure is vital and buys the company concerned a great deal more respect
(and regard) from the analyst community.
“One of the biggest and most crucial topics when evaluating a FTSE-100
company has been the health of the pension fund. You want as much information as
possible as to what is behind the figures,” he says.
For Acheson, this means disclosing the mortality assumptions, the asset mix
of the fund and the entire basis for the deficit calculation, including the
expected returns figures on the equity component of the fund.
“The main question you are asking is whether what you are looking at is
optimistic, or realistic. I would rather see a substantial deficit that I judge
to have been calculated on a very realistic basis, than a small deficit that
looks to me to be optimistic,” he says.
Acheson points out, however, that analysts still need to exercise caution, in
that even where assumptions are revealed in company accounts, those assumptions
can still differ markedly from company to company. “You can’t just assume that
you are comparing like with like when you look at a table of the deficits in
FTSE-100 company schemes,” he says. Each deficit has to be understood in its own
context and then the analysts have to form their own view on how it compares
with another company’s deficit.
However, Acheson celebrates the fact that over the past few years, companies
and pension fund trustees have become a great deal more professional about
disclosures and, in parallel, the discussions about fund deficits and strategies
have become much more sophisticated.
“As a consultant, it is obvious that the quality of the debate about how to
run the fund going forward, and how to analyse risk, has come on in leaps and
bounds,” he says.
For his part, LCP’s Waite points out that UK FTSE-100 companies did not get
to their present position of acceptable levels of disclosure without some
“In mid-February this year a group of analysts got together and wrote an open
letter to the Financial Times demanding greater disclosure of the underlying
assumptions, including mortality assumptions. That seems to have rung a bell
with UK companies and we saw an increase in reporting of mortality assumptions,”
In the first year LCP produced its survey, only three companies disclosed
mortality assumptions. Last year more than 30 companies reported mortality
assumptions and this year, by the time the report appeared in August, the vast
majority disclosed mortality figures.
Waite adds the cautionary note that even with FTSE-100 companies, the
disclosure of a deficit from one company to another could be under or overstated
by a factor of at least two. “Just by tweaking things like mortality assumptions
and discount rates on expected returns, you can massively alter the deficit
figure,” he warns.