TRUSTEES of multi-employer defined benefit (DB) schemes may come under added pressure from sponsors due to changes in the Generally Accepted Accounting Practice in the UK (UK GAAP).
Participants in multi-employer DB schemes can currently be exempt from accounting for a DB deficit on their balance sheets if it could not be easily apportioned. Contributions to schemes are only listed as cash payments included in profit and loss accounts (P&L), according to sister publication Professional Pensions.
However, from January 2015 this exemption will cease except in extreme circumstances. This will leave sponsors’ balance sheets taking a hit after the inclusion of a DB deficit.
This could affect plans for dividends as it reduces the amount of cash reserves available to a company. Experts have warned financial directors to take note immediately as 2014 accounts will need to be restated. There is also the threat of added pressure on trustees to take a more lenient stance on deficit contributions.
“Those companies which previously accounted for their DB pensions on a cash basis may now have to recognise a liability for the deficit,” PwC director Mark Harris said.
“The issue now is if you had accounted for the pension scheme on a cash basis, you never had a liability on the balance sheet. Going forward you could. If this was material in relation to the company it could impact on dividends,” he added.
KPMG director of pensions practice Naz Peralta said finance teams will need to think about how to deal with the disclosure.
“Companies might not currently disclose the whole recovery plan, so we might see more such disclosure to explain the balance sheet provision.
“Trustees, while typically not interested in corporate accounting, might get pressure for more gradual changes in cash commitments rather than big step changes.
“They’re under pressure anyway but this may add to that. The P&L nature of the accounting treatment is another reason why employers don’t want cash to jump around from one valuation to the next,” he said.
Deloitte director in tax Chris Coulston said trustees and sponsors should work together to avoid any kneejerk reactions to re-negotiate covenants.
“Standing back, the covenant hasn’t changed. So employers need to ensure there isn’t an adverse kneejerk reaction.
“Another issue in multi-employer schemes is sponsors all have different auditors, who could have different interpretations. This could cause other complications for trustees with potential for inequitable pressures on the employers. This will be a lot more complex if there is disagreement about how to apply the new rules,” he said.