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Financial directions – FRS17 hits final salary pensions

Last month Financial Directions reported on how the new accounting standard – under which the volatility of the company pension fund would go through the profit and loss account – was part of the reason for Boots’ decision to switch its entire pension scheme into long-dated gilts.

Since then, the National Association of Pension Funds has released its annual survey, which shows that 77% of companies say the new accounting standard is making it less attractive for companies to offer final salary schemes; 20% said it made no difference. “Financial directors are saying we can’t live with this volatility,” says director-general David Cranston. Only 23% of respondents planned to implement FRS17 ahead of the 2003 deadline. However, Cranston says only 13% of schemes are less than 100% funded, while 11% are more than 150% funded.

Since the survey was released, BOC has announced it intends to comply with FRS17 a year early, and said pre-tax profits for the year to 30 September 2001 of #392.3m would have been reduced by £13.4m. Cash flow was not affected, the group said, and the pension fund was 112% funded.

In the period covered by the survey, 17 private sector pension funds switched from final salary to either money purchase or group personal pensions and 17% of final salary pension funds in the private sector are now closed to new members. “You’re going to get a generation of pensioners who only have access to money purchase schemes,” says Cranston.

The survey also found that 60% of pension schemes offer AVC top-up policies with crippled provider Equitable Life. The crisis has resulted in 37% of pension funds reporting a decrease in the take-up of AVCs, while almost half, 46%, say members are no longer contributing to their AVC fund. This suggests employees have been frightened off AVCs even though they may not be directly affected by the Equitable disaster.

Comment: The impact of FRS17 should, in theory, not be so great as some FDs make out on the basis that it is a purely accounting requirement, not a cash requirement. In this respect, FRS17 differs from the minimum funding requirement (MFR) which is now set to be abolished. ASB chairman Mary Keegan defended the standard, saying, “An accounting standard that helps everyone to understand what is happening is good news.”

But it is apparent from our conversations with FDs that the impact of FRS17 is two-fold. First, it creates unwanted earnings volatility. Although institutional investors ought to understand how pension fund accounting rules are affecting p&ls, Cranston says, “It’s a new requirement – it has to be explained.”

Secondly, there is concern that under-funded pension schemes may affect distributable reserves so severely that companies’ ability to pay dividends is affected.

NAPF Annual Survey 2001; 020 7808 1300,

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