FRS17 uncovers pensions black hole

FRS17, which requires companies to show potential pensions liabilities on their balance sheets, is not the cause of the problems companies are having with pensions, according to KPMG Corporate Recovery.

“FRS17 and minimum funding requirements legislation are being blamed for the current pensions problem when in fact they are merely bringing to light the deficits in a number of pensions funds,” says KPMG partner Jim Tucker.

KPMG argues that companies are facing additional cash burdens that they may not have anticipated, especially in manufacturing, where cash is already at a premium due to the economic downturn.

Companies that have recently made large-scale redundancies may also have a problem as their pension funds will only have a small number of existing members to fund a large number of pensioners. These companies will have pension costs out of all proportion to their payroll.

“We will see an increasing number of situations where a company would like to cut its staff as part of restructuring, but is unable to afford the resulting pension costs,” says Tucker.

A recent KPMG survey found that pensions are now costing business 15% or more of payroll. Many companies, such as Marks & Spencer, are closing final salary pension schemes in an effort to control costs – but, even then, historic liabilities remain.