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Disclose FRS17 or not disclose, that is the question?

Finance | David Davison | 13 Apr 2010

David Davison warns that even though your charity may not fall under accounting standard FRS17 -  which forces companies to account for pension assets and liabilities, it doesn't mean the issue will go away.

We tend to get asked by charity and not for profit clients with final salary pension funds in what circumstances they are required to provide full FRS17 disclosures in their accounts.

The first step would be to identify if you have a defined benefit scheme. Simple you would have thought, however experience would suggest that the reality is much less clear cut. Some schemes may look like defined contribution but may have inherent guarantees or even ‘promises’ which would classify them as defined benefit. Some schemes have an element of defined benefit, such as underpin or hybrid benefits, which would classify them as defined benefit. Some schemes may have defined benefit and defined contribution versions apparently with the same name which make it difficult to identify which element you participate in. The watch word is if in doubt check it out!!

Next you need to establish if the organisation operates its own “stand alone” scheme or if it is part of a “multi-employer” scheme.   If the body has its own pension fund in which it is the only participating employer and which has separately identifiable assets and liabilities then there seems little doubt that full disclosure would be required.

Where the body is a member of a “multi-employer” scheme, namely that it is one of a number of employers who participate in the arrangement (e.g. LGPS, FFP, schemes run by the Pensions Trust etc), then the position is considered in detail in Section 38 of Practice Note 22 of the snappily titled ”The Auditors’ consideration of FRS17 ‘Retirement Benefits’ – Defined Benefits Schemes” and also in subsequent amendments.

The crucial element in the guidance appears to be whether the organisation is able to separately identify their share of the scheme assets and liabilities.  Clearly if their specific details cannot be identified then the accounts will reflect contributions as if they were to a money purchase arrangement and should include the additional information specified in the practice note. 

However, increasingly organisations participating in multi-employer funds are having their share of assets and liabilities specifically identified, indeed most LGPS can provide estimated FRS17 figures as a matter of course and will helpfully provide these in bulk for numerous participants to help control the costs.

There is a further discussion to be had with auditors around the materiality of any disclosures as if large organisations have minimal defined benefit pension liabilities then these may deemed to be immaterial. This however is rarely the case today and likely to be even less so in the future as scheme liabilities continue to build up.

Where liabilities are significant in relation to the value of the organisation, auditors may also begin to question the accuracy of the figures provided. Do the figures take in to account any significant changes to membership or experience since the last full valuation or have the figures been calculated on a basis which more closely reflects the experience of the membership of the scheme as a whole, rather than the specific circumstances of the accounting entity. In this case more specific actuarial advice will be necessary.

Undoubtedly it is those organisations who have historically been forced to disclose the extent of their increasing pension liabilities in their accounts who have become most aware of the issues arising as the impact on their financial position can be striking.  However the risks are ultimately the same where the FRS17 position has not been disclosed – just because something is ignored or glossed over doesn’t make it go away.
 
There is on-going evidence that pension scheme liabilities are continuing to rise, and charities, unlike large private companies do not have the option of going to their shareholders to fund any resultant shortfalls in funding. In many cases the only source for additional funding would be from charitable donations and there must be a concern that potential or current donors will be discouraged by this. Large deficits shown in accounts are also unlikely to help with this.

Even where it is agreed that disclosure is not required there is surely a need for awareness. This issue requires regular review to allow organisations to begin to manage, or even begin to minimise, the significant additional liabilities continuing to build up.

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