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Is your FRS17 deficit too high?

Finance | David Davison | 12 May 2010

David Davison warns that using a standard calculation for your FRS17 valuation instead of using one tailored to your organisation can give a false picture of your finances.

Many charities will be receiving FRS17 pension valuations from LGPS actuaries or their scheme actuary to allow them to disclose the extent of their pension liabilities / deficit in their accounts. I’ve recently had a very significant number of organisations ask me to review their results given how dramatically, in most cases, the deficit figure has increased – frequently three to four times last year’s figure!!

Charities are right to question this; indeed my only concern would be that many are not!

My colleague Ian Campbell in his blog explained the reasons why most organisations would witness a pretty dramatic increase in their FRS17 liabilities in 2010, primarily as a result of a significant reduction in bond yields. However, the figures are calculated using assumptions, and the old adage says when you assume it has a habit of making an ‘ass’ out of ‘u’ and ‘me’.

Many of the figures prepared use a standard set of assumptions which make it easier to produce multiple sets of figures on a more cost effective basis however clearly this means that by definition many of the figures do not reflect the specific circumstances of the entity disclosing. Assumptions for discount rates, mortality and salary growth can often not reflect the specifics of each organisation’s employees.

So while a standard calculation can be cost effective in producing a number, what if that number doesn’t reflect your organisation or create financial problems in disclosing a dramatically increased amount. In those circumstances you’ll need a bit of advice to provide an alternative set of assumptions and a set of figures which more closely match your requirements.

I’ve recently carried out a similar exercise for one organisation where some minor and totally acceptable changes to their assumptions have reduced the level of the pension deficit by over 50%, a move that may be equally beneficial for others. 

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