Pesh Framjee examines how the new pension accounting proposals will affect the financial reporting of agreed deficit funding plans in multi-employer schemes.

Many public benefit entities participate in multi-employer defined benefit (DB) pension schemes. In many cases it is not possible for them to identify their share of the underlying assets and liabilities on a consistent and reasonable basis. Accordingly, in line with FRS 17 ‘Retirement benefits’ (paragraph 9b) they account for these schemes as if they are a defined contribution (DC) scheme and include only the amounts payable in the accounting period.

Existing practice

Many organisations have an agreed deficit-recovery plan to fund deficits in a scheme by committing to pay a defined additional contribution each year for a fixed number of years. These agreed payments, even if they are voluntary, would usually meet the definition of a constructive obligation under FRS 12 as the employer has communicated the acceptance of the recovery plan to the pension trustees and has by past and current practice demonstrated that the payments will be made. Notwithstanding this, in al
circumstances that I have seen where there is an agreed payment plan this payment plan is not the basis for the number that makes up the provision but rather the FRS 17 liability measured on an actuarial basis using the projected unit is used for the balance sheet. This is because FRS 12 specifically derogates accounting for retirement benefits and FRS 17 explains the appropriate treatment.

The fact that a scheme is treated as a DC scheme under FRS 17 does not change the fact that the agreed future contributions are not, under UK GAAP, the numbers to use to arrive at the balance sheet liability. However, it is important that readers of the accounts understand the implications and there should be full and prominent disclosures.
There are clear stages with different issues to consider to arrive at this conclusion.