top stories

Comments from ACCA
March 2003

The Association of Chartered Certified Accountants (ACCA) are pleased to have this opportunity to comment on the above consultation paper issued by PRAG. The consultation paper was considered recently by ACCA�s Financial Reporting Committee and I am writing to give you their views.

In our view the obligations to pay future pensions are liabilities of the scheme and are not contingent liabilities. The conditions for recognition under FRS12 are met. The pension trustees are obliged to pay any pensions which are due under schemes covered by the trust deed. The obligating events are the receipt of contributions from the employer and the existence of the pension promise. A transfer of economic benefits is probable and the liability should be reliably measurable.

On whether the obligation to pay future pensions should be included as liabilities of the pension scheme, there seem arguments on both sides.

To include the extent of the full obligation would be helpful to compare with the net assets available currently in the scheme to meet them. A net assets statement (as currently required) is rather meaningless to the members without some information on the liabilities. Including the current assessment of the obligation to pay future pensions on the face of the balance sheet would have more impact than the disclosure of information in a note to the accounts or as a separate statement.

On the other hand strictly speaking (and under FRS12) the pension scheme is obliged to pay future pensions, although it is constrained by the extent of the assets that are available. Deficits are not the responsibility of the scheme, but of the employer who has made the pension promise. Surpluses in a scheme ultimately have to be distributed as pensions or returned to the employer. On this basis it would be rather pointless to include the actuarial liability to pay future pensions as it would equal the net assets available. We also noted the practical problems created by the different timing of financial statements and actuarial valuations.

On balance we support the inclusion of an estimate of the liability on the balance sheet of the pension scheme, alongside the net assets. This obligation would need to be carefully described, as in some cases it might strictly be a mixture of the obligations of the scheme and of the employer. We would not, however, have the implicit net surplus or deficit shown. It would be confusing in implying that a deficit, for example, would be a problem for the trustees to remedy, whereas it is in the end a matter for the employer to put right.

In terms of measuring that liability we do not accept the argument that a provision should exclude the effect of future salary increases. If the promise is to pay a pension based on a final salary level then a best estimate has to be made of that liability, not an estimate of a promise to pay a pension based on a current salary. An FRS17 basis seems appropriate for the measurement of this obligation to pay future pensions. It would be consistent with the information provided in the employer�s financial statements and it would be readily available.

We agree with the consultative paper that disclosures of the actuarial liabilities of schemes should be improved. We support the proposed disclosures suggested on page 10 of the paper (where the liability is included in the scheme balance sheet).

In addition the trustees should include a note as to how they and the employer responded to any recommendations made by the scheme actuary.

Many scheme members will only receive summary financial statements and the appropriate disclosures in these would have to be reconsidered in the light of any changes in the full accounts.

Most of the problems identified by the paper would not be applicable were the obligations disclosed on an FRS17 basis, as these would have been audited as part of the employer�s financial statements.

Back to top