The introduction of FRS102 has arguably improved the accuracy of company accounts, with changes such as including pension liabilities for the first time for some employers. Some of these changes have resulted in a decline in the Experian scores used to assess the Pension Protection Fund (PPF) levies for the affected employers. But are these worse scores and hence increases in levies always a true reflection of the change in risk to the PPF?
If a company has a liability to fund a pension scheme then it is right for the liability to appear in the accounts and hence impact the Experian score. No longer can employers in a multi-employer scheme use the fact that they couldn’t identify the assets and liabilities attributable to each employer, which resulted in them being unable to show a liability on the balance sheet.
However, the Experian score can be distorted via the trend variable that compares a figure from the latest accounts to the equivalent figure from 3 years ago. The upshot is that a company that has remained fairly stable over the years could incorrectly appear to be in decline as a result of a change in accounting treatment such as the pension liability being included in the latest figure but not the historic figure.
The PPF has introduced the option for employers to submit new voluntary information to remove the distortion to the trend variable caused by the change of accounting standard. The deadline for submission is 31 March 2017, and as this is a new option with limited time to act, there is a danger that many employers could miss out on the potential savings.
Sponsors of multi-employer pension schemes are most likely to benefit from this option, where they previously disclosed on a defined contribution basis due to being unable to allocate the assets and liabilities of the pension scheme across employers. This is also true for sponsors who are either not-for-profit, large, non-UK or an ultimate parent, due to the different scorecards Experian use for such entities. It could also benefit sponsors who are part of a corporate group, where the score of the ultimate parent forms part of the sponsor’s score, even if the ultimate parent does not participate in the pension scheme. It is not just the disclosure of pension schemes under FRS102 that could impact scores. Other changes to the way entities disclose figures in their accounts due to revised accounting standards may also have impacted the scores and hence levies.
The PPF doesn’t expect the impact of voluntary submission to be significant across the levy as a whole, but our research shows that individual schemes could see significant reductions to their PPF levy if they voluntarily submit information. One client is expecting a 25% reduction to their levy as a result of voluntary submission of information to Experian.
The deadline for submission is 31 March 2017, so sponsors should consider this now. 31 March 2017 is also the deadline for the majority of other actions available to minimise the PPF levy. We are in an uncertain world at the moment, and sponsors should be looking for the comfort provided by the certainty that they have reduced their PPF levy as far as possible.