lcp corporate pensions update october 2014 “must dos” … · “ifric14” rules could hit...
TRANSCRIPT
IN THIS ISSUE
p2 Budget revolution - “must dos” and
“wider opportunities”
p3 Abolition of FRS17 - are you
ready for changes to UK accounting
standards?
p3 IAS19 - proposed changes to
“IFRIC14” rules could hit balance
sheets
p4 Contact details and further
information
In this LCP Corporate Pensions Update we provide:
� A handy checklist of actions to undertake now, to reduce
cost and risk by taking advantage of the complete
flexibility in retirement saving introduced in the 2014
Budget.
� A guide to the new UK accounting standards, which come
into effect from January 2015; this change introduces
pitfalls for the unwary.
LCP CORPORATE PENSIONS UPDATE OCTOBER 2014
“Must dos” for employers in response to the 2014 Budget and pitfalls of the new UK accounting standards.
Key UK pension assumptions and statistics*
30 Sep 2014 31 Dec 2013 30 Sep 2013
IAS19 discount rate 3.8-4.2% 4.2-4.7% 4.2-4.7%
Assumed RPI
inflation
3.1-3.4% 3.3-3.6% 3.2-3.6%
Assumed CPI
inflation
1.8-2.7% 2.0-2.9% 1.9-2.7%
Long term gilt
yield
3.0% 3.6% 3.4%
FTSE 100 index 6,622.7 6,749.1 6,462.2
* the figures shown are indicative ranges, different figures may be appropriate
depending upon the individual circumstances
Latest developmentsOn 29 September 2014, the Chancellor announced
proposed changes to significantly reduce the
inheritance tax payable on death for DC funds.
Watch this space – but any such change is likely to
make all of the opportunities on page 2 even more
material for employers.
LCP Corporate Pensions Update October 2014 2
With the full ramifications of the 2014 Budget now apparent – notably full flexibility for retirement savings - employers have been getting to grips with what they must do, and what they might also want to offer. The new flexibilities give real opportunities for companies to proactively manage their pension costs and risks going forward. Below we provide a checklist showing the areas of “must do” actions and wider opportunities.
Wider opportunities to take full advantage of the
Budget
� Incorporating partial transfers-out for members: Taking cash at retirement is a very popular option for members, with most historically taking the maximum available. As the restrictions have been removed, members may welcome the opportunity to take an increased component of their benefit as cash, whilst retaining a stable pension income in retirement. By permitting partial transfers-out of benefits, employers can benefit from reduced liabilities whilst potentially also reducing administrative complexity in their schemes and significantly reducing the cost of a later insurance transfer.
� Ensuring transfers are permitted right up to retirement age: Members very close to retirement, and hence most engaged in their retirement planning, are the most likely to transfer-out to DC to take advantage of the new cash flexibility. If so, employers should aim to ensure that transfers from their schemes are available at all ages for non-pensioners (this is often restricted by scheme Rules at present).
� Implementing increased thresholds for cashing out small pensions: If your pension scheme includes a lot of members who have only accrued small pensions, then taking advantage of increased thresholds for fully cashing out these benefits directly from the DB scheme is likely to be beneficial to employers and members alike.
� Instigating bulk liability management exercises: Transfers-out and small pension cash-outs are likely to now be more attractive to pension scheme members. Therefore a cost/benefit analysis for different liability reduction exercises could highlight some obvious quick wins; with the right answer for each employer depending on the precise characteristics of their scheme membership. Generally speaking, however, any liabilities which “walk out of the door” as a result of the Budget announcements should be good news from the employer’s perspective.
2014 Budget revolution - “must dos” and “wider opportunities”.
Must dos � Ensure changes are communicated to
members eligible to retire now.
Employers are at risk if members make retirement decisions, without being aware of the new range of options available to them. Active employer engagement is therefore needed now, particularly with those individuals in the middle of (or approaching) their retirement planning.
� Review ongoing retirement processes and
communications. The new options require scheme retirement and communications processes to be reviewed urgently. From the employer perspective, getting this right will help maximise engagement, and hence increase the benefits in terms of future potential cost and risk reduction for members choosing to use the new Budget flexibilities.
� Review generosity of member options. The more people take advantage of the new flexibilities, the more important it is to ensure that the option terms granted from DB schemes are not overly generous to the member (hence penal from the employer perspective). The likes of transfer value assumptions and cash commutation factors therefore need reviewing urgently, with proactive employer input.
3LCP Corporate Pensions Update October 2014
From 1 January 2015, all UK accounting standards, including pensions accounting standard FRS17, will be replaced by new rules, based on international standards. There are some pitfalls with this change. For example for many companies, it will lead to significant extra liabilities on the balance sheet, with knock on implications for dividends, banking covenants, credit ratings, tax and Pension Protection Fund levies.
Some companies will have to show a pension deficit on the balance sheet for the first time. Particularly affected will be companies who have previously taken advantage of the “multi-employer exemption” in FRS17, which often exempts all of the subsidiaries in a group of companies from showing the deficit in a shared pension scheme. Under the new UK GAAP, this
will no longer be possible – at least one company in the group must record the deficit.
Lots of companies will have a choice of using full international standards (including the IAS19 pensions standard), or the simplified FRS102 standard. Under IAS19, complex rules in “IFRIC interpretation 14” can sometimes require companies to put extra liabilities on the balance sheet to reflect the commitments backing funding agreements with trustees. The Financial Reporting Council (FRC) has recently proposed a clarification that these rules will not apply under the simplified FRS102 standard. This clarification may make FRS102 a more attractive choice than international standards for companies with large pension scheme funding deficits.
Abolition of FRS17 - are you ready?
Getting ready for the abolition of FRS17 - recommended actions
� Identify those companies affected.
Particularly subsidiaries that are currently
exempt from full reporting under FRS17 and
may now need to disclose a deficit under the
new rules.
� Quantify the impact of the new rules.
On balance sheets and P&L, as well as
any knock-on implications for dividends,
remuneration, banking covenants, and credit
ratings.
� Identify appropriate actions to be taken.
In many cases, companies will be able to
take action that significantly mitigates the
impact, for example to move pension deficit
allocations from one company within a
group to another, before the new rules come
in in 2015.
� Keep abreast of evolving developments.
Proposals from both the FRC and the
International Accounting Standards Board
(IASB) in recent months could significantly
change the rules in due course.
IAS19 - Proposed changes to “IFRIC14” rules could hit balance sheets.The IASB’s interpretations committee has made recent proposals which could hit a number of UK companies with extra liabilities, or limit companies’ ability to disclose a surplus.
The proposals tighten the rules in IFRIC14 that apply for those pension schemes where trustees have the power to wind up the pension scheme without the company’s consent, or where trustees have a power to improve members’ benefits. Companies whose pension scheme trustees hold such powers could find that, in broad terms, the full amount of the trustee’s funding deficit has to be recognised on the balance sheet.
Companies should therefore carefully review their pension scheme rules to check if they could be affected if the proposals come into force. It will be particularly important to do this in cases where companies are currently negotiating a deficit recovery plan with trustees.
Alex Waite
Partner
+44 (0)1962 872738
Alex Whitley
Partner
+44 (0)1962 872717
The LCP Corporate Pensions Update is based on our current understanding of the subject matter and
relevant legislation which may change in the future. Such changes cannot be foreseen. This document is
prepared as a general guide only and should not be taken as an authoritative statement of the subject
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Any questions?
If you would like any assistance or further information on the issues raised, please contact Alex Waite,
Alex Whitley or the partner who normally advises you at LCP via telephone on +44 (0)20 7439 2266 or
by email to [email protected].
Other specific contacts:
2014 Budget
Alex Whitley or Jonathan Camfield
Changes to UK GAAP
Tim Marklew or Phil Cuddeford