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As year-end approaches, surpluses trigger a new ‘mindset’ for sponsors, and 40% of schemes are still considering how to reflect the impact of Covid in their accounts

Pensions & benefits DB corporate consulting DB investment consulting DB pensions

Scheme sponsors have developed a new mindset to accounting as the era of enormous scheme surpluses means new options, opportunities, and concerns. The accounting implications are just one element – sponsors should engage on rules, current funding levels, and ultimate objective to ensure their strategy remains aligned with wider corporate objectives in this new era and that they have access to value over and above the assets needed to settle liabilities.

Whilst the objective for some companies remained to optimise the balance sheet position, when asked in an LCP webinar this week, by far the biggest priority for most for the upcoming year end was a smooth audit process with 53% of responses saying that was their key objective. This is a shift from previous years when more companies were disclosing a deficit and there was a focus on showing the best balance sheet possible.

When asked their views on disclosing a pension accounting surplus: 35% of sponsors said that showing a surplus has no benefit to them as an organisation and 32% said that while it’s important to show a surplus to highlight a strong funding position, the amount is less important. Some even said that disclosing a surplus is unhelpful.

With this being new territory for many schemes, LCP say scheme sponsors should consider three things when accounting for a surplus.

  • Think about the messaging – a surplus points towards increased financial security but can lead to queries if also paying in deficit contributions
  • Understand your scheme rules and the implications for surplus – in particular, can you recognise it (this is an expected hot topic for auditors), as well as who is able to access the surplus and when?
  • As positions improve, look ahead to your long-term plan for the scheme. If planning for a buy-in or buy-out transaction, think ahead as in a crowded market it’s important to be prepared

LCP’s webinar this week also revealed that over 40% of scheme sponsors were still considering whether and how to reflect the Covid impact in their year-end corporate accounts, despite the fact that Covid has been on the agenda for the last three years. This uncertainty reflects a range of issues including the subjectivity of any adjustment, a preference to be in line with peers and wider market practice leading to herding and a reluctance to move from the pack, and the desire for a smooth audit process where assumption changes could cause additional questions.

Of those who had decided, over half were going to be making some allowance for Covid in their accounts. This is a step up from previous year ends. LCP are urging sponsors to better understand the long-term impact of Covid on their schemes – this impact will not have been felt evenly by each pension scheme, and coupled with the updated census data suggesting further reductions in future life expectancy, means now is a good time to consider the suitability of life expectancy assumptions in more detail.

Jonathan Griffith, Partner at LCP, commented: “We are seeing a shift in mindset in scheme sponsors when it comes to their approach to accounting as we enter a new era of improved positions and surplus. For many, now they are in surplus, the size has become irrelevant, and ensuring that their accounts have a smooth audit has become the key priority. Whilst this trend has perhaps been caused by increasing audit requests and requirements over recent years, I do recommend that companies remain engaged with their schemes and ensure the pensions strategy remains aligned with wider corporate objectives.

“It’s interesting that there are still a significant number of companies who are still working out whether and how to make an allowance for Covid. Whilst it highlights the amount of uncertainty and subjectivity that still surrounds the long-term impact of the pandemic, this is an area where scheme sponsors could and should be proactive as maintaining the “wait and see” approach is starting to look out of line with market practice.”

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