Get the best performance from your pensions accounting. Pensions accounting guide November 2017

Transcription

1 Get the best performance from your pensions accounting Pensions accounting guide November 2017

2 Taking a proactive approach to your pensions accounting can improve your financial reporting benchmarks. Your DB pension scheme obligations can be one of the biggest liabilities that your company has. How the details are presented in your accounts can work for or against you. Find out more

3 Pension scheme accounting implications for companies Companies face many challenges when it comes to their pensions accounting. We have developed this guide to help you get the best performance from your pensions accounting. Click on each topic below to show: How pensions can impact; What solutions are available; and How LCP can help. Take the next steps to getting the best out of your pensions accounting. Stakeholders Dividends Regulatory Capital Credit Rating Speak to an expert today PPF levies Banking Covenants Budgets Pension Strategy Find out how we have helped our clients

4 Stakeholders Your financial accounts are interpreted by an array of stakeholders within your network, from trustees to investors. Your challenge is to present your company in the best possible light. Why does it matter? Provides your stakeholders full visibility of your pensions commitments. Encourages investment to provide opportunities and help your business to grow. Working with a sense of responsibility and meeting compliance rules with regulatory bodies. How can we help? Different stakeholders focus on different aspects and figures within your accounts. We can guide you through and show you different approaches can improve the presentation of figures. Enhancing the company image and reassuring all parties that risks are understood and managed.

5 Dividends Why does it matter? Your dividends are an important reflection of your company s value. If market conditions worsen and your pensions accounting deficit grows you could be restricted in paying out dividends. It is important for companies to manage their pensions risk and monitor the capital within their company. How can we help? To avoid surprises we keep you up-to-date with the performance of your pension arrangements. Ensure your assumptions and accounting figures are fully aligned with the principles behind the accounting standards. Help you take advantage of the flexibilities you have within the accounting standards. Real time monitoring with LCP Visualise to report bespoke pension accounting metrics.

6 Regulatory capital Banks and insurance companies are bound by regulatory capital requirements. Pension schemes have an impact on the firms balance sheets and risk capital levels. Why does it matter? Pension fund feeds into the regulatory risk capital calculations, typically using accounting figures. Can affect the business which financial companies can write and can result in missed business opportunities. How can we help? Educate key parties so they understand the impact of the pension scheme, as well as sensitivities to small changes. Ensure all figures are presented in the best possible light. Changes in balance sheet figures can impact the capital reserves. May drive pension strategy and accounting approach.

7 Credit rating Pension schemes can impact your credit rating with increases in deficits and costs causing potential rating downgrades. Why does it matter? Changes to your credit rating can have a substantial impact on your wider business. It can become more expensive to borrow and can impact existing debt. How can we help? We can help you monitor the position and alert you to material changes in the pension scheme position. Potential increase in pension scheme levies.

8 PPF levies Your financial accounts feed into your scheme s PPF levy by providing you with a score on which your levy is based. Why does it matter? Changes in how you present your figures can materially improve or worsen your levy through a change in your PPF score. How can we help? Provide sensitivities of your score based on different figures and interpretations within your accounts. The PPF score is also important for scheme trustees as a measure of the company covenant.

9 Banking covenants Banks are reluctant to increase their lending if they know the pension scheme is costing a lot. Your bank covenant is unique to you and your business and can be quite specific. Why does it matter? Changes in your accounting figures can lead to: Breaches to your banking covenants; Penalties on interest payments; and Affect access to future funding. How can we help? Identify key accounting ratios in relation to your pension arrangements and monitor their values. In advance of corporate transactions involving your pension arrangements, we would advise you on the flexibilities you have within the accounting standards to potentially avoid hitting bank covenants triggers.

10 Budgets Pensions figures are volatile in the current climate and making sure you have accurate up-to-date figures will enable you to have greater insight and clarity when setting your budget. Why does it matter? Not having up-to-date figures can lead to inaccurate budgets and unwanted surprises. Your pension scheme can cost more than anticipated (both cash and P&L costs). Up-to-date figures need to reflect changes the latest developments in legislation. How can we help? Provide you with accurate up-to-date figures and estimates of projected figures for the following years. Give real-time sensitivities of these figures to changes in market conditions, ensuring no surprises.

11 Pension Strategy Your pensions strategy and your financial accounts are inter-linked. When setting your strategy you need to consider the impact on your financial accounts and the associated topics in this guide so you can have greater insight and clarity to make better business decisions. Learn how our 6-point review can help add value to your business

12 How have we helped our clients Planning ahead to avoid surprises Setting your assumptions right

13 Planning ahead to avoid surprises The background The balance sheet position is significant to our clients business operation and concerns were raised about its unpredictability. Our solution With the help of our real-time model, we efficiently provided regular updates on their pensions figures throughout the year. This allowed the client to review its options well ahead of their year end. The results Our client is now more confident they are less prone to surprises. They also did not have any difficult timeconsuming pension meetings during their year end period. Going forward the client also has easy access to accurate figures to build into their budgets, projections and long term pensions strategies. 50 Ahead of the year end, we discussed and resolved potential accounting issues, including exploring alternative methods of setting assumptions and helped liaise with auditors. Surplus / (Deficit) m 0 (50) (100) (150) Large increase in accounting deficit Discussions with client and auditors before year end (200) (250) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Regular updates provided to client on latest position

14 Setting your assumptions right The background Our clients pensions accounting figures and the balance sheet deficit were projected to have increased materially since their year end. Their worry was that it could cause problems with budgeting as well as the impact to their banking covenants and credit ratings. Our solution The results A review of the approach to setting assumptions led to a 10% improvement in their accounting balance sheet. These changes meant that the company s credit rating and covenant were not affected. Discount rate 3% LCP were able to review and benchmark the clients assumptions relative to market practice and relatively to their own experience within the pension scheme. Salary increases Pension increases 1% 1% There were a number of areas where they were either being prudent or their positioning within the market was not aligned with their intentions. We discussed proposed changes and provided evidence to the company s auditors ensuring a smooth audit process ahead of their year end. Commutation Percentage married Retirement age Bridging pension TOTAL 1% 1% 2% 10% reduction in liabilities 1% Confidence in assumptions Balance sheet Surplus

15 Contact us To find out more on how we can help with your pension accounting please contact a member of our team. Phil Cuddeford Partner phil.cuddeford@lcp.uk.com Jonathan Griffith Senior Consultant jonathan.griffith@lcp.uk.com Richard Chini Senior Consultant richard.chini@lcp.uk.com At LCP, our experts provide clear, concise advice focused on your needs. We use innovative technology to give you real time insight & control. Our experts work in pensions, investment, insurance, energy and employee benefits. Lane Clark & Peacock LLP London, UK Tel: +44 (0) enquiries@lcp.uk.com Lane Clark & Peacock LLP Winchester, UK Tel: +44 (0) enquiries@lcp.uk.com Lane Clark & Peacock Ireland Limited Dublin, Ireland Tel: +353 (0) enquiries@lcpireland.com Lane Clark & Peacock Netherlands B.V. (operating under licence) Utrecht, Netherlands Tel: +31 (0) info@lcpnl.com All rights to this document are reserved to Lane Clark & Peacock LLP ( LCP ). This document may be reproduced in whole or in part, provided prominent acknowledgement of the source is given. We accept no liability to anyone to whom this document has been provided (with or without our consent). Lane Clark & Peacock LLP is a limited liability partnership registered in England and Wales with registered number OC LCP is a registered trademark in the UK (Regd. TM No ) and in the EU (Regd. TM No ). All partners are members of Lane Clark & Peacock LLP. A list of members names is available for inspection at 95 Wigmore Street, London W1U 1DQ, the firm s principal place of business and registered office. The firm is regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are licensed by the Institute and Faculty of Actuaries. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Lane Clark & Peacock LLP 2017