The company’s annual Accounting for Pensions survey is based on the accounting assumptions of 155 pension schemes as at 31 December 2017 ranging in size from £10m to £5bn. It identified three areas that will impact accounting costs: pension freedoms, life expectancy and alternative discount rates. 

Among the survey’s key findings was that current accounting assumptions do not reflect the impact of members leaving defined benefit (DB) schemes to take advantage of the new pension freedoms. These transfers can increase a typical pension scheme’s liabilities.

Wayne Segers, principal at Xafinity Punter Southall, said: ‘We are starting to see older pension scheme members that are close to retirement, leaving their DB pension schemes to access the new pension freedoms. 

‘Transfer values remain high and this is an attractive proposition for members, but these values are typically worth more than the accounting cost. 

‘For a £500m scheme even a small proportion of members leaving could add £7m to their accounting liabilities.’

At the same time, changes to life expectancy may actually reduce pension accounting liabilities, but different approaches to setting discount rates mean shareholders need better information to objectively assess pension costs as this can give vastly different results for similar schemes.

The consultancy says finance directors need to take action by understanding the pension scheme’s membership and set assumptions based on the cost of members transferring out of the pension scheme. They also need to engage with the schemes trustees to understand the impact on members and the pension scheme funding, as well as making an informed decision on whether or not to reflect new information on the changes to life expectancy.

Segers said: ‘Last month, there was significant new information released on the number of members leaving pension schemes and also changes to life expectancy, which is starting to slow.  Given the material impact both these factors have on the cost of running a pension scheme, we have looked at how this might affect assumptions used in accounting disclosures.’

A study by the Office for National Statistics showed an extra £21bn of assets transferred out of UK pension schemes in 2017 compared to 2016.  Additionally, the latest study on life expectancy published by the Continuous Mortality Investigation (CMI) unit of the Institute and Faculty of Actuaries, provided further evidence that the low level of recent improvements in longevity may be due to medium or long term influences, rather than being a short-term blip.

Segers cautioned that small changes in approach can substantially change pension scheme deficits and finance directors need to act now. 

‘We would suggest that more information on the impact of discount rate methods needs to be disclosed in financial statements.  This will be very important to help shareholders understand and compare pension risks, especially if there are further legislative changes in the future, for example changes to funding as suggested in the government’s recent white paper on DB pensions,’ he said.

Report by Pat Sweet