Pension Schemes Bill [HL] — House of Lords, 2016-11-28
Topic: Labor
William David McKenzie (Labour, Centre-left): My Lords, the amendment of the noble Lord, Lord Flight, seeks a way of tackling the concern about the calculation of DB pension liabilities and deficits, particularly their volatility and the impact a large deficit can have on a company’s balance sheet. By way of illustration, the LCP annual survey of FTSE 100 company schemes estimated deficits at 31 July 2016 of £46 billion, compared with £25 billion a year earlier and an estimated surplus in February 2016—big swings, clearly. Of course, a significant factor in these calculations is bond yields, which reduced sharply following the EU referendum, pushing up liabilities, although it is suggested that some of this reduction has been negated by interest-rate hedging and that foreign currency-denominated assets have benefited from some decline in sterling The reality is that a number of factors feature in how DB schemes should be accounted for: life expectancy, inflation and discount rates, as well as contribution levels and benefits. In seeking to understand the sensitivity of this, for FTSE 100 companies, as reflected on the basis of International Accounting Standard 19, the aggregate pension deficit of £46 billion in July 2016 comprised liabilities of £628 billion and assets of some £582 billion. These are very large aggregates The noble Lord’s amendment concentrates on the calculation of defined benefit pension liabilities and would enable directors to use an alternative method if, "they are satisfied that accounts give a true and fair view" It provides that the Secretary of State must, "set out one or more alternative methods", for these purposes—I understand that this is based on actuarial advice—and that an alternative method of valuing DB liabilities must not be, "contrary to international accounting requirements" I am grateful to the Institute of Chartered Accountants in England and Wales for the information it provided in helping me to frame this contribution. At present, listed companies have to adopt international accounting standards. In other cases, companies can choose to use IFRS or FRS 102, which replaced FRS 17. However, it is understood that so far as pension scheme liabilities are concerned, the two standards are broadly consistent. The amendment of the noble Lord, Lord Flight, would not appear to apply to listed companies which are bound by international accounting standards—but for how long? He raised that interesting question. FRS 102 sets out how defined benefit plan liabilities are to be measured and recognised. It requires a defined benefit obligation to be calculated on a discounted present-value basis, using a rate of discount by reference to market yields at the reporting date on high-quality corporate bonds. This has to be recognised in full on the balance sheets We have sympathy with the amendment to the extent that it seeks to dampen the volatility of the measurement of liabilities for accounting purposes, but not if it is seen as a route to lessen employer contributions to DB schemes. We recognise that the current accounting treatment which generates this volatility is not ideal, although it is not helped by government policies such as quantitative easing. However, we have concerns about this approach. The Financial Reporting Council is responsible for setting UK accounting standards, not the Secretary of State A process in which generally applied standards are overridden on particular issues would set a precedent that could lead to a confusing regime and not help transparency and confidence in financial reporting. It begs the question of what alternative method of valuing DB liabilities would enable directors to be satisfied that the accounts give a true and fair view. What would this mean for trustee scheme valuations? The era of very low interest rates has brought the matter into sharp focus. In winding up our Second Reading, I think the Minister said that the Government had this issue in their sights and would explore it in the upcoming winter Green Paper. We look forward to that but, in the interim, we seek an update on where the thinking is going.