Guidance on pensions equalisation

By Christine Scott, Head of Charities & Pensions, ICAS

14 June 2019

Guidance is now on hand to show how pensions equalisation will affect reporting for pension schemes and employers

Pension scheme accounts are stewardship accounts recording the payment of pensions to scheme beneficiaries in the Fund Account and recognising the assets of the scheme in the Net Assets Statement. They do not record a scheme’s liability to pay post-employment benefits which have been built up by current and former employees of the sponsoring employer.

In respect of the requirement to equalise the effect of unequal GMPs, however, pension schemes must recognise a liability when the benefits payable and related interest can be measured reliably, and the liability is expected to be material.

In March 2019, the Pensions Research Accountants Group issued detailed guidance for pension schemes on how to approach accounting for GMP-related obligations following the Lloyds judgement. This guidance should be considered alongside the requirements of the Financial Reporting Standard applicable in the UK and the Republic of Ireland (FRS 102) and the Financial Reports of Pensions Schemes: A Statement of Recommended Practice (the Pensions SORP (2018)).

The question arises as from what date the GMP-related obligation existed. This is relevant to the employer’s consideration of when to account for the obligation, once it has been reliably measured.

One view is that the effective date of the obligation is the date of the High Court’s judgement in the Lloyds case. Another view is that trustees already had this obligation which the ruling has confirmed: this would lead to a prior period adjustment being required when the obligation is reliably measured. In either case, the effective date is earlier than the date the trustees come to amend scheme benefits to comply with the Lloyds judgement.

Therefore, schemes with periods ending before the date of the Lloyds judgement, which have yet to sign off their accounts and are able to measure reliably the obligation, need to decide on whether to account for the obligation as an adjusting or non-adjusting event after the end of the reporting period.

Pension schemes recognising a GMP-related obligation or disclosing a contingent liability should set out their approach within the accounting policies note. Current estimates of obligations relating to the equalisation of GMPs range from 1% of scheme liabilities to 4%. However, obligations could be outside this range.

Sponsoring Employers

In contrast to pension schemes, employers sponsoring defined benefit schemes are required to account for their obligation to provide agreed benefits to current and former employees.

Sponsoring employees preparing their accounts in accordance with the EU-adopted International Financial Reporting Standards must account for net defined benefit pension liabilities in accordance with International Accounting Standard (IAS) 19 on Employee Benefits. Similarly employers applying FRS 102 must comply with Section 28 on Employee Benefits.

The impact of GMP-related obligations on an employer’s net defined benefit pension liability following the Lloyds judgement will depend on whether the obligation previously included an estimate for GMP-related obligations, or is being updated to include an estimate for GMP-related obligations for the first time.

However, in either scenario, any change in an employer’s net defined benefit pension obligation is likely to meet the criteria for treatment as a change in accounting estimate rather than a change in accounting policy. Therefore, it will not be necessary to account for any impact as a prior period adjustment as changes in accounting estimates are made prospectively.

Nevertheless, employers should review and update their accounting policy for pensions and other narrative disclosures around pensions to explain the impact of the Lloyds judgement on their accounts to the extent necessary for those accounts to give a true and fair view.


The auditors of pension schemes and of employers will need to consider the implications of the Lloyds judgement on their clients’ accounts in planning and conducting their audit work. In particular, auditors applying International Auditing Standard (ISA) (UK) 540 (Revised) on Auditing Accounting Estimates and Related Disclosures should consider how this will impact on their work on GMP-related obligations. The extent of the work required to gain evidence to support the measurement of GMP-related obligations will depend on the extent of any uncertainty surrounding the estimates and the degree of complexity involved.

The revised version of ISA 540 (December 2018) applies to periods beginning on or after 15 December 2019 with early adoption permitted.


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