Accounting for LGPS pension commitments: when is a surplus a deficit?
David Davison highlights that employers participating in the Local Government Pension Scheme may need to make additional narrative disclosures in their accounts to explain the impact of pension commitments on their balance sheets.
If you’re one of the lucky admitted bodies who benefit from a council or other guarantee for your Local Government Pensions Scheme (LGPS) membership then this is likely to mean that you are currently reporting a much more negative position on your balance sheet than your funding position indicates.
A guarantee could mean preferential exit terms
In most cases transferee admitted bodies, and community admission bodies (including charities) with guarantees, benefit from preferential exit terms should they leave a Scheme Fund, with the debt payable on exit calculated on an on-going basis (as per that used to calculate Scheme Fund contributions) rather than the more stringent cessation basis. This is good news of course as it means the likelihood of having a large debt on exit is much lower.
Measurement: accounting versus funding
However, there is no correlation between the assumptions used in the calculation of the on-going funding position and those used when compiling the Financial Reporting Standard 102 (FRS 102) figures for company accounts. Under FRS 102, the discount rate must be set in line with the yield available on high quality corporate bonds. At the moment, corporate bond yields are low and so the discount rate used in the FRS 102 calculations is likely to be much lower than that used for the on-going funding basis, resulting in higher liabilities and a much larger deficit (all other things being equal), which therefore reduces balance sheet value.
Balance sheet impact
I recently witnessed an example of this where, on an on-going basis, the organisation, a charity, was in surplus but on the FRS 102 basis it had a £100,000 deficit. The charity had a guarantor and so was able to exit the Scheme Fund at any point, paying off any on-going funding deficit (which in this case was nil). The FRS 102 deficit cannot be correct in this case as the worst case scenario is the on-going position. This meant that the charity’s balance sheet was £100,000 worse than it should have been, which, for the charity in question, was very material.
So if you have a guarantee, discuss FRS 102 measurement of your pension liabilities with your auditor. It may be possible to add a note to the accounts to provide greater clarity about the impact of your pension commitments on your financial position.