FRS 102 - Xafinity

ntouch

September 2015

www.xafinity.com

Welcome to the September 2015 edition of InTouch.

In this issue... ▪▪ FRS 102 - Are you prepared? ▪▪ Refunding an ongoing funding surplus ▪▪ PPF draft determination ▪▪ Pension scams ▪▪ DB transfer activity - latest update on quotation volumes Forthcoming Webinar: Last chance to register for ‘Market volatility - protecting your scheme’

FRS 102 – Are you prepared?

Background The new UK accounting standard FRS 102 is mandatory for company accounting periods commencing on or after 1 January 2015. FRS 102 is based heavily on international accounting standards and applies to non-listed companies unless they adopt those international standards instead or are eligible for the small company exemptions. The changes to the accounting treatment of defined benefit pension costs and obligations could be significant for many companies currently accounting under FRS 17. Apart from some relaxations to the disclosure requirements, the main changes are: ▪▪ P&L costs will be hit by the removal of the expected return on scheme assets ▪▪ There is now more scope for employers to recognise pension scheme surpluses as an asset ▪▪ Entities participating in multi-employer or group schemes may have to recognise a pension liability for the first time. On first time adoption of FRS 102, the prior year comparatives will need to be restated. Owing to the volume of work involved, companies should already have started their transition project. The consequences for some companies could be significant and an early appreciation of the changes may enable mitigating action to be undertaken before the year end. The changes have the potential to affect key performance indicators materially and could result in one or more of the following: ▪▪ Banking covenants diminished ▪▪ Distributable reserves reduced ▪▪ Knock-on effects on bonus and incentive arrangements ▪▪ A worsening of Experian credit ratings and potentially higher PPF levies. The detail A) Expected return on assets FRS 17 allows a best estimate of the expected return on the scheme’s assets to be credited to the P&L cost. For schemes with a typical allocation to returnseeking assets, this expected return is usually higher than the interest (at a corporate bond discount rate) on the liabilities. Many companies are therefore currently able to show a finance credit even if their scheme is in deficit. FRS 102 adopts the IAS 19 treatment so that the expected return on assets is effectively replaced by the discount rate. Sponsors of schemes with an accounting deficit will in future have to show a finance cost. Only those companies sponsoring schemes with a very high allocation to government bonds are likely to notice an improvement. B) Pension scheme surplus recognition FRS 17 only allows surplus recognition to the extent that future service contributions can be offset or where a refund has already been agreed. Hence sponsors of schemes closed to accrual are usually unable to recognise any scheme surplus as a company asset. Page 1 September 2015

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The international standards are, however, more flexible in relation to the recognition of a pension scheme surplus. Under FRS 102, potential future refunds can be recognised. In most cases we would expect sponsors of such schemes to be able to recognise the whole surplus as a balance sheet asset. Exceptions would include situations where a refund is not permitted by the scheme rules or where a third party, for example the trustee, has unilateral powers to prevent the gradual settlement of liabilities over the lifetime of the membership. We expect such situations to be rare. C) Multi-employer and group schemes Under FRS 17, companies participating in multiemployer or group schemes typically do not show a pension asset or liability on their balance sheet. Instead they simply recognise the contributions paid each year as a P&L cost. Entities participating in non-associated multi-employer (NAME) schemes now need to recognise as a minimum on their balance sheet the present value of any future deficit contributions they are committed to paying.

Group schemes, where all of the employers are under common control, are treated in a different way to that of NAME schemes: ▪▪ The default is that the company that is “legally responsible” for the scheme should recognise the cost of the whole scheme in its own accounts. The other entities can then simply continue to reflect the contributions paid as a P&L cost. ▪▪ If there is a contractual agreement or policy setting out how the FRS 102 pension costs are shared between the participating employers then all employers should use full defined benefit accounting in their individual accounts. Whilst there may be some departures, we would expect the most common interpretation to be that the Principal Employer is legally responsible for the scheme. (However, it should be noted that the Pensions Regulator’s view is that all participating employers are legally responsible for their share of the scheme’s liabilities!) If the inclusion of the whole scheme’s costs and liabilities on that company’s accounts would not be desirable, the Principal Employer should aim to put a new cost sharing agreement in place as soon as possible.

Refunding an ongoing funding surplus Should a defined benefit pension scheme have an ongoing funding surplus, a refund of this surplus to an employer may be allowed if certain requirements are met. These requirements are: • there must be a power to pay a refund to an employer in the Rules of the scheme; • the refund must not exceed the maximum amount specified in an actuarial certificate; and • the trustees must be satisfied that it is in members’ interests to exercise the power and must have given members at least three months’ notice. Section 251 of the Pensions Act 2004 (as amended by the Pensions Act 2011) in effect provides that any pension scheme whose Rules as at 5 April 2006 included a power to return surplus to an employer will lose that power unless the trustees pass a resolution to retain it by 5 April 2016. In order to pass a resolution the trustees must give at least three months’ written notice to any participating employers and all scheme members; the trustees must also be satisfied that it is in members’ interests to pass such a resolution thereby retaining the ability to make surplus refunds to an employer. Whilst most schemes do not currently exhibit funding surpluses (and wouldn’t expect to in the near future)

any employer whose scheme currently has the power to pay them a refund of surplus may wish to ensure that steps are taken to preserve this power. Unless the trustees pass a resolution to preserve this power it will be lost and any future surplus could not be refunded except possibly on a scheme winding-up. If the Rules of a scheme currently permit such refunds, and if the Principal Employer wishes to preserve the power to have surplus refunded then the following actions would need to take place: 1. Principal Employer to write to the Trustees to request they pass a resolution to preserve the power to refund any ongoing surplus. 2. If the Trustees agree to the Principal Employer’s request they write to the scheme members and the Participating Employers giving them 3 months notice that a resolution will be passed. 3. Trustees to pass the resolution once the 3 months notice has ended. Please note that the notice to members and the Participating Employers would need to be issued no later than the end of December 2015 so that the resolution could be passed before the 5 April 2016 deadline.

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Are you

scammable or Scam: Pension access offered before age 55 and you are F RE not in ill health

!

Scam: Offers of a free pension F RE review, a one-off investment opportunity, the chance to cash in or release your pension early, pension loans or upfront pension cash

E

We have previously discussed the Code of Practice that describes the actions that Trustees should be taking to protect their members against the risk of falling victim to pension scams. This Code of Practice is particularly timely given concerns that in an environment of significant change (i.e. Freedom and Choice) it might be easier for unscrupulous individuals to convince members that their activities are bona fide. The first step in applying this Code begins when a member requests a transfer payment (not when they simply request a transfer value quotation). In most cases the appropriate action is to ask the member some questions to identify whether there are any tell-tale signs of scam activity (see graphic, source: The Pensions Regulator). The key challenge in obtaining this information is that scammers often complete transfer paperwork on behalf of the member, and will typically do so in a way that is designed to avoid raising any suspicions. Therefore, however diligent the administrators may be, there is a significant risk that a “paper-based” approach will not identify all situations where members are being scammed. An alternative approach (which many of our clients have implemented) is to speak with the member over the telephone to gather the necessary information. This will increase the chances that the information provided is robust, and make it more likely that any suspicious activity is identified. On one recent case our discussions with the member uncovered the following: • The member first started thinking about transferring their benefits after being cold-called about “a Government Scheme”. • The member then received three home visits to discuss his finances. • He was then couriered some documents to sign to arrange the transfer. • He had no idea how his transfer value would be invested once it was transferred into the new arrangement. • Because his transfer value was below £30,000 he did not need to take the advice of an Independent Financial Advisor, and so his only contact was with the company who cold-called him.

E!

Pension scams

Scam: Unsolicited contact via call, text, email or in person claiming to be from The Pensions Advisory Service, Pension Wise or governmentendorsed. Such contact would always be initiated by you first, never by those organisations.

Scam: Convincing marketing materials that promise you guaranteed high returns on your investment

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Scam: Overseas investment opportunities in property, green energy plantations, scratchcards where all your money is in one place


Is there a material risk of a pension scam?

Process transfer

No

Yes Ask member to complete appropriate discharge forms

Yes

Yes Does member have a right to transfer?

No

Yes

Decide whether to proceed with transfer

Notify the member that the transfer will not be paid and, where appropriate, the administrator of the receiving scheme, Action Fraud and the Regulator

As shown in the graphic if, having undertaken their due diligence, Trustees believe there is a material risk of a pension scam occurring, they will want to establish whether the member has a right to the transfer. A right to transfer could be either a statutory right, or a right arising under the transferring scheme rules (which may be discretionary). Determining the existence of the right is often not straightforward, and will typically require the input of legal advisers. If the member does have a right to transfer, but diligence suggests that there is a material risk of a pension scam, Trustees will need to make a judgement about whether to proceed with the transfer. This will involve an assessment of the risks associated with either blocking the transfer or allowing it to proceed. Again, legal advice is likely to be useful. It is worth noting that if a member does have a statutory right to transfer, and the receiving arrangement meets the legislative criteria – then the transfer must proceed, notwithstanding that this might not be in the individual’s best interests. If the decision is made to pay the transfer most Trustees will want to warn the member of the risks, and

No obtain an appropriate discharge from them. If there is no right to the transfer, the transfer can be refused. The Code states:

“A member may challenge a decision to refuse a transfer payment. This challenge may be informal or part of a formal complaint. You should be prepared to explain to the member why the transfer was refused. As part of the challenge, the member may provide sufficient additional information to satisfy the concerns or failure to provide information that led to the transfer being refused. If so, you need to consider whether it is now reasonable to proceed with the transfer. If you decide that the transfer should still not proceed because the concerns have not been resolved, you must notify the member that the original decision not to pay the transfer stands. If you decide that the transfer should proceed, then the transfer should be processed as quickly and efficiently as possible.“ Despite increasing recently, pension transfer scams are thankfully relatively uncommon, and so most trustees should not have to face this challenge frequently (if at all). However when they do decisions will need to be made quickly and so it is prudent for all Trustees to be aware of the issues just in case.



PPF draft determination The PPF have recently published their draft determination for the 2016/17 levy. This will be the second year that the PPF will be using the Experian model for assessing sponsor insolvency risk. The Experian model was introduced last year as part of a raft of changes to the levy calculation methodology. As expected following the major changes last year, this year is more a case of evolution rather than revolution, with the main changes being refinements to how data is submitted to the PPF & Experian. In addition, as the Experian insolvency model is now up and running, the insolvency

probabilities will be averaged over twelve months rather than just six, as was the case last year. Overall the total levy that the PPF intend to collect has dropped from £635m to £615m, this small reduction being due to an expected improvement in the insolvency probability risk for sponsoring employers, partially offset by a deterioration in scheme funding due to continued low gilt yields. The draft determination now gives schemes an opportunity to obtain an estimate for next year’s levy. As well as helping with

budgeting, an estimate will help inform trustees and sponsors on whether they should start work to put levy mitigation measures in place prior to the relevant deadlines next spring. We can assist with tracking Experian scores and modelling what-if scenarios so that companies can see the impact of changes to the major metrics in their accounts. Consultation on the draft determination closes on 22 October, with the final determination expected to be published early December.

Upcoming Industry Events Xafinity is sponsoring ‘Pensions Revolution’ – an in-depth, on-line programme specifically aimed at those within the pensions sector. The programme, created in partnership with NAPF and ITN, will investigate the major changes and impact of new legislation on the pension industry. It will also look ahead to the future of retirement savings. Pension Revolution will be screened for the first time at the NAPF Annual Conference & Exhibition in Manchester on 14 - 16 October 2015. Xafinity are also sponsoring the Professional Pensions Annual Investment Conference, taking place on 11th November 2015 at the Jumeirah Carlton Tower in central London.



DB transfer activity – latest update on quotation volumes The graph summarises recent levels of transfer value quotations. More details on the background to these statistics can be found in the June and August editions of InTouch. It will be interesting to see whether the drop observed in August is seasonal (reflecting Summer holidays for example).

Forthcoming webinar, last chance to register: “Market Volatility – protecting your scheme” At 10am on Tuesday 6 October we will be holding the latest in our series of online seminars focussing on topical pensions issues. The last few weeks have seen significant volatility in financial markets, which has had a detrimental impact on the financial position of many Defined Benefit pension schemes. However the impact on some pension schemes has been much lower than others, largely because of differing investment strategies. During this webinar we will consider two main subjects: 1. the causes of recent market volatility, the impact on pension schemes, and an outlook for the future, and 2. actions that pension schemes can take to protect themselves against future volatility. This webinar is aimed at Trustees and Sponsors of UK Defined Benefit occupational pension schemes, although it may also be of interest to those professionally involved in Defined Contribution pension schemes. Attendees will be eligible for 60 minutes of unstructured CPD. You can register to attend this webinar by visiting: http://www.xafinity.com/Events/Webinar-Programme If you are interested in this event but cannot attend the live webinar, please register anyway and we will send you a link to a recording of the event.

Xafinity is a market leading actuarial, pensions and employee benefit consultancy providing a full range of consulting and administration services to over 500 clients. We combine expertise, insight and technology to address the needs of both trustees and companies, specialising in pension de-risking solutions. We are committed providing a professional and proportionate service, tailored to our clients’ needs and delivered cost effectively. Xafinity Consulting Limited. Registered Office: Phoenix House, 1 Station Hill, Reading, RG1 1NB. Registered in England and Wales under Company No. 2459442. Xafinity Consulting Limited is authorised and regulated by the Financial Conduct Authority. A member of The Society of Pension Professionals.
