Corporate accounting framework vital when considering run-on and surplus sharing for DB schemes

Accounting issues may deter DB pension schemes from run-on and surplus sharing if a clear accounting framework is not considered by the sponsor, warns Hymans Robertson, as it releases its latest paper, Accounting implications of run-on and surplus sharing. With many DB schemes now facing improved funding levels, and the option of a run-on strategy becoming more of a reality for some, a clear accounting strategy must be thought through. Against the backdrop of a transforming political landscape with opportunities developing from the Mansion House reforms and potentially new legalisation post-election, care must be taken when agreeing an accounting framework.

An objective under a run-on strategy, the leading pensions and financial services consultancy states, may be to share surplus generated with corporates and members. Embedding such a strategy requires detailed planning and management early on to ensure any unexpected accounting implications are avoided.

Commenting on the need for companies with DB pension schemes to consider accounting implications when looking at surplus sharing with members, Sachin Patel, Senior Actuarial Consultant, Hymans Robertson, says:

“If a company is considering running on their DB scheme, and sharing the surplus with members, there is a lot to consider. For example, with discretionary pension increases, there are a number of different accounting treatments which could be considered appropriate and it’s vital that the preferred treatment is confirmed with company auditors when agreeing a run-on framework.

“A run-on strategy involving surplus generation, and improving member outcomes, is very different from a decision by a company to award a one-off discretionary increase to members. The scale and complexity of the accounting discussion in a run-on scenario should not be under-estimated and getting it wrong could have material and unexpected financial consequences on companies, at worst de-railing the strategy. The good news is that with early planning this is an entirely manageable issue.

“Our guide outlines the key areas which should be considered and sets out the potential different accounting treatments once a run-on framework has been agreed. Ultimately, the choice of accounting treatment depends on the scheme’s circumstances and the views of auditors. Over 30% of attendees of a recent webinar we hosted on this matter thought that accounting complications would be a deterrent to those looking to run-on, with nearly 50% not yet sure on the implications. This is a complex area, and these figures clearly illustrate how important it is to consider this early in the process.”