Matt Davis, Partner, at Hymans Robertson responds to the FRC’s analysis of DB pension accounting

“Thursday’s findings from the FRC urging auditors to subject pensions accounting disclosures to more rigorous examination is an interesting development.  Pension deficits are sensitive to subjective assumptions about the future as well as external events such as changing bond yields and life expectancy projections.  The FRC report may help companies better understand their pension schemes, which may help companies set funding and investment strategies that help for the longer term.

“This report may lead to a narrowing of the range of the discount rates selected by companies. This tends to be the most significant assumption a company can make and a more ‘optimistic’ rate can lead to significant drop in deficit levels. In light of this report from the FRC, auditors may be more cautious in the discount rates they are comfortable with and may be more likely to push back and challenge companies. The assumptions used to predict life expectancy can also have a significant impact on a scheme’s deficit. While a broad range of life expectancy assumptions can be justified by socio-economic factors, companies should be able to justify their approach. A relatively small life expectancy change can have a much larger impact on a scheme’s deficit.   The FRC highlighted a case where this was ten times a company’s materiality limit for their whole accounts.

“In terms of practicalities, it’s essential that employers recognise the need to fully engage with pensions accounting as early as possible in the run up to year-end. Failing to do so could risk auditor challenge and risks de-railing year-end processes.”