Stricter regulations on the way companies report pension schemes in their official accounts could wipe millions of pounds off retailers’ profits, new research has found.
The International Accounting Standards Board has this week published the final IAS 19 standard on employee benefits, which attempts to simplify and improve the quality of disclosures by companies regarding their pension plans.
As part of the revised guidelines firms will no longer be able to set the expected return on a scheme’s assets according to the assets actually held by the plan, instead from 2013 the calculation will effectively assume that all assets are invested in AA-rate corporate bonds.
This is bad news for retailers as most of these companies’ traditional schemes will expect to make much higher returns on their riskier investments than this, and consultancy and actuarial firm Barnett Waddingham believes this could cost them as much as £200 million in finance costs.
In a survey of retail companies in the FTSE350, Barnett Waddingham found 2.4 per cent of total profits in the sector could be lost due to the regulations.
Nick Griggs, Head of Corporate Consulting at the consultancy, commented: “The survey of FTSE350 companies with defined benefit schemes indicated that profits for the latest available accounting periods would have been around £2 billion lower had the new standard been in force.
“To put this into context, the total disclosed a profit for these companies was in the region of £50 billion.”
Other aspects of IAS 19 will require all companies to show pensions position in a much more simplified form than is currently common in Europe and it also bans the used of the ‘corridor method’ which allows companies to smooth returns to reduce volatility in published figures.
Although most retailers’ balance sheets will be hit by the changes, those which are more conservative with their speculating will be less affected, and it should be easier in the future to judge how manageable firms’ pension deficits are.
Griggs added: “Whilst change will always bring winners and losers the revisions will certainly simplify the accounting treatment of pension schemes and will result in greater consistency from company to company.”