Clear pension scheme disclosures can be key to helping users of IFRS accounts to understand a company’s future cash flows.
The FRC has conducted a thematic review which looks at pension disclosures in 20 companies’ annual report and accounts. Below is a summary of the key messages which could help enhance your disclosures to ensure they provide high quality information to users.
The full review provides some useful examples of good practice.
Explanation of different valuations
Companies should identify and describe the reasons for any differences between the accounting valuation and the triennial (funding) valuation eg due to portfolio risk profile or differences in timings of the calculations.
Funding in future years
Information about the amount, timing and uncertainty of future cash flows should be included. It is useful to disclose contributions for several years into the future, distinguishing between those made to cover any deficit and those in respect of current service.
The likely impact on future cash flows are required to be explained by disclosing:
- the funding arrangements and the mechanisms for determining future cash contributions (driven by the triennial valuations of pension schemes);
- the expected contributions for the next year; and
- information about the maturity profile of the obligations such as the weighted average duration of the obligation and the likely timing and amount of benefit payments.
The maturity profile of the defined benefit obligations drives a scheme’s investment strategy so this information is particularly important.
Investment strategy risks
The investment strategy and associated risks should be explained. This can be made more effective by including both explanations in the same section of the pensions’ note.
This disclosure should include description of any asset-liability matching strategies. These can be improved by:
- describing the specific nature of the risks, how these are being mitigated and which risks have been retained, and
- providing information about the risks to the deficit or surplus and the pension scheme’s funding which are not fully covered by the asset-liability matching.
Net pension assets
When a defined benefit asset is recognised the significant judgements made in assessing the trustees’ rights, including any to wind up the scheme or variation in the benefits payable, should be disclosed.
Explanations which refer to the trustees’ unconditional rights to either a refund or a reduction in contributions are more helpful than those that simply refer to the need for legal advice or reference paragraphs of the accounting standard.
Disaggregation of plan assets
The fair value of investment assets are required to be:
- disaggregated into classes that distinguish their nature and risks;
- distinguished between those which have a quoted market price in an active market and those that do not; and
- analysed so as to be meaningful to the user.
Valuation methodology for unquoted assets
Because the fair value disclosures of IFRS 13 do not apply to pension scheme assets there is often no explanation of how the value of unquoted assets has been determined. The FRC is of the view that a description of the approach adopted improves investors’ understanding of how the values were determined and the management judgements involved.
For example, where insurance policies are used to match benefits payable (Liability Driven Investments) disclosures can be improved by:
- describing the nature of the components of the LDI portfolio;
- quantifying and explaining how the fair value of the components has been estimated; and
- explaining the reason for holding the respective components.
Directors should consider whether aspects of the pension schemes constitute a principal risk or uncertainty. This will depend on the significance of the relevant amounts to the balance sheet.
The FRC will continue to question companies where:
- there is insufficient information on how the risk associated with the pension scheme effects future cash flows;
- judgements, valuations and investment strategies are unclear or not adequately described or aggregation appears inappropriate; and
- the strategic report does not reflect the significance of the pension to the balance sheet.
For more information, please speak to your usual RSM contact.