Lane Clark & Peacock (LCP), consulting actuaries, recently published its seventh annual survey of SS...
Lane Clark & Peacock (LCP), consulting actuaries, recently published its seventh annual survey of SSAP 24, the accounting standard relating to the disclosure of pensions information in UK company accounts. Yet again, LCP's survey shows that SSAP 24 has not succeeded in its aim of achieving full transparency through pensions disclosure in FTSE 100 companies' reports and accounts, as over a third of the FTSE constituents continue to disclose inadequate information.
Although some companies improved their disclosure (13, as opposed to nine last year, scored 20 out of 20) these improvements are too late to prevent the demise of SSAP 24. It is being replaced by a new standard, set out in Fred 20. This, says LCP, will improve disclosure, but at the expense of still more complexity.
Richard Abramson, partner of Lane Clark & Peacock, commented that, "Under Fred 20 companies will for the next two years have to disclose their results on both the current and the new approach. Although the primary statements will initially remain on the current standard every quoted company's report and accounts will have to carry at least two extra pages of notes. Not only will they be difficult to understand but they cannot be reconciled with the information given in the primary statements.
"The new system will lead to additional volatility in balance sheet numbers and pension costs so investors and other users of company accounts will find the new situation still more complex and confusing," he said.
"The new standard will continue to offer flexibility over the choice of key pensions assumptions. What is new under Fred 20 is that this could be used to directly increase headline profits one year with no offsetting reductions later on."
It is interesting to note that, under Fred 20, BT's high redundancy costs would have reduced reported pre-tax profits by about £250m a year in the two years to 31 March 1999, whereas under SSAP 24 these costs have not immediately hit headline profits.
Between them the FTSE 100 companies employ about 3.5m people in the UK. They have total pension assets of about £250bn. Total annual pension costs are over £3bn a year, or almost £1000 a year for each employee.
Pension cost as a proportion of pre-tax profit generally averaged 4% (the same as last year), although there were exceptions. British Airways' pension cost equated to 49% of profit and its pension scheme assets are worth nearly twice as much as its market capitalisation. At the other extreme they can also represent an addition to profits. BG (British Gas) and Reckitt Benckiser showed pensions credits of over 3% of total profits.
Six years ago, in its first survey, LCP began calling for greater standardisation of the format of pensions disclosures, together with stronger requirements of what had to be included. For 1999, although there is evidence of an improving trend, far too many FTSE 100 stocks still do not make anything like adequate disclosure of pension cost assumptions. This lack of detail serves to frustrate investors and users of company accounts looking to understand how pension costs have been arrived at.
Disclosure of information by 12 companies fell well short of the level required, as LCP awarded each of these companies a disclosure score of just 11 points out of a maximum 20. These companies were: Abbey National; BP Anioco, CGU; Compass, Norwich Union, P&O, Royal & Sun Alliance, Royal Bank of Scotland, Scottish Power; Sema, Wolseley and WPP.
Yet again the problem is caused by a refusal by too many companies to disclose the full range of assumptions which underlie the pensions cost. Without them it is almost impossible for investors, analysts or anybody else to understand the pension cost position.
Sun Life & Provincial scored highly on the disclosure ranking, yet the way the company discloses its pension cost prompted LCP to describe it as a model of confusion. Firstly the company quotes the pension cost as being increased by £10m because of a surplus, when precisely the opposite would be expected.
The total cost is described in money amounts but the breakdown between major schemes is expressed as percentages of payroll figures, which are not disclosed. Finally, the cost breakdown misuses the term regular cost to mean the cost allowing for surplus, but in fact it is defined as the cost excluding the effect of surplus.
Some companies (eg. Glaxo, Carlton and Schroders) which scored very badly last year have this year made dramatic improvements in the information they supply. Following LCP's criticism of its pensions disclosure and treatment of its redundancy costs last year, BT has radically changed its disclosure standards this year to fully overcome any objections. At least some of these improvements are a direct consequence of previous LCP SSAP 24 surveys.
The 13 companies (up from nine last year) that gained top scores for their disclosures were BAA, Barclays, BOC, Centrica, Daily Mail, Glaxo, Hilton, Legal & General, Reckitt Benckiser, Reed Elsevier, Schroders, Standard Chartered and Thames Water.
The trend away from traditional final salary, or defined benefit (DB), provision towards defined contribution (DC) continues. Ten companies now offer only DC arrangements; new employees are only being offered a DC scheme at a further seven. A third of UK based FTSE 100 companies now offer DC arrangements to at least some of their UK employees. Does this mean final salary schemes are on their last legs?
Not if one looks at employee numbers. The larger employers have tended to keep DB pensions and all ten companies where DC schemes are the only pension available are in the TMT sector. It is worth bearing in mind that over 98% of the 3.5m FTSE 100 employees are still in companies with mainly DB pensions.
"We expect the trend to DC will continue - already ICI has a
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