Defined benefit transfers could cost companies £25bn due to members transferring out in order to access pension freedoms, according to Xafinity Punter Southall.

Its inaugural Accounting for Pensions survey is based on the accounting assumptions of 155 pension schemes, as at 31 December 2017, ranging in sizes from £10m to £5bn.

Xafinity Punter Southall principal Wayne Segers explained that following new information released on the number of members leaving pension schemes, along with a slow in life expectancy, Xafinity Punter Southall decided to look at how this might affect assumptions used in accounting disclosures.

A study by the Office for National Statistics showed an extra £21bn of assets transferred out of UK pension schemes in 2017 compared to 2016. Additionally, the latest study on life expectancy published by the Continuous Mortality Investigation (CMI) unit of the Institute and Faculty of Actuaries, provided further evidence that the low level of recent improvements in longevity may be due to medium or long term influences, rather than being a short-term blip.

Three areas that impact accounting costs are pension freedoms, life expectancy and alternative discount rates. However, the survey found that accounting assumptions do not reflect the impact of members leaving DB schemes to take advantage of the new pension freedoms, but these transfers can increase a typical pension scheme’s liabilities.

On a more positive note, changes to life expectancy could lead to a reduction in pension accounting liabilities. The survey also found that different approaches to setting discount rates mean shareholders need better information to objectively assess pension costs as this can give vastly different results for similar schemes.

Segers said that older pension scheme members that are close to retirement are starting to leave their DB scheme in order to access the freedoms. He said that with transfer values high, it is an attractive option for members but the values are typically worth more than the accounting cost. For a £500m scheme even a small proportion of members leaving could add £7m to their accounting liabilities, he stated.

“The accounting standards provide flexibility, but small changes in approach can substantially change pension scheme deficits and finance directors need to act now. We would suggest that more information on the impact of discount rate methods needs to be disclosed in financial statements. This will be very important to help shareholders understand and compare pension risks, especially if there are further legislative changes in the future, for example changes to funding as suggested in the government’s recent white paper on DB pensions,” he added.

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