Companies handed accounting 'headache' by High Court pension ruling

Companies could be met with an “unwelcome end-year headache” by having to adjust their 2020 accounts following a High Court judgment regarding defined benefit (DB) pensions, according to LCP.

The High Court ruled that DB trustees that provided guaranteed minimum pensions (GMPs) should revisit and, where necessary, top-up historic cash equivalent transfer values that were calculated on an unequalised basis if an affected member makes a successful claim.

An estimate by LCP suggested that for roughly one in six (15 per cent) companies, the amounts involved would be material enough to need to be reflected in their 2020 annual accounts.

As such, LCP partner, Phil Cuddeford, recommended companies sorting their annual accounts take three steps, starting by obtaining historical pension scheme accounts back to 1990 and looking for figures on past amounts transferred out, adding interest as appropriate.

The companies should then make assumptions about the proportions of these transfers that need to be adjusted that are in line with the assumptions already made in company accounts after the previous GMP judgment in 2018, before assessing whether the resultant figure was significant enough to require an adjustment to company accounts.

LCP also offered further advice, stating that companies should not assume that the transfer figures that need adjusting will be as large as for recent years, pointing out that a lot of transfer activity “was triggered by the ‘freedom and choice’ reforms of 2015, so earlier years are likely to have fewer transfers than more recent years”.

Cuddeford urged companies to “be pragmatic” about the matter, noting that gaps in historic data may make it impossible to quickly calculate the uplift needed for some members who had transferred out, meaning that “it may be possible to scale down the theoretical maximum cost”.

He concluded: “Companies preparing their annual accounts for 2020 will not welcome this court judgment coming close to the end of the year.

“Firms will already have had to take account of an earlier judgment on the same topic, but now they need to assess whether they will have to make changes in respect of people who are no longer even members of their pension scheme and who have transferred out.

“However, there are a few rules of thumb that companies can use which will help to reduce the number who have to go through complex calculations in order to come up with a figure for their annual accounts.”

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