Schemes could face £260bn accounting deficit - XPS

Pension schemes across the UK could be facing as much as a £260bn accounting gap, a new survey from XPS Pensions Group has found.

According to its second annual accounting pensions report, covering 150 pension schemes, the difference between schemes accounting balance sheets and future long-term targets has been affected by different approaches to setting discount rates and falling average life expectancy.

Although there is already a deficit, The Pension Regulator’s expectation the trustees and employers must asset a long-term funding target (LTFT) for the scheme id making the difference greater.

Commenting on the findings, XPS Pensions Group principle, Wayne Segers, said: “Accounting disclosures will be an ever more important window in helping to explain this gap and good pension disclosures can help allay concerns around pension contributions and set out a clear path for managing pension risk.

“The accounting gap for UK pension schemes already exists but there is potential for this to now become materially larger as regulatory changes are introduced.

"It is therefore essential that annual accounts set out how the numbers in the balance sheet interact with cash and risk management actions. If users of accounts understand risk, then the company will get credit for managing it.”

As a result of the accounting gap, schemes are being urged to communicate the pension risk and funding by explaining why they decided on their LTFT and setting out the difference between cash funding and accounting to stakeholders.

According to XPS, the “significant” range in discount rates used across UK pension schemes drives a 10 per cent difference in discount rates.

XPS said there could also be a “restriction of surplus” on future company accounts, meaning that the 45 per cent of schemes currently in surplus “may have to show a deficit to reflect future cash contributions going into the scheme”.

Furthermore, auditors will continue to scrutinise pension schemes accounts more carefully, particularly more detailed questions around the calculation of disclosure items.

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