Listed companies are starting to inform their investors about their pension transfer volumes expectations, a trend which is expected to grow, revealed consultant Hymans Robertson.
According to the firm’s report on the health of FTSE 350 defined benefit (DB) pensions, at least one company adopted an allowance for future transfers in their annual report, informing its stakeholders about the probable impact of these in their pension liabilities.
In this particular case – a firm in the financial services sector – the expected volume of members transferring out will increase its liabilities on a IAS19 basis by 2 per cent.
Alistair Russell-Smith, head of corporate consulting at Hymans Robertson, told FTAdviser that this is probably one of the first time a listed company creates such an allowance for pension transfers.
He said: “But this is something I would expect to see more of in the future, particularly if transfers keep going on, and also in those situations where paying transfers lead to a funding strain on IAS19 as it was this case.”
The volume of DB transfers has been soaring, as savers seek to take advantage of sky-high transfer values and to move their nest eggs into defined contribution (DC) schemes in order to access their cash using pension freedoms.
Funds transferred out of pension schemes hit a record £10.6bn in the first quarter of the year, according to data from the Office for National Statistics (ONS).
Mr Russell-Smith explained that a listed company giving an indication of their transfers expectations can be relevant for investors.
He said: "Although it doesn't change the liabilities by a big amount, it massively changes the cashflow profile and when you expect to pay the benefits out.
"The scheme becomes mature more quickly, so it does have implications for funding and investment strategy, and therefore for risk.
"It also shrinks the scheme, and it becomes more manageable relative to the size of the company, which for an investor is interesting."
Even though a high volume of transfers has the impact of increasing liabilities under IAS19 in the case mentioned by the consultant, it doesn’t necessarily mean that the scheme will be worse off.
Under the accounting rules used for public accounts, DB scheme liabilities can be significantly inflated due to the calculation requiring "high quality" bond yields as a discount rate.
Mr Russell-Smith said: “IAS19 doesn't reflect the actual investment strategy of the scheme and the cost of providing the benefits, because the discount rate uses corporate bond yields.
“IAS19 is helpful to compare liabilities between companies, but it's not a true cost of providing those liabilities. It doesn't drive the cash contributions into the scheme either.”
According to Hymans Robertson report, FTSE 350 companies support £800bn of DB pension liabilities, and have a combined market capitalisation of £2.6tn.
maria.espadinha@ft.com
