FTSE350 companies with a defined benefit (DB) scheme should be disclosing all the ways a pension deficit can be calculated, to help avoid a repeat of cases like the Carillion failure.
Lincoln Pensions, a specialist covenant advisory firm, called on the Financial Reporting Council (FRC) to mandate companies to disclose more figures regarding their DB schemes in their annual accounts, including full disclosure of significant pension risks.
In the case of Carillion, its accounts disclosed an IAS 19 deficit of £0.6bn. This measure, used by companies in their reports, has been dismissed by experts because it assumes every scheme is invested in AA bonds.
Carillion's technical provisions deficit – which measures the extent of liabilities in relation to past service as they fall due – was also valued at £0.6bn.
However, its section 179 valuation, used to calculate how much it would cost for the Pension Protection Fund to take on the scheme, was £0.9bn.
On a buy-out basis – the amount that it would cost an insurance company to take on the pension fund – Carillion had a £2.7bn deficit.
According to Richard Farr, managing director of Lincoln Pensions, the last two figures weren’t disclosed in the contractor’s accounts "at all".
He said: "If this was disclosed years ago, you wouldn't have shareholders getting dividends, the money that was paid out in dividends would have gone to the scheme instead.
"If they had disclosed this amount of liabilities, there would be much more careful management, and maybe even a rescue rights issue planned a long time before when they could do it, rather than as a panic at the end."
Carillion had 13 final defined benefit (DB) schemes in the UK with more than 28,500 members, and an aggregate deficit for PPF purposes of about £800m.
It is expected that 11 of these plans will ultimately end up in the pensions lifeboat fund, with the vast majority of these already in assessment at the Pension Protection Fund (PPF).
After unsuccessful talks with its lenders and the UK government, Carillion made an application on 15 January to the High Court for compulsory liquidation.
Mr Farr said that Lincoln, alongside other members of the Employer Covenant Working Group, have submitted their thoughts in this area to the FRC.
He said: "The FRC are consulting generally on what to do about pensions, I expect something to happen soon.
"But we should be pressing for immediate action rather than waiting, because every month that goes by another House of Frasier, another Debenhams, another Carillion will come out."
Mr Farr’s criticisms come after Lincoln Pensions published a report today (10 September) about pension obligation disclosures among FTSE 350 companies – of which 177 have a DB scheme.
The report showed that a fifth (21 per cent) of these firms do not disclose their funding deficit or surplus position – which has improved from 67 per cent in 2016.
More than a quarter (26 per cent) of the companies don’t disclose the length of their recovery plan, and a fifth (19 per cent) also don’t reveal the actual amount of deficit repair contributions which they are committed to paying into their scheme.
With the exception of five FTSE 350 companies with DB obligations, not a single one disclosed their pension scheme’s funding position on any alternative valuation basis, which, if disclosed, would give stakeholders a complete picture of the size of the sponsor’s obligations to the pension scheme, Lincoln added.
Due to the lack of disclosure, the covenant specialist is asking that FTSE 350 firms start revealing the technical provisions funding position, and details of the associated recovery plan.
"This will show the actual cash funding commitments to the scheme as well as point towards those who need longer to pay," it said.
Lincoln is also asking for the FRC to define a standard basis for disclosure of pension scheme volatility, and a more prudent and comparable funding target.
maria.espadinha@ft.com
