Pensions getting into bad company

Accounting directive SSAP24 may sound harmless. But it has resulted in some of Britain's biggest corporations being taken to task for the way they disclose pension details.
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The Independent Culture
WHEN IT comes to pensions, it appears that large companies are pretty much like the population at large. That is, they have a tendency to not think about them too much or, when they do, to be rather confused.

This picture emerges from an annual survey of the approaches taken by FTSE 100 companies to complying with SSAP24, the accounting standard relating to the disclosure in company accounts of pensions information. This fifth study by the consulting actuaries Lane Clark & Peacock coincides with the 10th anniversary of the introduction of the standard and concludes that, while the intervening years have seen improvements, it has not succeeded in its overall aim of full pensions disclosure.

Since the Accounting Standards Board (ASB) - the successor body to the group that gave the world SSAP24 - has recently announced proposals for a new standard in this area, it is tempting to believe that this is not such cause for concern. However, Lane Clark & Peacock is concerned that reform may not make things appreciably better.

Bob Scott, a partner in the firm, says that greater prescription over the assumptions that companies can make when calculating their future liabilities should lead to the greater consistency and, hence, comparability that are generally sought by accounts users. But he warns that the expected shift away from actuarial assumptions to the use of market values could create great volatility in accounting for pensions and hence make it difficult to understand what the figures actually mean.

That said, there is not a lot of clarity around at the moment. Some pensions disclosures even defy the understanding of experts in the field such as Mr Scott.

For example, in the report the firm takes to task the 1997 accounts of BT. Pointing out that the company has the country's largest pension fund, it says that it is looking for BT to take a lead in this area. "In some ways they do," says the survey. "There is a substantial note on pension costs in the financial review, as well as the full note in its normal place at the end of the accounts. They show the pension provision and the offsetting tax credit very clearly. Unfortunately, the details given on the assumptions used, although very full, are confusing."

And, talking of tax credits, Mr Scott and his fellow Lane Clark & Peacock partner, Richard Abramson, are somewhat nonplussed by the way in which companies have tended to respond to the abolition in the July 1997 Budget of the Advance Corporation Tax (ACT) credit.

About a third of the companies in the FTSE 100 could not comment in their accounts on the impact of what amounts to a 20 per cent fall in dividend income because they had already reported by the time of the Budget. But of the 63 that issued their accounts after mid-July, a full 38 made no mention of ACT and, says the report, "in most cases, it was clear that no change had been made to their costings to allow for the impact". Of the 25 companies that did refer to the change, most concluded that it had very little effect. In fact, only three companies - BG (formerly British Gas), Royal Bank of Scotland and Williams - indicated a very large cost increase as a result.

Remarking that "on the face of it, these are very strange results", Lane Clark & Peacock concludes that the relaxed approach has at least something to do with companies subtly altering their actuarial assumptions - just the sort of flexibility that is allowed for in the accounting standard and the very thing that Sir David Tweedie and his colleagues at the ASB abhor.

But, of course, this leads to still greater confusion. As the firm says, it may be that those companies with the weakest, or most optimistic, assumptions will act quickest, while those with stronger, or more conservative, assumptions might be better able to weather the change.

Whatever, the current picture is not a pretty one from the viewpoint of Lane Clark & Peacock. Just five companies - Bass, Centrica (formerly part of British Gas), Reed International, Safeway and Standard Chartered (a client of Lane Clark & Peacock) - receive top scores for their disclosures, while three others - BP, Lucas Varity and Sun Life & Provincial - are picked out for inadequate disclosures.

Since the FTSE 100 companies have funds worth a total of more than pounds 200bn and that providing pensions can amount to as much as a third of pre-tax profits, it is perhaps understandable that Lane Clark & Peacock believes companies should be giving the area a little more attention than appears to be the case at present.

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