The hidden cost of FRS102

Published by Nick Griggs on

Lewys Curteis contributed to the writing of this blog post

The introduction of the new accounting standard, Financial Reporting Standard 102 (FRS102), could have unexpected consequences on the Pension Protection Fund (PPF) levies of certain pension schemes.

FRS102 applies to accounting periods commencing on or after 1 January 2015, and will therefore be used going forward for nearly all companies that have previously accounted for pension schemes under the FRS17 standard.

A number of changes have been brought in under FRS102, but, from a PPF levy perspective, it is the change relating to the treatment of multi-employer schemes that could have a significant impact.

Recognising deficit reduction contributions

In the past, companies that participated in a Defined Benefit (DB) multi-employer scheme that were unable to identify their share of the scheme’s assets and liabilities were able to account for their liabilities on a Defined Contribution (DC) basis.

Under FRS102, these companies will still be able to account for their DB liabilities on a DC accounting basis, but where a company is required to make deficit reduction contributions, a liability will need to be disclosed on the company’s balance sheet equal to the present value of the future deficit reduction contribution payments.

As the insolvency risk model that is used to calculate PPF levies relies heavily on the information disclosed in company accounts, this additional liability could result in a worsening an insolvency risk score for many companies participating in multi-employer schemes.

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Increase in PPF levies

Companies that are scored on the Experian model’s ‘Large and Complex’ scorecard are likely to be most affected by this change in accounting treatment. This scorecard currently considers the change in a company’s net worth over a four-year period, and therefore for those companies that see an increase in their balance sheet liabilities following this change in accounting treatment, a worsening in net worth could result in a worsening in insolvency risk score and, all other things being equal, an increase in the PPF levy.

As the ‘Large and Complex’ scorecard is used to calculate the insolvency risk score of ultimate parent companies, irrespective of their size, this technicality could have further consequences. Specifically, as the strength of the ultimate parent company is used to calculate the insolvency risk score of all group subsidiaries, any negative changes to the ultimate parent company’s score could ultimately result in a worsening to the group subsidiaries’ scores.

We recommend that companies affected by this change in accounting treatment investigate the potential impact that this may have on their PPF levy as early as possible. The PPF are investigating the impact of this change and their latest consultation (we will update you on this shortly) is inviting comments. Therefore, those that will be materially impacted should look to feed into this process to ensure their views are represented.

"As the insolvency risk model that is used to calculate PPF levies relies heavily on the information disclosed in company accounts, this additional liability could result in a worsening an insolvency risk score for many companies participating in multi-employer schemes"