Estimated reading time: 3 minutes
As ever, April has been a busy month for us - producing accounting reports for hundreds of participating employers in the LGPS. This year, local authority employers are required to adhere to tighter deadlines than ever before and we are well underway with producing all the required reports.
Roisin McGuire, Associate in Public Sector Consulting, reports about SEDR and the change in approach taken in accounting assumptions this year.
Many LGPS employers - in particular local authorities and other public sector employers - prepare accounting disclosures as at 31 March each year. These may be in accordance with either the IAS19 or FRS102 standard, depending on the employer.
Under both standards, the discount rate should be determined in relation to market yields at the end of the reporting period on high quality corporate bonds. There are a number of ways to approach this – and we’ve changed tact following an internal review of our methodology. For the previous accounting report, we used the “spot rate” approach; this year, we are instead proposing the SEDR (Single Equivalent Discount Rate) approach.
We continue to believe that either approach satisfies the requirements of the relevant accounting standard, but are aware that a number of the larger audit firms favour the SEDR approach. Whilst the different approaches may produce ever so slightly different assumptions, they do tend to produce very similar liability valuations. Accordingly we do not believe the change in methodology will produce materially different valuations.
The effect of adopting the SEDR approach instead of the “spot rate” approach will vary for employers of different maturity. Due to the shape of the bond yield curve, the discount rate derived will be lower for employers with higher liability durations than under the “spot rate” approach - and vice versa.
The effect of the change in assumptions will also depend on the discount rate assumed in the previous year which was based on the yield on bonds at 31 March 2017. As discussed in the section above, the yield curve at later terms is lower than at the previous accounting date, further compounding the decrease in discount rate derived from the SEDR approach – resulting in a higher value being placed on liabilities. The converse is also true.
What does the overall picture look like?
Based on market conditions at 31 March 2018, employers who receive reports at March would typically expect to see a decrease in the value of the defined benefit obligation as a result of changes in assumptions.
Of course, the impact on deficits will also depend on asset performance and overall funding position. Well-funded employers with longer durations and reasonable returns should see their deficit reduce. However, asset returns over the recent two months have offset the positive returns since 1 April 2017 - therefore it is possible that employers with average durations and where Fund returns have not been so good could see an increase in deficits.
Our briefing note issued shortly after 31 March 2018 covers more detail on financial reporting for employers. If you have any questions on this topic, or if you did not receive a copy - please let us know on the details below.