As you will be aware from previous alerts, a High Court judgement published on 26 October 2018 confirmed that defined benefit pension schemes will be required to equalise benefits for the effect of inequalities between males and females in respect of Guaranteed Minimum Pensions (GMPs) since 17 May 1990.
Guidance was published on 18 March 2019 by the Pensions Research Accountants Group (“PRAG”) which sets out the impact of this on the preparation of annual pension scheme accounts under FRS 102 and the SORP.
The guidance at a glance
The financial impact of equalising GMPs can be broken down into three main categories:
(1) Calculation of arrears payments (and interest) where pensioner and dependant members have been underpaid.
(2) The present value of paying higher benefits in the future for existing pensioners and dependants.
(3) The present value of paying higher benefits in the future for active and deferred members.
The new guidance places an obligation on Trustees in relation to item (1) only, i.e. past underpayments, for scheme accounts with a year-end date after 26 October 2018.
The main points are as follows:
- Where they “can be measured reliably”, the arrears payments (including interest) should be generally recognised as a liability in the pension scheme accounts via Benefits Paid and appear within Current Liabilities in the balance sheet (i.e. same as a tax-free cash payment which has been incurred but not paid at the year-end).
- A key consideration will be whether the arrears figure is material. If it’s deemed to be immaterial, no recognition is necessary, but a narrative should be included setting out how the Trustees will seek to address GMP equalisation in the future.
- Avoiding including a figure in the accounts on the grounds that the Trustees don’t think they can produce a reliable estimate (due to uncertainties around methodology/data etc) is expected to be very rare and exceptional.
- One technical area will be whether the arrears should be treated as an “accrual” or a “provision” as the accounting disclosure is quite different. This depends on the degree of estimation – a pure “finger in the air” number would almost certainly be a provision whereas a figure which is reasonably certain and accurate would be an accrual. We think the default will be the accrual route for most schemes.
- Additional information should be disclosed within the “Report on Actuarial Liabilities” regarding whether or not the liabilities allow for GMP equalisation.
It is essential for Trustees to contact their auditors and actuarial advisers at the earliest possible opportunity to consider the impact on their scheme.
Where actuarial calculations have already been carried out in relation to the scheme for company accounting purposes, the Trustees should request such information from the employer to gain a better understanding of the magnitude of the impact.
Another key consideration when quantifying past underpayments is whether a scheme’s rules place a limitation on the number of years over which arrears are payable, e.g. it is fairly common for a six-year limitation to exist. Such a limitation could have a significant impact on the underpayments figure and whether it is deemed material or immaterial. Legal advice is likely to be required on how such a limitation might apply.