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UK pension schemes may be understating liabilities by £260 billion

14 July 2019

UK pension schemes may be understating their liabilities by as much as £260 billion and this figure could rise, according to a new survey by XPS Pensions Group. 

According to its second annual accounting pensions report, which covers 150 pension schemes, the difference between schemes accounting balance sheets and future long-term targets has been impacted by different approaches to setting discount rates and changes in average life expectancy.

While the Financial Reporting Council has already called for clearer explanation of the difference between accounting and funding, XPS Group is urging companies to ensure their disclosures “clearly communicate pension risk and funding.”

This involves deciding on a long term funding target together with trustees , explaining how it can help reduce dependence of the scheme on the company over time; clearly communicating the actions they are taking to manage pension cost and risk; and clearly setting out the difference between cash funding and accounting.

Commenting on the findings of the report, Wayne Segers, principle, XPS Pensions Group, said: “The pensions Regulator is already expecting trustees and employers to set long term funding targets which will drive a greater difference between accounting and the cost of pensions, ‘the accounting gap’.

“Accounting disclosures will be an ever more important window in helping to explain this gap and good pension disclosures can help allay concerns around pension contributions and set out a clear path for managing pension risk.”

Segers added: “The accounting gap for UK pension schemes already exists but there is potential for it to become materially larger as regulatory changes are introduced. If users of accounts understand risk, then the company will get credit for managing it.”

According to XPS, the significant range in discount rates used across UK pension schemes is driving a 10% difference in pension liabilities.