Currently, under UK GAAP FRS17, an employer participating in a multi-employer defined benefit scheme can account on a defined contribution basis (under the “multi-employer exemption”) if it is “…unable to identify its share of the underlying assets and liabilities in the scheme on a consistent and reasonable basis”. Under this approach, contributions are booked to the P&L as they fall due. This approach is often used in the public sector, and is the approach adopted by employers participating in the Social Housing Pension Scheme (SHPS), where assets and liabilities are not segregated by employer.
Under FRS 102 (which is effective for annual periods beginning on or after 1 January 2015), whilst accounting for multi-employer schemes on a defined contribution basis can continue, employers will also be required to recognise the capitalised cost of any deficit contributions payable (i.e. the net present value (NPV) of any deficit contributions payable) as a liability on the balance sheet. As a result, profit and loss account (P&L) charges will generally reduce as the deficit contributions are reflected on the balance sheet rather than through the P&L on a year by year basis. However, with the SHPS valuation taking place every three years then there will be significant jumps in the balance sheet and the P&L charge every three years.
For some multi-employer schemes such as SHPS, it is possible to move to defined benefit (DB) accounting as long as the scheme can provide sufficient information to estimate the share of each participant’s assets and liabilities. In SHPS, the Trustees attribute valuation deficit payments in line with each company’s share of the total SHPS deficit and has done since the 2011 actuarial valuation, which provides the information needed. This means that it is possible make a good estimate of each employer’s liabilities (and therefore share of assets) on an FRS102 basis. Associations may be able to agree the defined benefit approach with their auditor.
Overall, P&L items can reduce significantly as a result of a move to defined benefit accounting, especially in years where the entity commits to a new deficit repair funding commitment – this alternative could be attractive to many housing associations. In the intervening years, operating charges are likely to be higher than the future service costs plus unwinding of the discount rate under FRS102. Under the defined benefit approach there will be more volatility in the years between the three yearly valuations.
Under the DB approach, the full actuarial of the liabilities and the value of assets (giving rise to the deficit) will need to be recognised and calculated using assumptions set out by FRS102. However, if the option to DB account is taken, the company would not also need to recognise the NPV of the deficit contributions.
With the two approaches being so different, each housing association will need to consider carefully which approach they prefer. However, once FRS102 is adopted it will be difficult to change policy so it is something to consider this year.
If you have any questions please get in touch with your usual KPMG pensions contact, or Steve Simkins.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.