UK sponsors should not seek to transform pension liabilities into equity through the use of contingent-asset funding arrangements, the Financial Reporting Council (FRC) has warned.
In a statement, the standard setter expressed concerns that a number of companies appeared to opt for an asset-backed funding arrangement so their future contribution payments could be reflected as equity within consolidated accounts.
“This has a favourable impact on financial solvency, gearing and reported comprehensive income, notwithstanding that the company has retained the obligation to fund the pension deficit,” it said.
It noted that specifically asset-backed arrangements employing Scottish Limited Partnership – such as the property partnership set up by UK retailer Kingfisher in 2011, among other asset-backed arrangements – allowed companies to provide collateral in place of higher contributions.
The cheese manufacturer Dairycrest last year also put in place an asset-backed funding arrangement to protect its pension fund against the fallout from its insolvency, granting the scheme time-limited ownership over maturing cheese stock.
The FRC said that, following enquiries from the Financial Reporting Review Panel, a number of companies had “revised either the arrangements or the amounts recognised”.
Richard Fleck, chair at the FRRP, said: “It is important companies and their advisers be aware that the FRRP will ordinarily open an enquiry into the financial reporting of any company in which material pension liabilities are reclassified from debt to equity.”
Asset-backed deals have grown in popularity in recent years, with the number of deals put in place doubling over the 12 months to October.
However, the Pensions Regulator has previously warned that such deals could increase risk for pension funds where advisers failed to anticipate all implications of the structure.
No comments yet