UK – FRS 17, the new accounting standard for pension funds could have major implications for company profits and has already forced one quoted company to cut its dividend to shareholders, according to research carried out by SEI Investments.

The SEI research, which examined awareness of the implications of the new accounting standard amongst finance directors and chief executives of UK companies with turnovers between £1-100 million, revealed that more than three quarters could not describe what the effects of the new standard might be.

SEI comments: “Senior managers in general do not know what FRS 17 is. 88% of those surveyed could not describe anything about it and even financial directors had little more understanding, with 79% admitting they knew nothing about it.”

The firm says 62% of those who were prompted by a description of FRS 17 were unable to indicate the implications for their company.
“Of those who did, 15% believed that FRS 17 would cost their company more money, 9% felt that the reported results would fluctuate (“it will make balances go up and down like a yo-yo”) and 8% believed that it would cause their company to change procedures (“I suppose one could invest in less volatile stocks”).”

FRS 17 is designed to make the cost of providing pensions more transparent within company accounts. Companies must put clear valuations on assets and liabilities within their schemes and the standard dictates that a portion of the cost should be routed through the profit and loss account.
If there is a deficit in a final salary scheme, then it has to register on the company balance sheet – affecting its distributable reserves.

In addition pension assets are to be valued on a market price basis, while liabilities are to be valued on the basis of yields on AA rated Corporate Bonds.

The survey also showed that 53% of senior management did not know if their company pension fund was running at either a deficit or a surplus and as many as 47% of financial directors didn’t know the current status of their pension fund.”
“75% of those surveyed had not been given advice by either analysts or fund managers on the effects of FRS 17,” says SEI.

Patrick Disney, UK managing director at SEI, comments:
“The introduction of FRS 17 again raises the issue of pension contributions for finance directors. Already the recent volatility of markets have raised the probability of increased contribution levels from a company and FRS17 is yet another pressure to deal with.
“At the extreme, a pension scheme deficit could restrict a company’s ability to pay dividends or borrow and may have implications for the company’s credit rating. Now that the first quoted company has specifically blamed FRS 17 for their dividend cut the spotlight will fall on this major form of balance sheet risk..”