Re-measurements change presents new practical and accounting challenges
January 21, 2019
Whilst everyone has been focussing their energy trying to understand the accounting impact of Guaranteed Minimum Pension (GMP) equalisation, another rather esoteric change to pension accounting has been implemented by the International Accounting Standards Board on the subject of remeasurements. This change, which applies for accounting years beginning 1 January 2019, will require companies to remeasure their pension cost each time there is a major pension event. A major event could be something like a scheme closure, redundancy exercise, a buyout or a member option exercise.
Remeasurement means companies will need to recalculate their pension deficit under IAS 19 at the date of the event and then calculate a new pension accounting charge for the rest of the financial year. Conceivably, for the purpose of calculating the pension cost, a company would have to split their financial year into many pieces to deal with this. For example, if there were three pension events at different dates, there would be up to four different pension accounting periods in a single financial year.
Besides the practical difficulties, not to mention cost, of the new regime of remeasurements, with it comes a major budgeting headache. It is not too difficult to construct a scenario where the p&l after a remeasurement was double what was budgeted due to changes in market conditions and actuarial assumptions between the balance sheet date and the remeasurement date. And this could occur even when the accounting impact of the pension event itself is immaterial. Indeed, the more machiavellian companies could deliberately create a non-material pension event for the sole purpose of reducing their pension expense due to more favourable market conditions at the remeasurement date. Given such scenarios, the challenge for audit firms will be to come up with a pragmatic, robust way of dealing with the new requirements.
Of course like all things pensions, the companies with the most material pension schemes will face the most complexity, not least because they are more likely to be experiencing a pension event. One must not forget too that this is applicable to all pension schemes globally, not just those in the UK, and is something that companies reporting in the US have had to deal with for years, albeit with materiality thresholds that reduce the number of remeasurements required.
The crucial action for financial controllers will be to get a handle on what’s coming up in the next 12 months on pensions and be prepared for even more uncertainty and cost in calculating the pension expense.