Telling stories about pensions
October 09, 2019
Telling a good story is a delicate balance. Go into too much detail and you risk the listener switching off, glazing over as you describe, in infinite detail, a room’s decor or your life history, neither of these embellishments adding to the story being told. Conversely, cut corners, or summarise too much, and the listener may not fully understand what has happened, leaving them none the wiser.
When telling a story, it’s important to understand your audience and what they are interested in, but also to get to the point with reasonable haste, unless you both have an abundance of time. (And, let’s face it, none of us seem to in this technological age.)
And so it goes with pensions disclosures. While the average person on the street may not be interested in a pensions discussion, the information that companies disclose on the employee benefits they provide can be crucial for users looking to place a value on the business. There is empirical evidence from PwC research that investors discount the share price where there is material defined benefit pensions risk, so the more useful information companies provide about how this risk is being managed, the lower impact pensions will have.
As part of its broader project looking at principles of disclosure, the International Accounting Standards Board (IASB) has embarked upon a review of the disclosure requirements for IAS 19 (employee benefits), as well as IFRS 13 (fair value measurement), and therefore pensions disclosures are once again an area of focus.
Recently, PwC held a roundtable discussion featuring investment analysts and shareholder representatives (amongst others), to get their views on what they want to see in the pensions note of a company’s accounts. We also had IASB staff at the table, and they provided fascinating insights on the review process thus far, and the balance they were trying to keep between excessive prescription and not enough.
There was strong support from those round the table for better disclosure around:
- expected future cash contributions and their potential variability;
- the company’s strategy for managing the pension and associated risks, including highlighting if a buy-out is being considered;
- member profiles and associated liabilities covering a split of current employees, deferreds and pensioners, with more information around future benefit payments;
- how the main assumptions used in the sensitivity analysis might affect asset values; and
- inclusion of an "executive summary".
Widening sensitivity disclosures to the impact on the balance sheet has long been a subject of debate. That a scheme’s defined benefit obligation increases if bond yields fall is expected; what is not always obvious is how the scheme’s assets would perform in such a scenario. With interest rate hedging in place, the impact may not be as drastic as it would first seem. It would therefore seem beneficial for a company which has such hedging in its scheme to make this very clear in the pensions note, as well as articulating why it is in place.
Furthermore, if a company is planning to fully insure its scheme in the short- to medium-term, users of the accounts would evidently find it useful for the company to disclose this and how their actions fit into this plan. For example, the company is likely to be funding to a level over and above what would normally be expected, or investing in a high proportion of low risk assets (such as UK gilts) in order to better match the insurance cost. As ever, context is everything.
So what happens next? The IASB staff told us that their Board will undertake technical discussions on IAS 19 for the remainder of 2019 and that an Exposure Draft is expected to be published next year. Therefore, we wait to see exactly what the IASB will propose but, in the meantime, companies can be proactive in this area by addressing some of the points above if they have not already.
There is always a story worth telling.
To find out how we're helping clients address these challenges, take a look at our financial reporting for pensions webpage.