The targets that UK pension schemes need to be managing could be £260bn more than what is shown in company accounts, according to research by XPS Pensions Group.

XPS warned that every pension scheme will be different and the actions to consider to manage cost and risk will depend on specific scheme and sponsor circumstances. But with a new funding code of practice and expected changes to pensions law, this accounting gap is only going to get wider.

“The Pensions Regulator is already expecting trustees and employers to set long term funding targets (LTFT) which will drive a greater difference between accounting and the cost of pensions,” Wayne Segers, principal, XPS Pensions Group said.

“Accounting disclosures will be an ever more important window in helping to explain this gap and good pension disclosures can help allay concerns around pension contributions and set out a clear path for managing pension risk.”

Indeed, FRC reviews have already called for clearer explanation of the difference between accounting and funding. XPS urged companies to take action now, and ensure their disclosures clearly communicate pension risk and funding by taking up a number of recommendations:

  • Deciding on their long term funding target for pensions together with trustees, explaining why this was chosen and describing how it can help reduce dependence of the scheme on the company over time to the benefit of all stakeholders
  • Ensuring they are clearly communicating the actions they are taking to manage pension cost and risk; and
  • Clearly setting out the difference between cash funding and accounting.

“The accounting gap for UK pension schemes already exists but there is potential for this to now become materially larger as regulatory changes are introduced. It is therefore essential that annual accounts set out how the numbers in the balance sheet interact with cash and risk management actions. If users of accounts understand risk, then the company will get credit for managing it,” Segers added.

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