Poor accounting disclosure among FTSE 350 companies is preventing investors from assessing the level of underlying risk caused by their pension funds, a report has found.
According to covenant advisory firm Lincoln Pensions, stock market investors and other stakeholders typically have to guess the actual funding commitment that a business has made to its pension scheme from limited IAS19 disclosure.
Research carried out on the latest released annual report of every FTSE 350 company with UK pension obligations as at 12 October 2016, found around two-thirds (67%) with defined benefit (DB) pension scheme assets totalling approximately £332bn, do not disclose the deficit or surplus position of their schemes relative to the actual funding target which drives company funding contributions.
In addition, more than half (54%) do not disclose the length of deficit recovery plans they are committed to in order to clear the funding deficit.
Lincoln argued full disclosure was “critical” because for many companies, the pension obligation is the longest-term and most volatile liability on their balance sheet.
Lincoln Pensions CEO Darren Redmayne (pictured) said: “The fact that a majority of the FTSE 350 neither disclose the size of their technical provisions deficit – the key figure for setting funding contributions – or the length of recovery plans to fund their deficits leaves members and stakeholders in the dark, having to guess the level of commitment a business has made to its pension scheme.”
Among the companies analysed, not one provided a measure of future funding risk volatility, such as value-at-risk (VaR); and only 37% referenced the DB pension scheme’s hedging strategy, either quantitatively or qualitatively.
Lincoln said better information would assist stakeholders in monitoring the sponsor covenant standing behind schemes and help prevent more “BHS-type situations”.
Redmayne added: “Directors of listed companies are already required to make a ‘long-term viability statement’ which, under the new version of the FRC’s UK Corporate Governance Code, requires a robust assessment of longer term risks. We believe that this new requirement provides the ideal catalyst and justification for obligatory additional disclosure in relation to pension obligations.
“Over time, our view is that this best practice should be extended to all company disclosures, listed and non-listed. We believe that many of the issues associated with recent high profile cases, such as BHS and Tata Steel, could have been highlighted much earlier through greater transparency in the accounts.”
