New accounting standards requiring pension deficits to be recorded on the balance sheet could result in a £100 billion hit to UK companies this year, says professional services firm Deloitte. Whether the change will result in a downgrading of companies’ share prices will depend on the extent that pension deficits have already been factored in by the markets.

Under new accounting standards*, UK companies will record the total deficit for final salary pension schemes in full on the balance sheet. For example, Deloitte actuaries estimate the total pensions deficit of FTSE 100 companies to be around £50 billion at the current time, whereas less than around £10 billion is currently booked in the accounts. Therefore, the FTSE 100 may need to provide for an extra £40 billion. Across all UK companies, the total hit could be as much as £100 billion.

The full impact of this adjustment may come as a surprise to the investor community. However, David Robbins, a consulting director at Deloitte, observes

“Fundamentally, it is only the accounting of the pension liabilities that is changing – the nature and timing of future pension cashflows should be independent of this change, and this information has largely been in the public domain for some time.”

Robbins adds ”It is important, however, that finance directors fully understand their own company’s pensions underfunding and can effectively explain future cashflows and volatility to their stakeholders.”

Another concern is that, once the full pensions deficit is reflected on the balance sheet, profit reserves will need to be reduced and, in some circumstances, may prevent companies from paying dividends. Some companies have recently changed their group structure in order to avoid this. However, Robbins warns: “A change in company structure may allow companies to maintain shareholder dividends, but it could also create a number of other challenges. Going forward, the new Pensions Regulator is going to be concerned by any moves which appear to reduce the security of the pension scheme. Consideration of the impact of the pensions scheme is now critical in the context of any corporate restructuring.”

Ends

Notes to Editors
The above analysis is based on Deloitte calculations of the FTSE 100 companies using disclosed pensions accounting information on their UK and overseas pension and post retirement benefit arrangements.

* Under the new standards, listed UK companies will report under IFRS, “Employee Benefits” IAS 19. Unlisted companies will use the UK standard, FRS 17. The move to IFRS and the impact of FRS 17 comes into affect this year. FRS17 has required disclosure of these deficits for the last two or three years in the UK but it is unclear whether investors have understood the full impact of the change.

About Deloitte
Deloitte & Touche LLP is the UK’s fastest growing major professional services firm based in 21 UK locations, with over 10,000 staff nationwide and fee income of £1,246 million in 2003/2004.

It is a member of Deloitte Touche Tohmatsu, a leading professional services organisation delivering world class audit, tax, consulting and corporate finance services, with around 120,000 people in over 140 countries.

Deloitte Touche Tohmatsu is a Swiss Verein, and each of its national practices is a separate and legal entity.

Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.