Businesses should factor latest pension accounting rules into their funding negotiations with trustees to avoid taking a hit to their balance sheet, they were warned today.
Pensions lawyers say companies concerned that new IFRIC 14 rules will mean they can no longer recognise surpluses in their accounts should factor this into forthcoming funding negotiations.
Previous accounting rules already limited the amount of pension surplus that could be included as an asset on a company's balance sheet and what could be returned to the company in the form of refunds or reductions in future contributions. But the latest rules for listed companies go a step further by stating that they must have an "unconditional right" to a refund or have "significant scope to reduce further contributions" in order for a surplus to be included on their balance sheet.
Francois Barker, a pensions partner at Hammonds in Birmingham, said: "Companies should look to review their pension scheme documentation and legislation to establish whether they have an unconditional right to some or all of any surplus in the future.
"The accounting rules can project forward to create surpluses in the future so this is still an issue even in challenging markets. For those schemes where no unconditional right to a refund of surplus exists, companies should consider amending their scheme rules via funding negotiations with trustees.
"Schemes that have not yet been through a specific funding valuation under the Pensions Act 2004 will need to do so during 2008. So the timing of the new accounting rules allows sponsoring companies to take a two-pronged approach to their negotiations."
Mr Barker adds that companies that want, or believe they have to, fund their pension scheme at above the level required by pension accounting standards, should also ensure they factor the new accounting rules in when deciding how to provide the extra funding.
"Companies that fund their pension schemes over and above current accounting standards should consider whether the extra needs to be provided in cash to the scheme - since, projected forward, this could ultimately create a surplus which is then 'trapped' by the new accounting rules and hits the company's balance sheet.
"Many companies should instead think about directing any extra funding into a separate escrow account or providing contingent assets, such as company guarantees or charges over assets, as alternatives to extra funding commitments.
"Companies should also try and negotiate amendments to their scheme's rules with trustees to provide for them to get back any money left in the scheme when it finally terminates and all benefits have been met. This may allow the company's auditors to offset any additional funding going in today against the residual balance to come back later, potentially leaving the balance sheet neutral."
He added: "All this comes at a time when the Accounting Standards Board is recommending a tightening of the way pension fund assets and liabilities are reported in company accounts. In this wider context, companies should take steps which allow them to continue to report any actual or projected defined benefit pension surpluses as profits in the company's accounts."