Mercer Study Finds UK Employers Not Ready for FRS 17

July 5, 2002 ( - Almost two-thirds of the UK's FTSE 350 companies' pension funds are in deficit if measured under FRS 17 accounting rules, according Mercer Human Resource Consulting.

Of the 61% in deficit status under the measure, 38% had deficits that were 10% more than their liabilities, according to the report. 

On Hold

FRS 17, originally targeted for implementation next year, requires pensions to be accounted for using market value instead of book value, which is the current practice (see FRS 17 Hits UK Balance Sheets ).  The British government took the unusual step earlier this week of ordering a review of the data used to estimate the value of employee pensions – just a day after apologizing for overestimating the amount of money in pension savings accounts.

Earlier this week, the UK’s Accounting Standards Board (ASB) announced that it will publish for comment an Exposure Draft of an amendment to FRS 17 ‘Retirement Benefits,’ a proposed amendment that would extend the transitional arrangements in the standard and therefore defer the mandatory requirement for the full adoption of FRS 17.

Without the proposed amendments, businesses with a year-end of June would have to disclose their pensions schemes’ assets and liabilities in full this December, without the traditional smoothing effect (see FRS 17 Implementation Delay Seen ).

Larger companies fared better in the Mercer study, which evaluated positions as of December 31, 2001.  Still, nearly half (47%) of FTSE 100 companies were in deficit, compared with 69% of those in the FTSE 250.  About 28% of FTSE 100 companies had a pension fund with a value of more than 50% of its net assets, compared with FTSE 250 companies, of which 43% exceeded 50% of their net assets.

“Clearly, for a significant minority of companies, pension scheme management is a major business activity in its own right,” the Mercer study said. “In some cases, the business is more like a pension fund with a company attached, rather than a company with a pension fund.”

Equity Shift

About a fifth of the pension funds it surveyed hold less than 60% of their assets in equities, according to Mercer – a major turnaround from a few years ago when “few schemes allocated less than 75% to equities,” according to the report.  A notable shift in this direction came last fall when UK retail drugstore Boots moved all its pension assets to bonds from stocks (see Boots Walks Away From UK Equities ).

Mirroring trends in the US, UK employers have been moving toward defined contribution programs, or “schemes,” as they are referred to in the UK.  Mercer noted that 33% of companies offer a defined-contribution scheme to new employees, while 18% offer a mix of defined-benefit and defined-contribution pensions.

The ASB’s announcement

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