11 November 2010 - Post by:Helen Powell
Chaos theory tells us that a single occurrence, no matter how small, can change the course of the universe. That might be overstating the case a bit, but it won’t come as news to you that changing from the Retail Prices Index to the Consumer Prices Index as the measurement index for calculating revaluation of deferred pensions and increases to pensions in payment is going to be a bit of a mess. Däna Burstow posted some comments here recently on the potential for the change to create gaps even between different sections of a single pension scheme, based on the wording of scheme rules which were never drafted with this type of change in mind.
In case you thought the Government hadn’t made things difficult enough already, the Accounting Standards Board has now added some confusion of its own. Under new draft guidance from the ASB’s Urgent Issues Task Force, there could be radically different impacts on an employer’s accounts, depending on the wording of the scheme rules.
The ASB’s view is that if a change from RPI to CPI represents a change in a scheme’s obligation to a member (for example, because RPI is specifically referred to in the scheme rules), then this is a benefit change which should be accounted for as a past service cost and recognised in the profit and loss account. If, on the other hand, the scheme rule refers to statutory indexation, then the change in liabilities arises from a change in assumptions and any actuarial gain should be shown in the statement of total recognised gains and losses.
And there’s more… there could be differences not only in how you account for the change, but when you can do so – which means the pension number in any scheme sponsor’s accounts, and any comparison between different companies, is going to be increasingly arbitrary until this whole issue is sorted out. The ASB’s view is that where a change in liabilities is treated as ‘actuarial’ (a change in assumptions), this is effective from the Government’s announcement in July 2010. So, for example, BT has been able to announce this week that the change to CPI indexation has wiped £2.9billion off its pension deficit in the last quarter. Where the change is considered ‘substantial’ (a change in benefits), this won’t be recognised for accounting purposes until an agreement to change the index is reached and communicated to members. Many companies won’t be able to make an announcement of the BT type yet, or even at all – it all comes down to (guess what?) the wording of the scheme rules.
Could the chaos spread even more widely? The ASB’s statement includes a suggestion that where the general understanding of scheme members is that increases would be based on RPI, a change of index should be treated as a change in obligation rather than a change of assumption. Given that, until 8 July 2010, no one in the industry had an expectation of any measure other than RPI being used as the statutory index for private sector pensions, this seems like completely the wrong test – we can only hope the ASB has received that message back from its consultation.
Whether or not a butterfly flapping its wings in Brazil can set off a tornado in Texas, it seems that Edward Lorenz’s chaos theory is alive and well in private sector pensions.
Helen Powell is a senior professional support lawyer at Allen & Overy LLP.