Pensions Oldie is I think an accountant.  Here are his thoughts following my blog on employer strategy from Hymans Robertson

Pension Oldie

I agree that the webcast is an excellent review of the current position and the matters to be considered by all employers, who are the party that will ultimately determine the success or otherwise of the occupational pension system in the UK.

My own views with a 40+ year experience of occupational pension arrangements is that in 30 to 40 years time we will look back on DC pension arrangements as a failed experiment.

The reasons they will be regarded as having failed may still to be determined but I consider that they are likely to include the diversion of attention from the objective of providing retirement income instead viewing them as tax subsidised savings vehicles, distancing the employer from the pension outcomes of the employees past, present and future; but primarily through the extraction of profit by third parties dealing with all aspects of the administration, investment, and payment of pensions. The consequential question of where those profits are ending up and how far they contribute to the UK economy is likely to prove far more significant than any mandation of investment policy.

My own 40 year prediction from my past 40 years experience would be a return to favour of single company DB arrangements, possibly on a shared ambition basis.

In the meantime, employers should open their minds to all the alternatives available and perhaps as Hymans suggest take a watching brief while both the Government (perhaps through the Pensions Commission) and the industry opens up new opportunities. This is likely to be more significant to long term employer survival than seeking to maximise short gains from surplus refunds paid out as dividends or used for share buy-backs while enhancing past service benefits for previous employees beyond those required to protect the real value of their pensions.

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Derek Scott is an accountant and responds to Pensions Oldie as one to another!\

In reply to Pensions Oldie

Agreed, PO, but we desperately need a change in present day accounting standards to give management more incentive to run on DB schemes or use DB surpluses to part fund DC or CDC.

Estimates of pensions deficits that arise from informal promises or expectations arguably fail the strict tests for a present obligation, reliable measurement, and “no realistic alternative” that are used to justify balance sheet recognition as a constructive obligation; in many cases they arguably better fit the definition of a contingent liability, warranting disclosure in the notes instead.

Conceptual arguments
• IAS 37, Provisions, Contingent Liabilities and Contingent Assets, requires a present obligation (legal or constructive) from a past event, with no realistic alternative but to settle, before recognising a provision. Where an employer can still change, cap or terminate a scheme or discretionary enhancements, and/or reasonable investment returns may be expected to settle liabilities and reverse a current value dip, there is arguably still a realistic alternative, so the obligation is contingent, not present.
• IAS 19, Employee Benefits, extends this perverse logic by bringing in constructive obligations from informal practices (for example, a history of benefit increases) into the estimated pension measurement. But whether those practices genuinely create an irrevocable commitment is judgemental; if employees’ expectations are not enforceable or could be changed without “unacceptable damage”, the obligation is conditional on future management intent, not a present obligation.

Measurement uncertainty
• Estimates of defined benefit deficits depend on long‑term actuarial assumptions (discount rates, pay growth, longevity, inflation) that can move the estimated liability materially with small changes. IAS 37 treats obligations as contingent (footnote-only) when the outflow cannot be measured with sufficient reliability.
• For many schemes, the “deficit” on IAS 19 differs dramatically from the funding basis actually driving contributions, because funding valuations use different discount rates and risk assumptions. Recognising a single headline deficit as if it were a firm obligation overstates precision; footnote disclosure better reflects the range and conditionality of possible outcomes.

Economic vs accounting obligation
• Companies can report an IAS 19 “surplus” yet still be required (by funding agreements or regulation) to make “deficit reduction/repair” contributions, showing that the recognised pension position may not track the economic burden. This weakens the case that the booked pension number is a faithful representation of a present obligation.
• Conversely, deficit estimates that rely on assumed future benefit improvements (treated as constructive obligations) may never materialise if business conditions change. In economic terms these are options or intentions, not liabilities; presenting them as contingent in the footnotes allows users to see the potential exposure without implying an unconditional obligation.

Faithful representation/true-and-fair-view and neutrality
• Constructive obligations for pensions rest heavily on management’s past practices and implied promises, which are inherently subjective and susceptible to bias. Recognising large balance sheet liabilities based on such soft evidence risks undermining neutrality and comparability of accounting.
• Footnote treatment as contingent liabilities would still require robust qualitative explanation of pension plan terms, funding policy, and sensitivities, but avoids embedding speculative amounts directly in equity and leverage ratios. This can produce a more faithful representation where the boundary between present and future obligations is especially blurry.

User understanding
• Analysts and creditors often already adjust reported pension numbers because they see gaps between accounting measures and economic risk; research shows markets previously “priced in” off‑balance‑sheet pension deficits when transparency was lower. This suggests that sophisticated users can work with footnote disclosures rather than relying on a single recognised figure.
• Treating pension deficits related to constructive obligations as contingent note items lets users model their own scenarios (eg different discount rates or benefit policies) instead of taking management’s prescribed accounting assumptions as if they were certain, improving decision usefulness for valuation and credit analysis.

Pensions accounting under FRS 17, Retirement Benefits, and IAS 19 has been anything but “neutral”, leading to the closure of the majority of DB schemes in the UK and changing investment policy from a bias for real growth and income to one based on “matching” with low-yielding gilts and other bonds where the assumed inflation hedge is far from perfect in practice.

In addition, use of DB surplus to part fund DC or CDC, while cash flow neutral, is not earnings neutral under present day accounting.

This is incredibly useful, even to those who aren’t accountants, in understanding the use of surpluses. DC and CDC should be friends to DB surpluses!