FRS17/IAS19 disclosures – December year ends and trustee interest

The recent moves in gilt/bond yields look likely to result in an interesting set of FRS17/IAS19 disclosures for many DB sponsors with December year ends. The story is best told by the financial data.

Chart 1: Data for 2014FRS17 16.12.2014

Note: December 2014 figures are as at 16 December 2014.

Chart 2: data for December year ends from 2009 onwards

FRS17 DEc year ends 16.12.2014

Note: December 2014 figures are as at 16 December 2014.

Chart 3: Financial Data from Jan 2009 to Dec 2014

FRS17 from 2009

Note: December 2014 figures are as at 16 December 2014.

As a trustee, I have no role in the FRS17/IAS19 disclosures. These are the responsibility of the directors of the sponsoring employer(s). I do however have a strong interest in them.

In my experience, a tricky set of disclosures is second only to the triennial actuarial valuation in terms of providing a great opportunity for engagement with the employer. I very much suspect that the disclosures for December 2014 will – for many employers – fall squarely into the ‘tricky’ category.

The steep fall of over 100 bps in AA bond yields between December 2013 and December 2014 will have a significant affect on the discount rate used in the disclosures. Whilst there is some comfort from a slightly reduced inflation assumption, an increase in liabilities of between 15 and 25% is a very real possibility.

What such an increase in liabilities does to any deficit will depend significantly on the amount of interest rate hedging in place. If there is little or no hedging it is highly unlikely that any growth in assets will have kept pace with the growth in liabilities. Where there is hedging in place, either through holding a portfolio of long duration bonds or through LDI strategies, some or all of the rise in liabilities should be covered by a corresponding rise in asset values.

Where assets have failed to keep pace with liabilities, this means that  finance directors will be faced with an increase in any deficit and an unfavourable set of disclosures. How this will affect their day-to-day business activities depended largely on the very specific circumstances of the employer. It can affect relationships with suppliers, customers, the bank and shareholders. In practice there is little good news to be had from a set of disclosures that show a deterioration over the past year.

There is one crumb of comfort in the fact that the disclosures do not have any direct influence on the funding plan. On the assumption that there is an affordable funding plan in place – that reflects the strength of the employer covenant – this will not change as a direct result of the disclosures.

One other potential benefit is that the disclosures do provide a useful focus on the investment strategy. This is a good opportunity for trustees to discuss risk and to develop their understanding on the type and quantum of risks to which the employer is willing to be exposed.

So, whilst this year’s disclosure may have the characteristics of an ‘ill wind’, there is some benefit to be had from any heightened employer engagement. This can prove to be very useful when the more substantive issues of the funding plan and the future path of the scheme are considered at the next actuarial review.

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