Adjust 17: Two Different Actuaries Could Legitimately Derive Wildly Varying Figures for Your Company's Pension Scheme Deficit under FRS17. David Davison Urges FDs to Question Actuarial Assumptions
Davison, David, Financial Management (UK)
Although FRS17 has undoubtedly gained acceptance in recent years, there is still a significant divergence of opinion about the audit standard. Some people believe that it provides a useful measure of a potential liability and some treat it more as a necessary evil--while others still see it as a complete pain in the proverbials. But, if nothing else, it has at least given us a starting point from which to measure companies' pension liabilities on a consistent basis. Or has it?
The debate has moved from "should the FRS17 figure be produced?" to "just how accurate and consistent a measure of pension scheme liabilities is it?" This question has become increasingly important as the standard has become more widely used to value pension liabilities on everything from sales and purchase to setting scheme contributions. It has, therefore, become more important than ever for financial directors to get the right figures.
There seems to be an element of blind acceptance among FDs and auditors that whatever they are provided with on FRS17 is a fait accompli without realising the degree of standardisation that's used in making numerous calculations and the potential level of variation in the assumptions that could acceptably be made. In most cases it is pretty much a given that the assumptions made will not reflect the specific position of the company involved.
This is problematic mainly because minor differences in the assumptions made can produce material differences in the final results. Three key variables are used in calculating FRS17 figures--the assumed discount rate, salary inflation and price inflation--and generally these have varied by only about 0.2 per cent, 0.3 per cent and one per cent respectively over the past year. A couple of other areas where assumptions need to be made, but in this case not disclosed, are life expectancy and the commutation of pension for tax-free cash. Actuaries preparing FRS17 figures can take significantly different approaches to these two variables. …