FTSE 100 pension risk exposures: The information gap

Alzheimer's information event
14 September 2010

Most FTSE-100 firms are failing to provide information on the risks in their pension schemes as suggested by the Accounting Standards Board’s guidelines, according to experts.

This is one of the key findings of a research report just published by the Institute of Chartered Accountants of Scotland. The report reveals that finding out how much risk a FTSE 100 company faces from its pension funds can be very difficult even though the aggregate deficit for the FTSE 100’s defined benefit pension schemes currently stands at over £50 billion.

The research, conducted by academics from the Nottingham and Aston Business Schools, reveals a widespread failure to report the sensitivity of pension liabilities to changes in the core assumptions which strongly influence their valuation. This creates problems for readers of the annual reports who want to understand the overall scale and timing of the potential pension risks faced by companies. Such understanding requires clear reporting of information about how much the liabilities might change as a result of, for example, shifts in life expectancy or the rate of inflation.

The researchers found that:
  • Only ten FTSE 100 companies disclosed the sensitivity of their defined benefit pension schemes’ liabilities to the four major actuarial assumptions, as recommended in the Accounting Standard Board’s guidelines.

  • Thirty-five companies disclosed no sensitivities to changes in actuarial assumptions.

  • The time frame covered by life expectancy forecasts varies significantly between companies – anything from 5 to 25 years in the future. Ten companies failed to indicate how far into the future their forecasts related.

  • Comparing industry sectors, banks have the highest levels of pension risk disclosure.

  • Pulling together the narrative information on a company’s pension schemes is difficult, because it is scattered throughout the annual report and not always linked to the related quantitative disclosures.
These findings indicate that the IASB’s current proposal to require the disclosure of such sensitivities is both significant and necessary. The report suggests, however, that more is needed to help investors compare pension risks across companies and sectors. It proposes that the International Accounting Standards Board (IASB) may wish to extend its proposed requirement beyond the use of company specific “reasonably possible” sensitivity levels to the use of tables that include standardised time frames of sensitivity for the key assumptions.

Such standardisation would have two benefits:
  • An increase in the overall level of disclosure above that being achieved by “best practice” guidelines.

  • Improved comparability of pension risks across companies and sectors.
Further details and copies of the report can be obtained here.

To arrange an interview with a key lead on the report, Margaret Woods, or for all media enquiries, please contact Dhiren Katwa on 0121 204 4954 or email d.katwa1@aston.ac.uk