The recent Lloyds judgement on GMP Equalisation has set the industry in a spin.
Whilst the Actuaries get to grips with what exactly is needed we take an auditor’s view on this and how this could impact on the accounts.
FRS102 requires a liability to be recognised if:
- There is an obligation at the end of a reporting period based on a past event
- It is probable that the entity will transfer economic benefits in settlement
- The settlement can be measured reliably
How does this differ from a contingent liability?
A contingent liability is a possible but uncertain obligation or a present obligation, that it is not recognised because it is either not probable or quantifiable or both!
What the High Court ruling has done is created an obligation to equalise based on past events and to correct past underpayments. It also outlines a framework on how to calculate this although further guidance is expected from the DWP.
It is rumoured in the Industry that transfers out are being stalled while trustees consider the effect of the GMP ruling on the values.
One option being cited is the possibility of paying the transfer now and then topping this up at a later date with the increase in value following GMP equalisation.
To consider this from an accounting perspective:
Transfers out are accounted for (2018 SORP ref 3.8.25) when the related liability transfers between schemes. This is normally when the transfer is paid.
However – if the initial amount has been paid, the liability has transferred, so to satisfy the liability test:
- Is there an obligation – Yes;
- Will the settlement be satisfied in economic benefits – Yes; and
- Can the settlement be measured reliably? –
It’s the last statement that falls down, but in most cases a reasonable estimate can be placed, and the accounts will only be adjusted if the amount is material to the scheme.
Other areas to consider, whilst using the same recognition criteria is the impact on costs to the scheme with regard to:
- Pension Increases; and
- Actuarial and adviser’s fees
It is estimated that scheme liabilities could increase by 1-2%. The actuarial position of the Scheme, which does take account of the obligations for the defined benefit section, is dealt with in the report on Actuarial Liabilities.
The matter of the increase in liabilities is more of an immediate problem for the sponsoring employer who will need to account for these liabilities and ensure that the disclosures provided by the Actuary have factored the GMP equalisation effect in.
If you have any concerns of how your scheme accounts may be affected by the GMP Equalisation ruling please contact a member of our Pensions Team.