Kathleen Stevenson, FRRP

At the FRC’s Financial Reporting Review Panel, we take an active interest in pension scheme disclosures in company accounts. We recently reviewed the December 2006 accounts of 20 listed groups, whose accounts we had reviewed last year as part of a wider survey, to see if there was any improvement in the areas we had thought could be better.

Companies had worked hard to improve the clarity of their disclosures, particularly about the liabilities of their schemes. More information was provided this year about mortality assumptions and about the potential volatility of liabilities to relatively small movements in major assumptions, for example mortality, discount rates and inflation.

The panel hopes to see continued convergence around best practice, which should develop as companies become more familiar with the international requirements. In seeking further improvement we know that it is important to consider the materiality of pension schemes to each company. Unnecessary proliferation of immaterial disclosures can cloud key issues.

However, in some areas, like the area of pension assets and expected returns, we saw little improvement. Assets are typically disclosed in wide bandings ­ equities, bonds, property, cash and the like ­ with little further disclosure of what lies behind these headings. Little information could be found about the extent to which derivatives or structured products were held within the portfolios nor information on bond maturities.

The maturity of defined benefit schemes is another area of interest. With the majority of schemes now closed to new members and an increasing number also closed to further accruals by existing members, it is becoming possible to estimate an end date for these schemes and to project, in general terms, the pattern of cash flows throughout their remaining lives. As the schemes mature and the conversion of the liabilities into cash payments out of the scheme comes closer, this information becomes more pertinent.

To state the obvious, a scheme where the bulk of its members will not reach retirement age for another 20 years or so is in a very different position in terms of cash flow from one where the bulk of its members are already pensioners.

Providing a graphical representation of projected cash flows and disclosing the duration of a scheme would provide users with useful information about how the future cash flows of the scheme might fall.

Kathleen Stevenson is FRRP case officer