Academy schools and their auditors are well-used to recognising liabilities on the school’s balance sheet in respect of defined benefit (“DB”) pension schemes, typically Local Government Pension Scheme (“LGPS”) obligations relating to the non-teaching staff. Since the academy sector in its current form was created these schemes have been in deficit, with the discounted value of estimated future liabilities being significantly higher than the value of the corresponding plan assets. But what happens when that position is reversed?
Corporate bond yields have increased dramatically over the past 18 months, meaning that the discount factor applied to estimated future liabilities has increased at the same pace. One leading pension consultancy has estimated that increased bond yields have caused DB pension liabilities to fall by between 25-50% in a year, more than offsetting the fall in equity and other asset markets over the same period. At the same time the rate of growth in life expectancy slowed slightly, further restricting the rate of growth of future liabilities. This means that many LGPS employers will potentially be in a net asset position at 31 August 2023, leading to the question: to what extent these net assets positions can/should be recognised as assets on the balance sheet?
The only likely way in which an individual school might be able to recover a net asset is by a reduction in future contributions, but this is by no means certain and will not be clear by the time Trustees are approving 31 August 2023 financial statements. Where there is an LGPS asset, a reduction in employer contributions is not definite and will be based upon a broad range of economic factors for consideration within the scheme’s next cyclical valuation. These funding valuations are carried out every 3 years, and typically take a year to finalise, so there will be a significant delay in any reduction in future contributions being agreed.
Our view is that any future reduction in employer contributions will not be virtually certain by the time that 31 August 2023 financial statements are approved, and therefore no asset should be recognised on the balance sheet. Where this requires an accounting entry to restrict any measurement of the net defined benefit liability to a net nil position, FRS 102 para 28.25 requires that this restriction be shown within Other Comprehensive Income, and does not pass through the profit and loss account.
According to the definitions set out in FRS 102 “Contingent assets are possible assets whose existence will be confirmed by the occurrence or non-occurrence of uncertain future events that are not wholly within the control of the entity.” In this context the future events would be the result of the next LGPS valuation and the agreement of the scheme’s trustees to permit reductions in future contributions where the asset position still exists at that point. Contingent assets are not recognised, but they are disclosed when it is more likely than not that an inflow of benefits will occur. Our view is that this represents the most appropriate accounting policy where a plan has an accounting surplus as at 31 August. Where the amount of any contingent asset would be material, the basis of the judgement not to recognise an asset should be explained within the Critical judgements and estimates section of the accounting policies.
To discuss this further or for more information, please contact our Academies team.
