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FEATURES - COUNTING THE COST OF FRS 17

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New retirement benefits proposals may shake up public sector accounting, but delivery is far from straightforward, ...
New retirement benefits proposals may shake up public sector accounting, but delivery is far from straightforward, say Kieran Rix and John Stanford

It is rare for financial reporting issues to excite controversy outside standard-setting circles, but there are occasional exceptions.

The accounting treatment of staff's share options, with its implications for the profitability of the hi-tech sector, has produced some strong views and there has been a flurry of media interest in FRS 17 Retirement Benefits.

Unlike share options, FRS 17 is more relevant to the public sector. From a council perspective the standard has provided the biggest challenge to local authority standard setters and those responsible for preparing accounts since the introduction of capital accounting in 1994 moved local government financial reporting onto a full accruals basis.

Issued in November 2000, FRS 17 radically changes the approach to accounting for pensions costs. It does this by requiring financial statements to reflect the assets and liabilities relating to employers' retirement benefit obligations and by rigorous requirements concerning the cost of pension benefits and other related expenses.

In adopting this approach the Accounting Standards Board moved towards international practice and confronted criticisms which said it gave far too much flexibility in how pension costs were reported.

The public sector impact is linked with the Treasury's Whole of Government Accounts initiative. The Government Resources and Accounts Act 2000 requires the Treasury compile WGA on a 'true and fair' basis, compliant with accepted accounting practice.

At an early stage the Treasury made a key decision that, in order to conform with the requirements of the Act, liabilities relating to the various public sector occupational pension schemes would be reflected at the whole of government level. This basically means it is not feasible for any part of the public sector to opt out of compliance with FRS 17. To do so would impair the integrity of the whole of government accounts when published for the 2005-06 financial year.

The Treasury reaffirmed its approach at a series of discussion forums hosted by CIPFA in spring and early summer last year. The aim of these discussions was to promote consistency in the adoption of FRS 17 across the public sector. In this respect WGA is important because inconsistencies in the accounting approach would simply cause trouble further down the road.

Adopting FRS 17 in the public sector has not been straightforward. Although it gives a welcome nod of recognition to public sector pension schemes, FRS 17 was primarily written for the private sector.

While industry-wide pension schemes do exist in the private sector, many of the most significant public sector schemes have a large number of participating bodies. For example the NHS scheme has over 9,000 bodies, while each local government scheme may have admitted and scheduled hundreds of bodies.

Under therequirements of the standard, members of multi-employer schemes are required to account on a defined benefit basis unless they cannot identify their share of underlying assets and liabilities on a consistent and reasonable basis. If this is not possible, accounting will be on a defined contribution basis, which is far less onerous.

For local government the joint committee - set up by CIPFA and the Local Authorities (Scotland) Accounts Advisory Committee - which determines the financial reporting requirements of the local government, police and fire sectors considers that principal councils can identify assets and liabilities in the main local government scheme consistently and reasonably and therefore should account on a defined benefit basis.

Similarly CIPFA/LASAAC has proposed police and fire authorities can identify their share of the liabilities of the unfunded police and firefighters' schemes.

A further issue facing CIPFA/LASAAC is the interest rate at which pension liabilities should be discounted. FRS 17 requires the use of a high-quality corporate bond. This rate was chosen as it reflects the time-value of money and represents the employers' ability to curtail its liabilities. But it is questionable whether a corporate bond rate adequately reflects the nature and risks of public sector schemes. The basis of the schemes is statutory, so individual councils have little or no discretion to curtail their pension liabilities. For example, it would not be possible for a council to refuse defined benefit arrangements to new staff and introduce an alternative defined contribution scheme. So it is the adoption of a similar approach to that developed by the Treasury for central government is proposed. This involves a rate based on a portfolio of long-dated index-linked gilts.

FRS 17 has lengthy transitional arrangements. For the first two years disclosures must be made, so the figures will hit council financial statements in 2003/04.

The CIPFA/LASAAC proposals involve the creation of a pension reserve. All the components of the pension cost will be recognised on the revenue account and each council's share of the asset/liability of the pension fund will be shown on balance sheet. But there will be no direct impact on annual financing and so on council tax.

The CIPFA/LASAAC proposals accord with both the spirit and detail of FRS 17. At the same time they are fiscally neutral in their impact. They give the information on one of the key fiscal issues of the new century to politicians and policy-planners, but they do not involve accountants making funding decisions.

-- For further information contact kieran.rix@cipfa.org

www.cipfa.org.uk/pt

Kieran Rix and John Stanford

Policy and technical directorate, CIPFA

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