10 December 2020
A court judgment handed down on 20th November 2020 on a complex pensions issue could mean hundreds of companies may need to make last-minute adjustments to their accounts for the current year. But, according to LCP partner Phil Cuddeford, there are tips which companies can follow which might help to reduce the number who have to make complex end-year calculations.
The judgment relates to the duty on company pension schemes to pay ‘Guaranteed Minimum Pensions’ (GMPs) and in particular to make sure that they are paid in a way that does not fall foul of equalities legislation. An earlier court judgment in 2018 had already found that GMP payments need to be adjusted and company accounts should already have taken account of this. But the latest judgment indicates that *even where people have transferred out* of the company pension scheme in the past, they may still be entitled to a top-up payment to correct for any inequality. An estimate by consultants LCP, suggests that for roughly 1 in 6 companies the amounts involved are material enough to need to be reflected in their 2020 annual accounts.
In a note on the issue, LCP partner Phil Cuddeford recommends that companies take three steps. In brief, these are:
- To obtain historical pension scheme accounts all the way back to 1990, and look for figures on past amounts transferred out, adding interest as apropriate;
- Make assumptions about the proportions of these transfers that need to be adjusted that are in line with the assumptions already made in company accounts after the first judgment in 2018;
- Assess whether the resultant figure exceeds the threshold for ‘materiality’ which would require an adjustment to company accounts.
On the basis of a sample of clients, LCP estimates that for roughly 15% of schemes the amounts involved could be significant enough to need to be reflected in company accounts based on this simple assessment.
However, Phil Cuddeford points out that even where this process looks as though it means an adjustment to accounts will be needed, there are further checks which can be applied which may save companies from having to conduct a complex exercise to work out how much adjustment to make. These include:
- Where earlier scheme accounts are missing, do not assume that the transfer figures that need adjusting will be as large as for recent years; for example, a lot of transfer activity was triggered by the ‘freedom and choice’ reforms of 2015, so earlier years are likely to have fewer transfers than more recent years;
- Be ‘pragmatic’ about the fact that in reality trustees will make choices about how they implement the court ruling; for example, a lack of historic data may mean it will simply be impossible to calculate the uplift needed for some members who have transferred out; on this basis it may be possible to scale down the theoretical maximum cost to a more realistic figure and this in turn may be below the ‘materiality’ threshold.
Commenting, Phil Cuddeford said:
“Companies preparing their annual accounts for 2020 will not welcome this court judgment coming close to the end of the year. Firms will already have had to take account of an earlier judgment on the same topic, but now they need to assess whether they will have to make changes in respect of people who are no longer even members of their pension scheme and who have transferred out. However, there are a few rules of thumb that companies can use which will help to reduce the number who have to go through complex calculations in order to come up with a figure for their annual accounts”.