As year-end approaches, UK companies face a complex landscape for pension accounting under IAS 19 and FRS 102. Strategic decisions, market movements, and regulatory developments could all influence financial reporting. Here are the key issues to consider.
Improved funding levels and the new defined benefit funding regime require trustees and sponsors to re-examine, agree and document their long-term funding and investment objectives. Options such as buy-out, transfer to a consolidator, or running on to generate surplus are being actively discussed. Each carries a distinct accounting implication, including the potential for IFRIC 14 restrictions on recognising pension assets when targeting buy-out, or past service costs when agreeing surplus sharing arrangements. Actuarial advice and subsequent engagement with auditors are essential to understand the financial impact and accounting treatment before making these strategic decisions.
Following the Virgin Media judgments in 2023 and 2024, legal uncertainty persists around historic rule amendments where Section 37 actuarial confirmations from the time are unavailable. While the Government plans to legislate for retrospective confirmations, this is unlikely to become law before mid-2026. Auditors will expect disclosures to be current, reflecting both the scheme's own investigations and the evolving legal position. The judgment in the Verity Trustees v Wood case will need urgent consideration when it is handed down, which could still be before the end of 2025. Companies should liaise with trustees and auditors well ahead of signing accounts.
At the time of writing, corporate bond yields have risen since the start of 2025 and long-term inflation expectations have fallen. These shifts will affect the discount rate and inflation assumptions and likely lead to lower benefit obligations than last year. Return seeking assets have shown positive returns, especially equities. However, this is offset by flat to negative returns on many matching assets. With the UK Government's budget in late November, talk of an AI bubble, and numerous geo-political issues this picture could still change significantly before financial markets close for the year.
The release of the CMI 2024 mortality model adds further complexity as it changes the way the COVID-19 pandemic is allowed for in the projection of future increases in life expectancy. Generally, the CMI 2024 model will increase life expectancy assumptions compared with last year's CMI 2023 model, but it does requires careful consideration of its parameters such as the new pandemic half-life overlay.
The Financial Reporting Council continues to encourage enhanced disclosures, particularly for schemes in surplus. We expect auditors to continue to probe the accounting for special events, actuarial factor changes, and controls around data reliability. Questions about GMP equalisation progress, and treatment of hybrid benefits where there is an underpin, are increasingly on the radar.
