The pension liability: your checklist

The pension liability Your checklist

These questions are designed to assist you in helping to ensure the Board as a whole is aware of the pension liability risks to implementing strategy, and that these risks are proactively managed.

February 2008 The Chartered Institute of Management Accountants 26 Chapter Street London SW1P 4NP United Kingdom T. +44 (0)20 8849 2275 F. +44 (0)20 8849 2468 E. innovation.development@cimaglobal.com www.cimaglobal.com

This document is for general guidance and is intended to be a useful starting point to be adapted to the individual circumstances of a company for circulation to directors and others to consider. It should not be relied upon in any respect without seeking specialist pensions’ advice. Please note that CIMA and the Pensions Advisory Group do not accept any responsibility or liability to any individual or company who relies TE028V0208B

on the guidance set out in this document.

Relevant?

1. Do you understand the current regulatory framework?

Do you have a process in place to ensure you report notifiable events?

Are you aware of the circumstances in which you may wish to seek clearance of a corporate transaction with the Pensions Regulator (‘Regulator’)?

Are you working in partnership with the fund trustees to meet the Regulator’s code of practice on funding defined benefit liabilities?

Do you know what would trigger a section 75 debt payment into the fund?

Do you understand how your company’s Pension Protection Levy is calculated and have you considered ways to reduce it?

Are you aware of the latest accounting and disclosure standards and statements?

2. Have you identified the material risks arising from the pension liability that could affect the implementation of your business strategy?

Do you take the added pension(s) liability implications into account when deciding wage and salary increases as well as pension benefit changes and discretionary pension increases?

Does the valuation of the pension liability include realistic and up-to-date membership longevity assumptions?

Do you challenge the validity of the longevity assumptions with the scheme actuary?* Do you understand the risk arising from any mismatch between the way the fund assets are invested and the profile of the pension liabilities?

Have you evaluated the risk that there might be unexpected calls for additional contributions to correct a deficit?

Have you looked at the detail of the scheme trust deed to ascertain where certain powers lie between the company and trustees – such as the setting of contributions?

Have you considered other risks, such as scheme operational risk, that might be relevant to your company?

3. Do you sufficiently understand the risks?

Do you understand the different ways of valuing the pension liability, the range of values that this can produce and their relevance?

Do you understand that the true economic cost of the pension liability may be significantly more than the FRS17/IAS19 value?

Do you understand the impact the pension scheme can have on your balance sheet and P&L? Do you undertake cash flow modelling of both assets and liabilities to evaluate the alternative courses of action?

Where there is a significant mismatch of assets and liabilities, do you apply ‘value at risk’ (VaR) techniques to check the impact on the company?

4. How are you managing the risks?

Have you considered paying an insurance company to take over some, or all, of the pension liability?

Have you considered closing the scheme to new members, or to future accruals by existing members, and providing ongoing pension benefits in a different way?

Have you considered whether it is cost effective, on a post tax basis, for a company to borrow to fund a deficit?

Have you considered financial inducements for scheme members to transfer out?

In light of cash flow modelling/VaR analysis, have you decided what risk the company can afford to take?

Have you considered and modelled different investment strategies such as: different allocations between equity, bonds and property; diversification into alternative assets; liability driven investment, in order to reduce the risk for the company and the trustees?

Have you discussed risk and investment strategies with the trustees?

Do you have a clear funding plan agreed with the trustees that can be shared with the Regulator?

Have you considered whether directors should act as trustees, given the potential conflict of interest and also their personal exposure to possible breaches of trust?

Are you clear about any potential conflicts of interest from advisors giving assistance to both the company and trustees, and are there sufficient safeguards in place?

5. How are you reporting on the management of risks?

Is there sufficient analysis of the risks presented to the board on a timely basis?

Are you checking the funding level between actuarial valuations?

How does your company’s external reporting compare with best practice and should you consider changing it?

Should the pension risk of your company be covered as one of the ‘principal risks and uncertainties’ for inclusion in the Business Review/Operating and Financial Review? * See additional questions in Appendix 2 The pension liability – Managing the corporate risk, and our associated publication on longevity risk, due to be published in April 2008. www.cimaglobal.com/pensions

Comments/evidence

Action/due date