TREATMENT OF FRS 17 IN CGA AND LINKS TO PENSION SCHEMES’
RESOURCE ACCOUNTS
Issue
Agreeing how pension scheme accounts should be
incorporated into CGA to allow strict application of FRS
in the published CGA statement of accounts.
Timing
For the 2003/04 published CGA.
Recommendation Schemes and auditors are invited to comment on:
i)
the proposed treatment of Pension Scheme
resource account items in published CGA;
ii)
the proposed treatment of Compensation
Scheme and minor agency items in CGA;
iii)
the proposed data collection approach.
Background
This paper arises from discussions at the Public Service Pensions Group
meeting on the accounting for the main unfunded public sector schemes in
Central Government Accounts. The aim is to set out the proposed treatment
of schemes’ data in WGA, where this differs from schemes Resource
Accounts and where there will be specific information requirements on
schemes.
2. Differences arise between CGA treatments and schemes’ Resource
Accounts because of the different circumstances that apply at CGA level. For
departmental Resource Accounts the main public service schemes are
typically multi-employer schemes in which the underlying liability cannot be
identified by employer. Accordingly the FRAB approved an adaptation of
GAAP in which the schemes themselves recognised the liability.
3. However at CGA level this rationale does not apply as the liability clearly
lies with the CGA group. However the CGA group is for most schemes an
employer operating an unfunded pension scheme. FRS 17 applies to FRS
17, but does not offer any advice on the specific circumstances. Thus the aim
must be to apply FRS 17 as closely as possible. Thus amounts shown as
payable in scheme accounts should, where possible, be shown as
movements in the liability only in CGA.
Treatment of Resource Account Items
Pension Scheme Income & Expenditure
4. Table 1 sets out the proposed treatment of Schemes’ Income &
Expenditure items in CGA. Where necessary the rationale for the proposed
treatment is set out in the technical annex to this paper, Annex A.
Table 1 – Treatment of Pensions Scheme I&E Items
Scheme Resource Accounts Item
Maps to
Comment
CGA ‘Employer’ Accounts Item
See Annex A
paras or FRS 17
Expenditure
Pension Cost (Current Service Cost)
Current Service Cost
—
Pension Cost (Past Service Cost)
Past Service Cost
—
Enhancements
Past Service Cost
A1 – A5
Transfers in
Current Service Cost
A6 – A13
Injury benefits
Non-FRS 17 Item – thus map to [Other
A14 – A15
Pensions Costs (511130/511230)]
Other interest payable
Non-FRS 17 Item – thus map to relevant
—
interest expense code (540400).
Interest on scheme liabilities
Unwinding of Discount in Pensions
—
Income
Contributions in
Employee contributions – current service cost
Per FRS 17.51
Employer contributions – eliminate on
—
consolidation
Transfers in
Current Service Cost
—
Other income1
Employers costs will eliminate on
—
consolidation. Refunds of gratuities – Other
Non-trading Income (412050)
Notes
1
Consists of: Refunds of Gratuities received and Amounts in respect of bringing forward the payment of accrued superannuation
lump-sums, capitalised cost of enhancement to pensions payable on departure, and capitalised cost of enhancement to pensions payable
at normal age
Compensation Schemes
5. Compensation scheme transaction streams and balances are not related
to FRS 17. The WGA Team therefore consider that these items should
continue to be reported in accordance with schemes Resource Accounts.
Minor Agency & Principal Arrangements
6. A number of minor schemes are accounted for in the Civil Superannuation
resource account. The income and expenditure is recognised on a pay as
you go basis and no adjustment is made to the FRS 17 liability for these
schemes. Gross expenditure in 2002/03 was approximately £15.5m.
7. The WGA Team consider that accounting for these items on a pay as you
go basis will not result in material misstatement at CGA level. We therefore
intend to treat the expenditure as Other Pensions Costs (511130/511230).
Income will be recognised as Other Non-Trading Income (412050).
Treatment of Balance Sheet Items
8. Schemes do not usually have fixed assets. The majority of schemes
current assets and liabilities will be creditors and debtors with CGA bodies
and the central funds, which will be eliminated on consolidation. Cash at
Bank will of course be recognised directly.
9. Schemes recognise pensions payable, but not yet actually paid, as
creditors falling due within one year. Because FRS 17 does not specifically
address unfunded schemes this is not mentioned within the standard.
However the WGA Team consider that this is the correct treatment, reflecting
a payable amount rather than a provision.
10.The FRS 17 liability will be recognised in accordance with Scheme
accounts. The movement in the liability, as disclosed in the notes, will include
a line showing the payment of benefits, drawn from scheme accounts. While
this is not shown in the FRS 17 formats it is necessary to reflect the unfunded
nature of the schemes.
Data Collection Approach
Resource Accounts Data & Counter-Party Transaction Streams & Balances
11.The Pensions group meeting of 23rd June discussed the possibility of
Schemes either continuing as GOLD users or using a specially designed
consolidation pack (‘P-Pack’).
12. The advantages of using a specially designed P-Pack are that it can take
Scheme’s accounts with the accounting policies and formats pack users are
familiar with, then generate the necessary upload files for GOLD using the
accounting policies required for CGA. This should make the process easier
for both schemes and the WGA Team.
13.In accordance with the minutes of the 23rd June meeting the WGA Team
have also sent the draft P-Pack with this paper.
14. It will be necessary to consider the longer-term issues for collecting
Scheme’s data in the light of the Single Data System Project, and the
development of the COINS system, which will replace GOLD. This will be
done in conjunction with Schemes and the SDS project team.
FRS 17 Narrative Disclosures
15.FRS 17.92 allows employers with multiple schemes to disclose ranges or
weighted average figures. The costs of preparing weighted averages on an
actuarially robust basis across the whole public sector would certainly
outweigh any benefits to users of WGA. Large amounts of information on
public sector pensions are already published; CGA disclosures should aim to
give a concise but informative overview. The WGA Team therefore propose
to disclose ranges.
16.The P-Pack will include a small number of additional cells to allow the
following items of narrative disclosure to be collected:
a. Contribution Rates for period ended 31/03/2004
§ Employers Contribution Rates
§ Employees Contribution Rates
b. Financial Assumptions as at 31/03/2004
§ Rate of increase in salaries.
§ Rate of increase in pensions in payment.
§ Discount rate for pension liabilities.
§ Inflation assumption.
c. Analysis of Recognised Gains & Losses
§ Experience gains / (losses) arising on the scheme
liabilities.
§ Changes in assumptions underlying the present value
of scheme liabilities.
Annex A
Rationale for Mapping of Scheme I&E Items in CGA
Enhancements
A1.
Enhancements are increases in the benefits accrued by active
members or payable to pensioners. The reported cost represents the capital
value of enhancements granted during the year. Enhancements will not be
included in the calculation of Current Service Cost (CSC) or Past Service Cost
(PSC) in Schemes’ Resource Accounts. They are accounted for separately in
Schemes’ Resource Accounts to reflect that they are separate from the
routine benefits of the scheme.
A2.
To the extent that enhancements refer to service during the financial
year they would constitute CSC under the FRS 17 definitions. However the
majority of enhancements will relate to prior years service and thus appear to
meet the definition of PSC.
A3.
WGA Team proposes to map the cost of enhancements reported in
scheme accounts to PSC in published CGA.
A4.
Implications of the proposed treatment are:
·
CSC would be overstated and PSC understated to the extent that
enhancements related to current year service.
·
PSC would be overstated to the extent that enhancements actually
vested over future periods.
A5.
The issues in the last two bullet points of paragraph 4 are highly
unlikely to be material at CGA level. Collecting the information to achieve
strict accuracy would not meet the FRS 18 cost-benefit test. In particular, any
misstatement arising from the final bullet point can be considered prudent in
conditions of uncertainty.
Transfers in (Income & Expenditure)
A6.
Transfers may come from within the public sector schemes club or
from non-Club schemes. Transfers may also be individual as employees
move, or group transfers as MOG changes occur. The boundary of the club
does not exactly match the WGA boundary and is significantly different from
the CGA boundary. Transfers within the CGA group should be eliminated and
accordingly should not result in a gain or loss.
A7.
Transfers in are recognised in Schemes’ accounts as expenses
(increase in the liability) and income (transfer values receivable). FRS 17
does not refer to inward transfers at all, because, for an employer operating a
funded scheme, the transfer occurs between pension funds transfers are
almost invariably at par, meaning that there is no shortfall for the employer to
meet.
A8.
CGA, like other employers operating unfunded schemes, is not in this
position. The transfer will result in an increase in the liability, but because the
assets receivable are not ring-fenced in a pension fund the increase in the
liability is not offset by an increase in FRS 17 assets. The assets transferred
appear as cash or debtors.
A9.
There are two alternatives in accounting for transfers in at CGA level:
a. All non-eliminated transfers in could be shown as both income
and expenditure, in line with scheme accounts; or
b. Only exceptional gains and losses arising from difference
between transfer values and transfer payments could be shown.
A10. Option A would require reporting non-FRS 17 elements, because FRS
17 applies to employers operating unfunded schemes this would be an
adaptation of GAAP. As transfers are typically at ‘par’ value option B will
almost always mean that no non-FRS 17 gain or loss needs to be reported.
Given the aim of accounting for pensions at CGA level as an employer the
WGA Team considers that option B is more suitable.
A11. In either case it is necessary to consider where the transactions in
scheme accounts should be mapped to in WGA. Arguably this could be
through:
a. Current Service Cost (in CGA I&E) reflecting that the benefit is
given to attract the employee for service this year.1
b. Actuarial gain or loss (on the CGA STRGL), reflecting that
previous actuarial assumptions had naturally failed to allow for
the transfer.
A12. In relation to transfers out FRS 17 requires that gains or losses in
relation to transfers included in the actuarial assumptions are treated as
actuarial gains or losses. Gains or losses on transfers out that had not been
predicted are treated as gains or losses on settlements and curtailments. A
similar split could be imposed on transfers in. However on cost-benefit
grounds we propose to treat all gains or losses on transfers in as not related
to any actuarial assumption and thus to map gains or losses on transfers in to
CSC for CGA purposes.
A13. Implications of the proposed treatment are:
· CSC and actuarial gains and losses will be misstated to the extent
that any gains or losses on transfers in have been included in
actuarial assumptions. We do not expect this to be material.
Injury Benefits
A14. Injury benefits are not typically financed by the contribution regime.
Older benefits payable are a charge to the scheme, financed from Supply;
more recent benefits are recovered from employers. The cost of injury
benefits represents the cost of the enhanced benefits payable compared with
a conventional early retirement. This is recognized on a pay as you go basis
– there is no increase in the FRS 17 liability when the injury benefits are
approved.
1 The cost could of course be amortised over the employment period. However this would not
reflect the principles of FRS 17 and the practical difficulties and record–keeping at a CGA
level would make this not a cost-beneficial accounting policy.
A15. Because the recognised cost of injury benefits does not relate to a
movement in schemes FRS 17 liability it is not necessary to map this item to a
FRS 17 I&E item. Thus the WGA Team propose to recognise injury benefits
as a separate item within operating cost.
