The most recent SORP is both bonkers and impractical, says Richard Butcher
By now we’re all becoming familiar with the new accounting requirements in the most recent SORP – the ones that require us to value annuities and include them as both asset and liability on our pension scheme balance sheet.
I have a genuine practical problem with these – but I’ll come to that in a moment. Firstly, I should come off the fence and make it clear where I stand on this idea: It’s bonkers.
An annuity is an exact match for a pension liability. The only possible time when this isn’t the case is if a scheme passes into assessment for the PPF or, indeed, if it is included in the PPF, in which case the annuity proceeds are redistributed to reflect the PPF benefit cap that applies to pensioners.
Absent this, the match is perfect. What then is the point of paying an actuary to value the annuity on some basis (at a cost) so that it can be included and immediately offset to zero effect?
Now, I’ve been involved in the development of enough policy to know that not all that is said in incubation makes it to the outside world. For this reason, I’m sure someone must have asked this question and been given a convincing and good answer. If so, please could someone repeat it to me. If not, can we get rid of this, on the face of it, silly reg? Please.
I mentioned there is a genuine practical problem. It is this: you can’t always tell who the owner of an annuity policy is.
In the dim and distant past (well let’s say anytime pre-2000) it was very common for DB schemes and in particular smaller schemes, to buy out their pensioners. More often than not, more fool them, they used the insurer who packaged their DB services together (fools, because the annuity costs were often not competitive).
An annuity was, indeed is, a financial product derived many years ago but originally for the retail market. The documentation on the things, written well before unfair contract terms legislation, was at best vague. No one seemed to mind or complain though. The trustee bought the annuity to cover Jane’s pension, the insurer paid Jane and dealt with tax, they paid increases where due (according to the contract that is, not the rules – but that’s a different potential problem) and they continued to pay until Jane died.
If the trustee was lucky, the insurer would tell them that Jane had died – not that it mattered, from an operational perspective for the trustee, whether they did or didn’t. Job done.
Some insurers wrote an owner into the contract but it could be either trustee or member (it didn’t matter then), most, however, didn’t. The contract was silent on ownership.
For years, scheme accounts have skirted around this issue – they had no real reason to do otherwise. The pensioner headcount was usually just the count of pensioners paid from the fund itself.
The problem first started to become apparent with the advent of the PPF, but it only really mattered if a scheme was at risk of falling into the PPF. The new SORP makes it matter for every DB scheme – well-funded and secure or not.
This leaves trustees with a practical and possible legal dilemma. Track their annuities down, decide who owns them. In respect of the first, a lot of digging in old paper records. In respect of the second, legal advice leading, possibly, to no conclusion. How then, to account for them, except in the operational and legal costs budget!
Richard Butcher is an independent trustee and the managing director of PTL