Accounting issues may deter defined benefit (DB) pension schemes from run-on and surplus sharing if a clear accounting framework isn’t considered by the sponsor, Hymans Robertson has warned.

In its paper Accounting implications of run-on and surplus sharing, Hymans Robertson said that, with many DB schemes now facing improved funding levels and the option of a run-on strategy becoming more of a reality for some, a clear accounting strategy must be thought through.

The firm also stressed the need for caution when establishing an accounting framework, given the changing political landscape and potential opportunities resulting from the Mansion House reforms and potential post-election legislation.

It also noted that one objective under a run-on strategy may be to share the surplus generated with corporates and member, arguing that embedding such a strategy requires detailed planning and management early on to ensure any unexpected accounting implications are avoided.

Indeed, Hymans Robertson senior actuarial consultant, Sachin Patel, said that if a company is considering running on their DB scheme, and sharing the surplus with members, there is “a lot” to consider.

“For example, with discretionary pension increases, there are a number of different accounting treatments which could be considered appropriate and it’s vital that the preferred treatment is confirmed with company auditors when agreeing on a run-on framework,” he added.

“A run-on strategy involving surplus generation, and improving member outcomes, is very different from a decision by a company to award a one-off discretionary increase to members.

“The scale and complexity of the accounting discussion in a run-on scenario should not be underestimated and getting it wrong could have material and unexpected financial consequences on companies, at worst de-railing the strategy.”

However, Patel said that the “good news” is with early planning this is an “entirely manageable” issue, with Hymans Robertson's guide outlines the key areas that should be considered, as well as the potential different accounting treatments once a run-on framework has been agreed.

“Ultimately, the choice of accounting treatment depends on the scheme’s circumstances and the views of auditors," he continued.

“Over 30 per cent of attendees of a recent webinar we hosted on this matter thought that accounting complications would be a deterrent to those looking to run-on, with nearly 50 per cent not yet sure on the implications.

“This is a complex area, and these figures clearly illustrate how important it is to consider this early in the process.”

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