Dispatch (UK/ROW version)
| by Paul Gosling 04 Feb 2008 Topic: News |
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'IFRIC 14 driving new pension deficits' Pension scheme deficits are set to rise again with the implementation this year of IFRIC 14, scheme advisers have warned. IFRIC 14 establishes clearer rules preventing companies treating surpluses as company assets except where they have an unconditional right to those surpluses. The potential increase in defined benefits scheme liabilities comes at a difficult time. Share price collapses during January added £40bn to scheme liabilities in one week, wiping out virtually all the achievements made last year in reducing deficits, according to scheme consultants Aon. And the Pensions Regulator has issued a strict requirement on schemes to use more cautious mortality assumptions, in a period of quickly rising longevity. Advisers Pension Capital Strategies - part of the Jardine Lloyd Thompson Group - says that while FTSE100 companies' scheme deficits were cut by £27bn last year to £8bn, more conservative life expectancy assumptions may generate an extra £40bn scheme liabilities. The impact of IFRIC 14 could also be severe. IFRIC 14 came into effect in January, interpreting the defined benefit asset standard, IAS 19. A company can now only treat a scheme surplus as an asset if it has an unconditional right to realise it at some point during the life of the plan, or when it is settled. If a company is unable to realise the surplus without the approval of scheme trustees - as is the case in about a quarter of FTSE100 company schemes - it cannot treat the surplus as an asset. Many companies are now seeking scheme rule changes and new methods to fund schemes - for example by holding funds in escrow accounts and through contingent assets. Charles Cowling, managing director of Pension Capital Strategies, said that IFRIC 14 will lead to the recognition of large deficits and encourage companies to avoid surpluses by under-funding schemes. Steve Priddy, ACCA's director - technical policy and research, said this was not the first time that accounting standards had driven business decisions. 'Changes in accounting standards have behavioural impacts,' he pointed out. 'FRS 17 has been one of the contributing factors, along with others, which have led towards the reduction in the number of defined benefit schemes open to new members, or future accruals.' Hard times are predicted in 2008 for businesses and consumers, as fears grow that the credit crunch could lead to a widespread economic slowdown, or even recession. Some 58% of chief finance officers asked by Deloitte in its most recent CFO survey believe their businesses will be hit this year. This compares with just 42% who made the same prediction in the previous quarter. However, most large companies do not seem to be facing significant difficulties posed by the withdrawal of credit lines. Over half of CFOs said they were optimistic about finding alternatives to bank loans, including through capital markets debt and public and private equity. Some 95% of CFOs said they already have untapped resources they can use, including liquid assets and undrawn facilities. Two-thirds said they have no need for significant debt refinancing in the next year. Personal borrowers, though, are more vulnerable. KPMG predicts a record 130,000 personal insolvencies in England and Wales this year - putting at risk a potential £6.5bn of consumer debt. If KPMG's prediction is correct, it will be the latest in a sequence of annual rises in the number of personal insolvencies, which have jumped from 46,650 in 2004 to nearly 110,000 last year. Last year, creditors had to write-off £1.3bn in debts as a result of borrowers entering into individual voluntary arrangements (IVAs), with debtors on average owing over £50,000 each, but offering to repay only 38% of their debts. As well as 43,000 people using IVAs last year to deal with insolvency, about 67,000 were declared bankrupt. Mark Sands, director of personal insolvency at KPMG, said that although several banks had complained about the misuse of IVAs to avoid repaying debts, KPMG's research found that only in 17% of cases last year did creditors reject a proposed IVA. accountants and bankers still in demand Ernst & Young recruited 3,000 new staff in the UK last year, as the demand for accountants and other finance staff continued, despite the international economic difficulties. E&Y made the announcement when it declared its results for the year ending June 2007, which showed 9% revenue growth in the UK and a profits increase of 7% to £328m - with 50% revenue growth in three years. There was a similar story at the other major firms. Deloitte's revenue grew by over 15% last year, while KPMG's revenues grew by 11% and profits by 20%. At PricewaterhouseCoopers, there was growth of 8% in both audit and in performance consulting, and 13% growth in tax advice. Demand for finance professionals is equally clear from the financial results at leading recruitment advisers. Michael Page reported increased profits and turnover, despite a reduction in demand for banking professionals in the UK and Asia. It said that, overall, there remains 'a massive global shortage' of finance professionals. Hays, too, showed strong growth in its recruitment consultancy work dealing with accountants and other finance professionals - the sector drove much of its performance in the UK. In the final quarter of 2007, it reported income growth of 13% in the UK and Ireland. It did even better in other markets, with 61% growth in the Asia Pacific region and 49% in the rest of the world, including continental Europe. Evidence of the need for more finance professionals is also reflected in the bonus payments made by banks. Research conducted by employment consultants Mercer found that average bonus payments to banking chief executives rose from 121% of base salary in 2006 to 164% last year, putting their average pay at €2.7m, without including rewards paid in shares and other long-term incentives. The use of bonuses to retain and attract key staff in the banking sector shows no sign of abating, despite the scale of write-offs in the industry. Vicki Elliott, Mercer's global financial services industry leader, said: 'As part of a broader trend across Europe, remuneration for financial services executives has become more linked to performance. This has been driven by increased shareholder scrutiny. Financial services chief executive officers on average receive 70% of remuneration through variable performance related pay - in the form of annual bonus and long-term incentives.' liability cap attacked by investors The UK Government's attempt to protect the Big Four from destructive liabilities claims has been seriously damaged by the refusal of investors to co-operate.The latest guidance from the National Association of Pension Funds (NAPF) advises members to vote against moves to cap audit liability, instead supporting only proportional liability proposals. This is despite the fact that from the beginning of this year, under the Companies Act 2006, companies can agree with their auditors a limitation of liability. The NAPF guidance points out that any such agreement must be voted on by shareholders and is subject to annual renewal or amendment. The NAPF suggests that while proportional liability should lead to improved audit quality, the same argument does not apply to a financial cap that is unrelated to the level of responsibility for a loss. 'It should be noted that the Companies Act makes it clear that liability cannot be limited below what the courts deem “fair and reasonable” in all the circumstances - in effect, proportional liability,' says the NAPF guidance. It says that directors would have to make a 'compelling case' for a cap on liabilities and for its legality. The Association of British Insurers (ABI) takes a similar position. Peter Montagnon, director of investment affairs at the ABI, said that any proposal for a financial cap would be 'red-topped' by it - flagged to members as a serious corporate governance issue. However, draft guidance on liability limitation issued by the Financial Reporting Council (FRC) suggests that a financial cap on liabilities is permitted by the Companies Act. Sir Anthony Colman, a former commercial judge who chaired the working group, explained: 'The law allows a degree of flexibility as to the manner in which liability can be limited and the form that agreements can take, and is intended to cover a wide range of circumstances; for example, it applies to private as well as public companies.' He added that the working group believed that generally acceptable approaches to liability limitation should be identified to reduce the need for individual negotiations between auditors, companies and shareholders. The FRC's consultation runs until March and final guidance is expected to be published during the summer. Fraud is as likely to be conducted by outside gangs of professional fraudsters as it is from managers and staff, warns KPMG. This represents a significant change, as until the last four years most frauds were conducted by insiders. In its latest Fraud Barometer, KPMG predicts a significant increase in fraud as the impact of the credit squeeze is felt more widely. Drawing on analysis of past trends, the firm says that economic slowdowns commonly lead to a rise in high value corporate frauds. KPMG points to the association between the major recession in the early 1990s and the subsequent major corporate frauds at the Maxwell empire, BCCI. 'Our analysis shows that in times of economic slowdown, when belts are tightened and processes are committed to greater scrutiny, more high value frauds have tended to be uncovered,' said Alex Plavsic, head of fraud investigations at KPMG. 'If the current credit crunch does lead to a slowdown through 2008, we may therefore see the detection of some high value frauds in its wake.' Recent trends shown by the KPMG analysis include a disproportionate growth in fraud conducted away from London and the south-east of England, and the targeting of government bodies by professional fraud gangs. This has included not only VAT missing trader frauds but also large-scale attempts at benefits frauds. The Government is now the primary target for frauds, with over £1bn of fraud cases against the Government having gone to court in the last four years. The financial services sector is also being strongly targeted by fraudsters, but banks have become increasingly effective in deterring and preventing high value frauds. Northern Ireland will not get a lower corporation tax rate than the rest of the UK - matching that of the Irish Republic - the UK Government has decided. Sir David Varney, the former executive chairman of HM Revenue & Customs (HMRC) and more recently an adviser to Gordon Brown, was given the job of reviewing the case for a cut in corporation tax rate in Northern Ireland. The review was set up as part of the St Andrews Agreement, which re-established devolved government in the province. Calls for equalisation of the corporation tax rate north and south in Ireland were led by the Northern Ireland Executive and local business organisations. While the corporation tax rate in Ireland is just 12.5%, the top rate in the UK is 30% at present, falling to 28% in April. However, the Varney report concluded that adopting a lower rate in Northern Ireland would be at a cost to the UK exchequer, in the short-term, of £300m in lost tax revenues and subsequent costs to the rest of the UK of about £2.2bn over a decade. It would also create 'substantial administrative burdens' on HMRC to prevent companies establishing bogus headquarters in Northern Ireland to take advantage of lower tax rates. Varney also argued that comparisons between headline corporation tax rates were misleading, as most businesses in Northern Ireland pay the lower Small Companies' Rate of 19%, though the rate rises to 21% in the new financial year and 22% next year. Varney concluded that instead of reducing corporation tax, more effective economic policies for Northern Ireland would include reducing the size of the public sector, strengthening the local skills base and improving the operation of agencies promoting investment into the region. Varney stressed that Northern Ireland has been the fastest growing UK region in recent years, suggesting that it did not need a corporation tax rate cut to succeed. Alistair Darling, the Chancellor of the Exchequer, welcomed the report. But Northern Ireland's Finance Minister, Peter Robinson, responded that the province was continuing to suffer from a legacy of under-investment over the three decades of the Troubles when 'resources available for economic development policy were diverted towards law and order issues'. He added: 'We will continue to argue the case for a reduction in corporation tax. The issue will not go away.' in brief...
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IHT trusts 'must be amended urgently' | |