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Aon Hewitt says proposed changes to accounting standards could wipe over £25 billion off FTSE 350 balance sheets
NYSE:AON

LONDON 11 August 2014 – Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE:AON) has said that proposed changes to pensions accounting standards, outlined by the International Accounting Standards Board (IASB) could take more than £25 billion off the balance sheets of FTSE 350 companies and £1 billion from their annual profits.

About 25% of FTSE 350 companies have an accounting surplus in relation to their pension scheme that is recognised on their balance sheet.  Under the proposed changes to the IFRIC14 guidance that supports the international accounting standard IAS19, this surplus would no longer be recognised unless there is a realistic expectation that the company will eventually be able to have access to the surplus. This would have a significant impact on balance sheet calculations.

Simon Robinson, principal consultant at Aon Hewitt, said;
"The big change being proposed is that in the future, when assessing the funding position of a pension scheme, companies will have to take into account the expected behaviour of the trustees.  This means that they will need to recognise trustees’ potential future actions, such as de-risking exercises, that might reduce the calculated accounting surplus.

“We expect that most companies with schemes which already have a surplus will not be able to recognise it under the new proposal – which would reduce the balance sheets of the FTSE 350 by £8 billion.  However, the proposal also affects companies committed to ongoing deficit contributions that are currently expected to deliver an accounting surplus in the future. These contributions would now need to be recognised as liabilities on corporate balance sheets which would amount to a further £20 billion hit for FTSE 350 companies.

”This is not just a balance sheet problem; it also negatively affects the P&L account of companies by increasing the finance charges relating to pension schemes – which would rise by more than £1 billion each year across the FTSE 350.”

While these proposals are at a relatively early stage and not expected to take effect before at least 1 January 2017, Aon Hewitt is recommending that companies and schemes bear them in mind in current funding discussions.

Simon Robinson said:
"Although these proposals are at an early stage, the direction of the IASB’s approach is clear.  In order to control the size of their accounting problem in 2017, companies will not want to get any closer to an accounting surplus than they are already and should look for ways to manage this.”

Aon Hewitt believes that in order to achieve pensions stability in an uncertain situation such as this, schemes may well need to utilise alternative financing to bridge the difference in views between sponsors and trustees.

Lynda Whitney, partner at Aon Hewitt, said:
"If companies are not willing to put cash into their pension scheme to make up deficits, then the trustees need to seek other forms of security.  This potential change to how the pension scheme is accounted for is another reason why schemes may want to explore non-cash funding methods such as escrow, a surety bond or charges over assets. Such options will allow companies to offer security against pension funding positions without committing cash directly into the scheme and moving it further towards or into accounting surplus."

 

Media Contact:    

Colin Mayes                                            Giles Abbott
Aon Hewitt                                               Capital MSL
01372 733689                                          020 3219 8805                                colin.mayes@aonhewitt.com                      giles.abbott@capitalmsl.com
 

Notes to editors

About Aon Hewitt
Aon Hewitt empowers organisations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organisational and personal performance and growth, navigate risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness.  Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide.  For more information on Aon Hewitt, please visit www.aonhewitt.com.

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About Aon
Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 66,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world’s best broker, best insurance intermediary, best reinsurance intermediary, best captives manager, and best employee benefits consulting firm by multiple industry sources. Visit aon.com for more information on Aon and aon.com/manchesterunited to learn about Aon’s global partnership with Manchester United.

 

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