More than £25bn could be wiped off the balance sheet of FTSE 350 companies when proposed changes to pension accounting standards come into effect in 2017, Aon Hewitt has claimed.
On July 15, the International Accounting Standards Board proposed changes to its IFRIC14 guidance, which supports the international accounting standard IAS19.
Proposed changes would mean that surplus on defined benefit pension assets would no longer be recognised unless there is a realistic expectation that the company will eventually be able to have access to the surplus.
According to Aon, around 25% of FSTE 350 companies have an accounting surplus in relation to their pension scheme that is recognised on their balance sheets. Aon said the proposed changes would have a significant impact on balance sheet calculations.
Aon Hewitt principle consultant Simon Robinson 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.'
Under the new proposals, Robinson said he expected most FTSE 350 companies with schemes that already have a surplus to reduce their balance sheets by £8bn.
The proposals will also limit the ability of a company to recognise future deficit asset contributions on their balance sheets that are expected to deliver an accounting surplus. These would now need to be recognised as a liability on balance sheets, amounting to a further £20bn hit for FTSE 350 companies.
Robinson said: 'This is not just a balance sheet problem; it also negatively affects the Profit & Loss account of companies by increasing the finance charges relating to pension schemes - which would rise by more than £1bn each year across the FTSE 350.'
Although the proposals are at an early stage and not due to take effect until at least 2017, Aon is recommending that companies and schemes bear the changes in mind in current funding discussions.
The firm also suggested schemes could consider utilising alternative financing, such as escrow accounts or charges over assets.
Aon Hewitt partner Lynda Whitney added: '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.'