The government has announced changes to the minimum level of increase in private sector occupational pension schemes. 

Up to 8 July 2010 pensions payable from UK schemes were subject by law to a minimum level of increases, at least for certain periods of employee service, based on changes to Retail Prices Index ("RPI"), subject to a cap.  Such a minimum level of increase applies both between the date a member leaves a plan and their retirement (referred to as "deferment"), and to pensions once in payment.  From 8 July 2010 the minimum increase is based on changes to Consumer Prices Index ("CPI") as the Government believes that CPI provides a more appropriate measure of pension recipients' inflation experiences and is also consistent with the measure of inflation used by the Bank of England.

In the long-term, CPI is expected to increase at a lower rate than RPI, although this may not be the case in every year.

Exactly how this change will affect a client’s scheme will depend on the precise wording in the Trust Deed, Rules and associated documentation, both for pensions during deferment and once in payment.  Some will be committed to providing increases based on RPI; others will now provide reduced increases with the government’s move to CPI.  If this change reduces the benefit obligations recorded in the company's accounts, the question arises as to how this reduction should be accounted for.

Under IFRS our view is that a one-off reduction to the defined benefit obligation as a result of this change should be accounted for as a negative past service cost, which would be an immediate credit to the income statement.  Under UK GAAP our view is that an immediate credit to the profit and loss account would also be appropriate. 

Under both IFRS and UK GAAP, as well as a one-off reduction in the defined benefit obligation, there would be a reduced pension expense in future due to a lower interest cost, and for schemes still open to accrual, a lower future service cost as well.  To the extent that a scheme sees an increase in liability as a result of having to provide the greater of RPI and CPI, the accounting treatment is simply the reverse of that discussed above. 

Based on our understanding is that no further legislation is necessary to bring this change into effect (the government will simply use CPI in their next annual statement of the rate to be used), the recognition date is 8 July 2010, subject to the position for each scheme being clarified with the trustees and legal advisors.

If you have any questions then please refer to your usual KPMG Pensions or other contact.

The Institute of Chartered Secretaries and Administrators ("ICSA") has released for consultation ‘best practice’ guidance designed to complement the FRC’s new UK Corporate Governance Code.

The draft guidance takes account of an earlier consultation that showed overwhelming support for short, non-prescriptive guidance to help improve board effectiveness.  Key issues covered by the draft guidance are:

• More emphasis on the role of the chair as critical to building an effective board 
• The importance of the board’s role in creating a high-performance culture which maximises the opportunities for value creation and minimises risk 
• The need to create an environment of challenge in the boardroom 
• The value for companies of well-informed and high-quality board decision making 
• Board composition and diversity as major factors in delivering an effective board 
• The advantages of a good training and development programme designed to improve directors# skills, experience and knowledge 
• The benefits of regular board evaluation to explore how well the board is functioning

The European Commission ("the EC") published a green paper in May on a range of options to strengthen corporate governance in EU financial institutions.  The principal messages are that current corporate governance structures were proven inadequate to detect and prevent the build up of risk, and that reforms should be undertaken to reduce incentives for risk-taking and strengthen the ability of boards to understand, evaluate and direct the management of risk.  The green paper is open for consultation until 14 August.

The EC has announced that it will launch a broader review on corporate governance within listed companies in general and, in particular, on the place and role of shareholders, the distribution of duties between shareholders and boards of directors with regard to supervising senior management teams, the composition of boards of directors and corporate social responsibility. The press release which accompanied the Financial Institutions green paper suggests that this paper should be expected later in the year.

KPMG International Standards Group is a part of KPMG IFRG Limited ("KPMG IFRG") and has published a Briefing Sheet containing further information about the green paper.

On 30 July 2010 the IASB published an Exposure Draft on Insurance Contracts.  The ED proposes a new standard on accounting for insurance contracts which would replace IFRS 4.  The ED does not propose an effective date for the new standard since the IASB plans an additional consultation on the effective dates of these proposals in conjunction with other proposed standards to be issued in 2011, including consideration of IFRS 9 Financial Instruments. 

The IASB is proposing to base measurement of rights and obligations under an insurance contract on an amount an insurer is obliged to pay through the life of the contract rather than a model based on an “exit value” as if transferring the contract to a market participant.  This reflects the difficulty in developing market-based assumptions in measurement when there is not an active market for insurance contracts.  In the proposed insurance model gains would not be recognised when an insurance contract is secured but rather as the services are provided. 

Both of these elements are likely to be viewed as increasing the relevance of financial statements over the model in an earlier Discussion Paper since they are aligned with the business model of insurers, which include long-term servicing of insurance contracts as opposed to contract trading for short-term gain.  Particular aspects of the proposed insurance model which are likely to attract debate include the determination of the a discount rate for obligations, based on their characteristics as opposed to the return on invested assets, and the treatment of changes in assumptions driving the measurement of the insurance obligation.  The effects of changes in assumptions, whether financial such as interest rates or non-financial such as mortality and morbidity rates, would be required to be recognised in the balance sheet and the statement of comprehensive income each reporting period. 

Another area which is likely to draw significant comment is the presentation of the statement of comprehensive income.  Although the IASB has proposed a presentation for the statement of comprehensive income which follows the new measurement model, this presentation focuses on net margins rather than reporting revenues and expenses of an insurance contract.  As a result, there may be a loss of information needed for financial statement users to analyse an insurer’s business.

The IASB has invited comments on the ED by 30 November 2010.

KPMG International Standards Group is a part of KPMG IFRG Limited ("KPMG IFRG") and has produced a Briefing Sheet, summarising the proposals within the ED.

The IASB has recently released an Exposure Draft Revenue from Contracts with Customers (discussed in the previous edition of Financial Reporting Matters), proposing a single revenue recognition model to be applied consistently in different industries.

KPMG International Standards Group is a part of KPMG IFRG Limited ("KPMG IFRG") and has published guidance summarising the overall impact of the Exposure Draft and separate industry-focused publications outlining the impact of the Exposure Draft on the telecoms, building and construction, media and food, drink and consumer goods sectors.

These publications are available, for free download, from the KPMG IFRG website at the links below.