Many Colleges and Academies are already reporting Local Government Pension Scheme (LGPS) surpluses, with those positions continuing to grow in recent years. However, under FRS 102, a surplus doesn’t automatically mean a pension asset can be recognised in the financial statements.
Instead, establishments must carefully assess whether the surplus is recoverable and whether an asset can be recognised under the accounting rules.
As part of the year-end process, it’s important that management teams engage with their actuaries early and obtain the necessary reports, calculations and supporting evidence to help avoid delays during the audit and financial statement process.
When can a pension asset be recognised?
Under FRS 102 section 28, a pension surplus can only be recognised as an asset where the entity is able to recover that surplus either through:
- Reduced future contributions; or
- Refunds from the scheme.
This is often referred to as the “recoverability test”.
In practice, many Colleges and Academies will focus on whether they are entitled to reduced future contributions under their funding arrangements with the pension scheme, and the reality following recent Local Government Pension Scheme (LGPS) valuations is that many Colleges and Academies have seen their funding positions improve significantly, resulting in substantial reductions in employer contribution rates.
Even where an actuarial valuation shows a significant surplus position, an asset cannot automatically be recognised unless it can be demonstrated that the economic benefit is genuinely recoverable.
Understanding the asset ceiling
Where recoverability has been established, entities must then consider the “asset ceiling” restriction.
The asset ceiling effectively limits the amount of surplus that can be recognised on the balance sheet.
Typically, the asset ceiling is calculated as:
- The present value of future accounting service costs; less
- The present value of future employer contributions.
If this calculation results in a positive balance, this represents the maximum pension asset that can be recognised within the financial statements.
If the result is nil or negative, no pension asset can be recognised regardless of the actuarial surplus position.
This is an area that often requires significant actuarial input and management judgement.
What should you obtain as part of the year-end process?
Where a pension scheme is in surplus, entities should ensure they obtain the appropriate supporting evidence from their actuaries as part of the year-end process.
This will typically include:
1. FRS 102 actuarial valuation report
The standard year-end pension disclosure report prepared under FRS 102.
2. Asset ceiling assessment
A specific calculation demonstrating:
- Whether the surplus is recoverable
- Whether reduced future contributions are available
- The maximum asset that can be recognised
3. Evidence supporting contribution reductions
Management should understand:
- How future contributions are determined
- Whether contribution offsets or reductions are contractually available
- Any restrictions imposed by the pension scheme
4. Management assessment and documentation
Management should prepare internal documentation covering:
- The rationale for recognising an asset
- Key judgements made
- Assumptions relied upon
- The basis for concluding that the asset is recoverable
Key accounting considerations
Judgements and disclosures
Where a pension asset is recognised, it should be ensured that:
- Significant judgements are appropriately disclosed
- Key assumptions are clearly explained
- The basis for the asset ceiling assessment is documented
- Financial statement disclosures remain consistent with actuarial reports
Early engagement with actuaries and auditors
Given the technical nature of pension asset recognition, early discussions with both actuaries and auditors are strongly recommended. This can help:
- Avoid delays during the audit process
- Ensure sufficient evidence is available
- Address technical queries early in the year-end cycle
Wider pension developments Colleges and Academies should monitor
Alongside year-end accounting considerations, Colleges and Academies should continue to monitor wider pension scheme developments and funding changes.
Recent actuarial commentary has highlighted that employer contribution rates in public sector pension arrangements are expected to reduce in future periods following changes to discount rate assumptions and wider economic forecasts.
Changes to contribution rates, funding assumptions and actuarial methodologies could all impact future pension valuations and asset ceiling calculations.
As a result, management should ensure pension scheme developments continue to form part of their wider financial planning and budgeting discussions.
Practical actions for Colleges and Academies
To support a smooth year-end process, the following actions should be considered:
- Engage with actuaries early
- Obtain appropriate actuarial reports and supporting calculations
- Review whether future contribution reductions are available
- Document management’s conclusions and key judgements
- Ensure financial statement disclosures are updated appropriately
- Discuss the proposed treatment with auditors early in the process
How Menzies can help?
Our Education team supports Colleges and Academies with year-end financial reporting and technical accounting matters, including pension scheme accounting under FRS 102.
We can assist with:
- Reviewing pension asset recognition assessments
- Challenging and interpreting actuarial calculations
- Assessing asset ceiling positions
- Reviewing year-end disclosures and accounting papers
- Audit readiness and technical accounting support
If your College or Academy is considering recognising a pension scheme asset or would like support with year-end pension accounting considerations, please speak to your usual Menzies contact.
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