IFRIC 14, recognition of additional liability arising from deficit contributions and guarantee of deficit, discussions with pensions regulator

Renishaw plc – Annual report – 30 June 2018

Industry: manufacturing

  1. Accounting policies (extract 1)

Key sources of estimation uncertainty (extract)

(ii) Defined benefit pension scheme liabilities

Determining the value of the future defined benefit obligation requires judgement in respect of the assumptions used to calculate present values. These include future mortality, discount rate, inflation and salary increases. Management makes these judgements in consultation with independent actuaries. Details of the estimates and judgements in respect of the current year are given in note 14. Based on a review of the terms of the UK scheme trust deed, management has concluded that there are no likely circumstances which would result in the Company having an unconditional right to a refund in the event of a fund surplus.

  1. Accounting policies (extract 2)

Employee benefits

The Group operates contributory pension schemes, largely for UK, Ireland and USA employees, which were of the defined benefit type up to 5th April 2007, 31st December 2007 and 30th June 2012 respectively, at which time they ceased any future accrual for existing members and were closed to new members.

The schemes are administered by trustees who are independent of the Group finances. Pension scheme assets of the defined benefit schemes are measured at fair value using market value. Pension scheme liabilities are measured using a projected unit method and discounted at the current rate of return on a high-quality corporate bond of equivalent term and currency to the liability. Remeasurements arising from defined benefit schemes comprise actuarial gains and losses, the return on scheme assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest). The Company recognises them immediately in Other comprehensive income and all other expenses related to defined benefit schemes are included in the Consolidated income statement.

The pension schemes’ surpluses, to the extent that they are considered recoverable, or deficits are recognised in full and presented on the face of the Consolidated balance sheet under employee benefits. Where a guarantee is in place in relation to a pension scheme deficit, liabilities are reported in accordance with IFRIC 14. To the extent that contributions payable will not be available as a refund after they are paid into the plan, a liability is recognised at the point the obligation arises, which is the point at which the minimum funding guarantee is agreed. Foreign-based employees are covered by state, defined benefit and private pension schemes in their countries of residence. Actuarial valuations of foreign pension schemes were not obtained, apart from Ireland and USA, because of the limited number of members. For defined contribution schemes, the amount charged to the Consolidated income statement represents the contributions payable to the schemes in respect of the accounting period.

Accruals are made for holiday pay, based on a calculation of the number of days holiday earned during the year, but not yet taken and also for the annual performance bonus.

  1. Employee benefits (extract)

An agreement was entered into in 2016 with the trustees of the UK defined benefit pension scheme in relation to deficit funding plans which supersede all previous arrangements. The Company has agreed to pay all monthly pensions payments and lump sum payments, and transfer payments up to a limit of £1,000,000 in each year (Benefits in Payment).

A number of UK properties owned by the Company are subject to fixed charges. One or more of the properties may be released from the fixed charge if, on a subsequent valuation, the value of all properties under charge exceed 120% of the deficit.

The Company has also established an escrow bank account, which is subject to a floating charge. The balance of this account was £10,413,000 at the end of the year (2017: £12,850,000). The funds will be released back to the Company from the escrow account over a period of five years.

The agreement continues until 30th June 2031, but may end sooner if the deficit (calculated on a self-sufficiency basis as defined in the agreement) is eliminated in the meantime. At 30th June 2031 the Company is obliged to pay any deficit at that time. All properties will be released from charge when the deficit no longer exists. The charges may be enforced by the trustees if one of the following occurs: (a) the Company does not pay any Benefits in Payment; (b) an insolvency event occurs in relation to the Company; or (c) the Company does not pay any deficit at 30th June 2031.

The Company, trustees and their respective advisors concluded that the 2016 agreement was in the best interests of the scheme members. The agreement was subject to approval by tPR (the regulator) and was submitted to the regulator in July 2016. The regulator’s October 2017 response to the recovery plan submission questioned whether the 2015 recovery plan provides greater security than the 2012 recovery plan which funded to technical provisions only but required an earlier cash injection. Both the Company and the trustees have held discussions with the regulator to detail how each party satisfied itself that the 2016 agreement was preferred and to seek terms acceptable to all parties. The Company and the trustees continue to engage with the regulator. In the meantime the Company and the trustees are complying with the terms of the 2016 agreement. If this agreement terminates the parties may be required to revert to the 2012 recovery plan. In this event the Company would be required to make a contribution to the scheme of approximately £45m, adjusted for company deficit repair contributions and the potential investment return had the contribution been invested in October 2016, and agree a new recovery plan with the trustees. The next triennial valuation will be undertaken at 30th September 2018.

The present value of projected future contributions under the 2016 agreement relating to the UK defined benefit scheme at 30th June 2018 was £60,900,000 (2017: £62,900,000) which exceeded the value of the deficit at the year end, therefore, under IFRIC 14, the UK defined benefit pension scheme’s liabilities have been increased by £31,500,000 (2017: £16,200,000), to represent the maximum discounted liability as at 30th June 2018. The IAS 19 deficit reduced in the year primarily due to the return on scheme assets exceeding the 2017 discount rate and the effect of the 0.1% increase in the discount rate compared to 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

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