Mercer Study Finds UK Employers Not Ready for FRS 17

July 5, 2002 (PLANSPONSOR.com) - Almost two-thirds of the UK's FTSE 350 companies' pension funds are in deficit if measured under FRS 17 accounting rules, according Mercer Human Resource Consulting.

Of the 61% in deficit status under the measure, 38% had deficits that were 10% more than their liabilities, according to the report. 

On Hold

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FRS 17, originally targeted for implementation next year, requires pensions to be accounted for using market value instead of book value, which is the current practice (see FRS 17 Hits UK Balance Sheets ).  The British government took the unusual step earlier this week of ordering a review of the data used to estimate the value of employee pensions – just a day after apologizing for overestimating the amount of money in pension savings accounts.

Earlier this week, the UK’s Accounting Standards Board (ASB) announced that it will publish for comment an Exposure Draft of an amendment to FRS 17 ‘Retirement Benefits,’ a proposed amendment that would extend the transitional arrangements in the standard and therefore defer the mandatory requirement for the full adoption of FRS 17.

Without the proposed amendments, businesses with a year-end of June would have to disclose their pensions schemes’ assets and liabilities in full this December, without the traditional smoothing effect (see FRS 17 Implementation Delay Seen ).

Larger companies fared better in the Mercer study, which evaluated positions as of December 31, 2001.  Still, nearly half (47%) of FTSE 100 companies were in deficit, compared with 69% of those in the FTSE 250.  About 28% of FTSE 100 companies had a pension fund with a value of more than 50% of its net assets, compared with FTSE 250 companies, of which 43% exceeded 50% of their net assets.

“Clearly, for a significant minority of companies, pension scheme management is a major business activity in its own right,” the Mercer study said. “In some cases, the business is more like a pension fund with a company attached, rather than a company with a pension fund.”

Equity Shift

About a fifth of the pension funds it surveyed hold less than 60% of their assets in equities, according to Mercer – a major turnaround from a few years ago when “few schemes allocated less than 75% to equities,” according to the report.  A notable shift in this direction came last fall when UK retail drugstore Boots moved all its pension assets to bonds from stocks (see Boots Walks Away From UK Equities ).

Mirroring trends in the US, UK employers have been moving toward defined contribution programs, or “schemes,” as they are referred to in the UK.  Mercer noted that 33% of companies offer a defined-contribution scheme to new employees, while 18% offer a mix of defined-benefit and defined-contribution pensions.

The ASB’s announcement

See also  FRS 17 Threatens UK Pension Plans

IRS Rule Amending Stock Exemptions Under Fire

May 6, 2002 (PLANSPONSOR.com) - A newly proposed rule by the Internal Revenue Service to impose payroll taxes on employee stock purchase plans has industry insiders up in arms.

In particular, lobbyists for the tech industry are chagrined because the rule would include ESPPs and other plans currently exempt. ESPPs are widely used by employers in the embattled sector.

The Problem

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ESPPs allow companies to take a portion of a participant’s after-tax wages to purchase company stock at a discounted rate – usually 10% to 15% below market price. Participants can then choose whether to sell their stock immediately or hold on to it.

The new rule would tax the discount, thus creating a new problem for participants. Unless participants were to sell the stock they receive through their company’s ESPP the same day they receive it, they would owe money on the earnings they have yet to receive. In turn, employers would be required to pay the IRS a matching amount. 

To add insult to injury, the new rule would create a conundrum for employers and participants at the same time. Employers would have to withhold payroll taxes without knowing an actual amount to calculate withholdings on. Participants, on the other hand, would have to sell their stock to cover the cost of the tax. And, those participants who sold quickly would be subject to higher taxes at the end of the year because they would be disqualified from the lower capital-gains tax.

On The Hill

The IRS put the new rule into effect last year when it overturned the exemptions from payroll taxes on certain kinds of stock. Soon after, the IRS decided to delay the change so that it could clarify the effect the rule would have. Last November the IRS came back, clarified the changes and declared that the new rule would go into effect on January 1, 2003.

Several members of Congress have proposed legislation to block the regulation from taking effect, including Senator Pat Roberts (R-Kan) and Senator Hillary Clinton (D-N.Y.). Another bill sponsored by Representative Amo Houghton (R-N.Y.) opposing the rule passed a House vote last month.

Critics of the rule are skeptical that any final legislation on the issue will come out of Congress this year. They say the Republican House and Democratic Senate are not likely to agree right away and other issues such as the war on terrorism and the accounting industry’s problems will most likely overshadow the debate on the new rule. The IRS is planning a hearing on May 14.

Weighing In

Opponents of the new rule say it would add another level of complexity to an already complicated process. 

“Many people oppose this rule because it would discourage employers from offering the programs due to the new administrative and economic burdens it would impose,” said Scott Roderick, director of publishing and information technology at the National Center for Employee Ownership.

Caroline Graves Hurley, tax counsel and director of tax policy at the American Electronics Association, said the new rule is troubling because it flies in the face of why ESPPs were set up in the first place.

“Congress created these benefits to afford beneficiaries better tax benefits,” she said. “By changing the rules the IRS will create a significant tax increase on employers and employees by imposing wage withholdings on income that is not wages.”

Hurley continued that the Joint Committee on Taxation released findings that found that the passage of the new rule would turn into a $23 billion tax increase over the next 10 years. However, she added that while over each year, the increase might seem small; employers would feel the changes the most.

John Scott, director of retirement policy at the American Benefits Council agreed.
“Employees would have to sell their stock to pay for owning the stock,” he said. “And employers would have to get into a lot of modification issues to impose this proposal.”

To raise awareness about the issue, the AEA is teaming up with ABC to sponsor an informational teleconference on May 13th. Members of both groups will be on hand to answer questions about the IRS’ regulatory aims and the history of the plans.

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