Practical considerations for pension schemes under FRS 102

The preparation of pension scheme reports and accounts is a team effort involving the trustees, who are ultimately responsible for these, and many other professionals, including accounts preparers, scheme administrators, actuaries, investment managers, custodians and scheme auditors.

The ICAS Pensions Committee recently hosted a discussion event with representatives from the pensions industry and scheme auditors to discuss the challenges around delivering pension scheme reports and accounts which comply with FRS 102: The Financial Reporting Standard applicable in the UK and the Republic of Ireland and the new Pensions SORP 2015 (SORP 2015).

A number of key messages arose from the discussions, including tackling low awareness levels of SORP 2015 and its impact among the trustees of small and medium-sized schemes.

Also, while the participants recognised SORP 2015 may be beneficial in a number of respects, some concerns were raised about the additional costs of compliance which will place further strain on the governance budgets of pension schemes.

Early discussions and detailed planning

Trustees should ensure a detailed plan and timetable is drawn up, discussed and agreed with all key parties to the accounts preparation process.   This should allow time to anticipate and resolve technical and operational issues enabling a smooth transition to SORP 2015.  This will help to minimise the risk of accounts being late and the possibility of cost overruns arising if relevant information is not available on a timely basis.

Small and medium-sized schemes

The challenges of SORP 2015 compliance are amplified in relation to small and medium-sized schemes.  Therefore, accounts preparers, investment managers, custodians and scheme auditors will need to take a more pro-active role to help trustees of small and medium-sized schemes understand what is involved in the preparation of reports and accounts under FRS 102 and SORP 2015.

Investment valuation disclosures

Investment managers and/or custodians will need to provide accounts preparers with the relevant information for the investment valuation disclosures. Some of these disclosures will also require comparative information.  This is a significant new disclosure requirement and will need early discussion and agreement on responsibilities.

The pension scheme will be required to prepare a Statement of Net Assets as at its date of transition to FRS 102, this will be the opening date of its comparative period e.g. a scheme with a 31 March year end will have a transition date of 1 April 2014.  Consideration will therefore need to be given as to what information as that date requires to be made available to enable the opening positon as at the date of transition to be established.

Joint Pensions Research Accountants Group (PRAG) and Investment Association (IA) guidance on investment risk disclosures, published on 25 June 2015, will help support the consistent classification of assets across the industry.  It is essential that investment managers and custodians follow the PRAG/ IA guidance as a matter of good practice and also to facilitate an efficient accounts preparation process for third party administrators and accounts preparers.

Trustees, accounts preparers and auditors need to understand how investment managers and custodians intend to determine investment classifications, in accordance with the fair value hierarchy, in client reporting packs. They may not always have access to sufficiently detailed information about all the assets held, resulting in inappropriate or irrelevant classifications.   Trustees, accounts preparers and auditors should consider this risk and where necessary plan early to determine what further information is required to support classifications (such as obtaining Fact Sheets).

The importance of following good practice cannot be underestimated given the practical challenges investment managers and custodians will face in view of FRS 102's fair value hierarchy being different from IFRS. In order to produce information in accordance with the FRS 102 hierarchy, investment managers and custodians may need to make infrastructure changes and we would expect these changes to reflect the approach taken by PRAG and the Investment Association in their guidance.

It is possible that necessary infrastructure changes may not be achievable to meet accounts preparation timetables and it is unclear if others, such as price vendors, would instead be able to supply the necessary information.  Early discussion is therefore critical.

Additionally, accounts preparers need to be mindful that accounting requirements in other jurisdictions may be different and early dialogue with overseas investment managers is desirable to avoid delays.

Investment risk disclosures

The main challenge presented by the investment risk disclosures is making them meaningful.  While pension liabilities remain off balance sheet, it is questionable whether understanding investment risk is helpful without reporting on the risks attached to pension liabilities.

Preparing meaningful disclosures will mean linking information in the trustees' report with information included within the accounts. Investment risk disclosures within the accounts themselves need to be sufficient for the accounts to "give a true and fair view"; indeed scheme auditors will require this if an unmodified auditor's opinion is to be achieved.

On a more positive note, the investment risk disclosure requirements will oblige pension trustees to revisit their scheme's statement of investment principles.  SORP 2015 may therefore be helpful if trustees take this as an opportunity to discuss in more depth, funding risk, covenant risk and investment risk.  This could be a valuable exercise especially for the trustees of those smaller schemes who have not given any recent consideration as to why certain investments are being held.

Investment risk disclosure will be a mix of narrative and numbers.  There will need to be some quantification around credit ratings and currency holdings but on the whole the focus will be on the narrative.  Trustees and accounts preparers will need to ensure that comparative information is available and also that the input of investment advisers and consultants is organised on a timely basis, particularly if they are required to produce information for this purpose.

Obtaining meaningful rating information on bonds may be tricky as some bonds are not currently being rated by any of the rating agencies: this is an area where the PRAG/ IA guidance should be helpful.  In time, tender specifications for investment management could include a requirement to provide ratings thus improving the quality of information.  However, at the moment a change in investment manager could create issues around obtaining the historic information that will be required to prepare the disclosures, therefore, contracts will need to reflect this requirement if possible.

Annuities

The recognition and measurement of annuities is an area where the cost versus benefit assessment has been questioned by the pensions industry. This is in part due to the challenge of demonstrating that information on annuities is sufficiently complete.

Trustees and third party administrators should be planning now to identify and locate individual and bulk annuity policy documentation as this may now be requested by the scheme auditor as part of the annual audit.  It is possible that policy documentation is not able to be traced due to the age of some of the policies and scheme auditors may therefore have to apply professional judgement on how they assess the completeness of these assets.

Trustees will need to decide early whether the annuity policies are best valued by the actuary or insurance provider and engage early to ensure that the information will be available on a timely basis.  In the first year of producing SORP 2015 accounts, three years of valuation information will be required as the valuation basis is a change in accounting policy.

Where annuity income is not paid directly through the scheme's bank account then information on annual income will need to be obtained by the accounts preparer in good time to enable it to be brought into the scheme's accounts.

Fortunately, help may well be at hand as the scheme actuary should have information on annuity policies as these must be taken into consideration in calculating the scheme deficit on a section 179 basis.  A deficit calculated on this basis illustrates the extent to which the scheme could fund Pension Protection Fund (PPF) compensation.  This is information which the PPF gathers routinely.

Conclusions

Undoubtedly the SORP 2015 provides pensions schemes and those involved in the accounts preparation process in the widest sense, some new challenges. Trustees, guided by accounts preparers and the scheme's auditor, should already be thinking about the practical steps needed to deliver reports and accounts under the new requirements.

More than ever, good communication and effective working relationships among all the professionals involved will be essential, especially if the additional costs of compliance are to be minimised.

Read an overview of the main changes arising from FRS 102 and SORP 2015 for pension scheme accounts.