Pensions scheme accounts: essential update for preparers and auditors
Christine Scott highlights some further changes to the accounts requirements for occupational trust-based pension schemes.
As accounts preparers and auditors get to grips with the implementation of Financial Reporting Standard 102 (FRS 102) and the new Statement of Recommended Practice for Pensions Schemes (2015) (the Pensions SORP), there are some further changes to take on board:
- Guidance issued by the Pensions Research Accountants Group (PRAG), the SORP-making body, on amendments to FRS 102.
- The Financial Reporting Council’s (FRC’s) proposed changes to the fair value hierarchy disclosures in FRS 102.
- Expected changes by the Department of Work and Pensions (DWP) to the audited accounts regulations for pension schemes to streamline investment disclosures.
The timing of the changes to FRS 102 covered by the PRAG guidance is certain but there remains a degree of uncertainty over the timing of the proposed changes to the fair value hierarchy and the audited accounts regulations.
A further planned change to the audited accounts regulations is likely to lead to the requirement for the auditor’s statement on the statement of contributions being dropped for schemes with more than 20 participating employers.
Guidance issued by PRAG on amendments to FRS 102
Since the Pensions SORP was published in November 2014, there have been a number of amendments to FRS 102. Two of these amendments are of particular relevance to accounts preparers and auditors for periods commencing on or after 1 January 2015:
- Disclosure requirements when accounts depart from FRS 102
FRS 102 has been amended to align it to UK legal references to ‘true and fair’ reporting rather than to ‘fairly present’ when the accounts of an entity depart from FRS 102.
- Definition of a related party
The definition of a related party has been extended to include ‘An entity...or any member of a group of which it is a part, [which] provides key management personnel services to the reporting entity or to the parent of the reporting entity.’
In the context of pension schemes, key management personnel are normally the trustees. In some instances key management personnel services may be provided by a corporate entity, for example, a trustee company, which will fall to be a related party.
PRAG is not republishing the Pensions SORP to take account of these amendments and has instead published additional guidance which should be read in conjunction with the SORP.
Proposed changes to the fair value hierarchy disclosures under FRS 102
The FRC is proposing changes to the fair value hierarchy disclosures within FRS 102 for pension schemes (referred to in the standard as retirement benefit plans) and financial institutions to align these with International Financial Reporting Standards (IFRS).
The proposed amendments will only go some way towards aligning the fair value hierarchy in FRS 102 with IFRS as no changes are being proposed: to the fair value determination for pension schemes and financial institutions; or to the fair value disclosures for entities which are not pension schemes or financial institutions.
However, this development is certainly a step in the right direction and should make it easier for pension schemes to obtain the information they need from investment managers and custodians to prepare FRS 102 compliant accounts.
The intention is for the amendments to FRS 102 to take effect for periods commencing on or after 1 January 2017. It is also positive that early adoption is to be permitted for periods commencing on or after 1 January 2015 for accounts which have not been approved by the time the FRC issues the final changes.
ICAS responded to the FRC’s consultation on the proposed changes urging for these to be finalised swiftly to enable as many pension schemes as possible to take advantage of early adoption.
Audited accounts regulations
The DWP has consulted on changes to the Occupational Pensions Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 (the audited accounts regulations) which are expected to take effect for pension scheme accounts approved on or after 1 April 2016. However, amendment regulations have not yet been laid before the UK Parliament.
The audited accounts regulations require certain disclosures to be made about scheme investments and other assets but, with the implementation of FRS 102, these have fallen out of date. The proposed changes remove most of the detailed investment disclosures and require a statement in the audited accounts that the accounts have been prepared in accordance with FRS 102 and the Pensions SORP, noting any material departures.
Another important proposed change to the audited accounts regulations is an exemption for multi-employer schemes with at least 20 participating employers, which are not connected, from the requirement to obtain a statement from the scheme auditor on whether, in their opinion, contributions have been paid in accordance with the scheme’s schedule of contributions.
The consultation documents, which cover these changes and other proposed changes to regulations applying to occupational pension schemes, are available for reference.
During the summer of 2015, the ICAS Pensions Committee prepared a series of three articles, in conjunction with other industry professionals, on the new Pensions SORP: these include more detail on how pension scheme accounts are changing and potential implementation challenges.
Christine is a member of the PRAG SORP Working Party which prepares the Pensions SORP on behalf of PRAG.