New Pensions SORP comes into force
Liz Duffy and Christine Scott report on the changes to financial reports of pension schemes: A statement of recommended practice (The Pensions SORP).
The Pensions SORP (2018), issued by the Pensions Research Accountants Group (PRAG), is applicable to accounting periods commencing on or after 1 January 2019: early adoption is permitted.
The Pensions SORP (2018) reflects changes to UK GAAP and amendments to pensions legislation since the Pensions SORP (2015) was published:
- Triennial review amendments to the Financial Reporting Standard in the UK and the Republic of Ireland (FRS 102) applicable to accounting periods commencing on or after 1 January 2019, with early adoption permitted.
- Fair value hierarchy disclosure amendments to FRS 102 applicable to accounting periods commencing on or after 1 January 2017, with early adoption permitted for accounts with periods commencing on or after 1 January 2015 approved on or after 8 March 2016.
- Minor amendments to FRS 102 applicable to accounting periods commencing on or after 1 January 2016, with early adoption available.
- Changes to The Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 applicable to pension scheme accounts approved on or after 1 April 2016.
The increased emphasis on going concern in Audit Practice Note 15 (Revised): The audit of occupational pension schemes in the United Kingdom (November 2017) has prompted the inclusion of additional material within the Pensions SORP (2018) on interpreting the going concern concept for pension schemes.
The Pensions SORP (2018) is available to PRAG members or can be purchased by non-members via the PRAG website.
Note on early adoption
Early adoption of the Pensions SORP (2018) means the adoption of FRS 102 triennial review amendments and any other amendments except those relating to bullet points 2 to 4 above. Where such amendments are adopted early this should be disclosed.
More details on the following key issues for pension scheme trustees, accounts preparers and auditors are set out below:
- Common investment funds
- Hybrid schemes: comparative information
- Transfers out
- Fair value hierarchy disclosures
- Changes to legislation applicable to pension scheme accounts
- Going concern considerations
- Legal status and scheme address
Common investment funds
FRS 102 no longer includes pension schemes within the definition of a financial institution. While included with the definition of a financial institution, pension schemes were scoped out of the additional financial instrument disclosures imposed on financial institutions.
This change to FRS 102 may have an impact where common investment funds (CIFs) are used by employers with more than one pension scheme to pool assets. Where scheme assets are pooled within a CIF, pension scheme trustees need to decide whether the CIF falls within the FRS 102 definition of a financial institution.
If so, the accounts will need to include the additional financial instruments disclosures required of financial institutions as the previous concession available to pension schemes will no longer apply. The accounts will also need to comply with the investment disclosure recommendations of the Pension SORP (2018).
It is anticipated that trustees will be unlikely to classify a CIF as a financial institution. However, the Pensions SORP (2018) does require an active decision by the trustees to confirm the status of the CIF.
PRAG will keep this issue under review and may issue further guidance if there is sufficient demand.
Hybrid schemes: comparative information
The Pensions SORP (2018) has clarified the requirement to present prior year comparative information for hybrid schemes: schemes with a Defined Benefit (DB) section and a Defined Contribution (DC) section.
The Pensions SORP (2018) recommends that comparative figures are provided on the face of the primary statements. However, if it is not practical to do so, comparative figures can be prominently presented in the notes to the accounts instead.
While this will require a fuller analysis of their numbers in the current year’s accounts, the information needed to produce the requirements is already available from the previous year’s accounts.
The requirement to include comparatives applies to the primary statements of schemes with multiple DB sections.
Transfers out from a pension scheme were previously treated differently by the Pensions SORP and FRS 102. FRS 102 required transfers out to be disclosed on the face of the Fund Account whereas the Pensions SORP only required disclosure in the notes to the accounts. FRS 102 has now been amended to bring it into line with the Pensions SORP.
However, in view of the increased volume of transfers out as a result of scheme members exercising the pension freedoms, transfers out could be a material to the scheme accounts. Where this is the case trustees may wish to consider disclosing transfers out on the face of the Fund Account.
Fair value hierarchy disclosures
The Pensions SORP (2018) incorporates the earlier changes to FRS 102 which brought in the requirement to disclose the fair value determination of investments in line with hierarchy used within International Financial Reporting Standards (IFRS.): ‘the Level 1,2,3 hierarchy’. Aligning the hierarchy was a helpful development as it brought consistency between pension schemes and those providing pension schemes with financial information about their investments.
In a joint publication, Practical Guidance: Investment Disclosures (May 2016), PRAG and the Investment Association set on how these requirements should be applied to pension schemes. This guidance has now been incorporated into the Pensions SORP (2018). Therefore, it is anticipated that most pension schemes should not have to make significant changes in this regard.
Changes to legislation applicable to pension scheme accounts
The Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 were amended to remove most of the detailed investment disclosures required and now 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.
Also the requirement to obtain an auditor’s statement on contributions and therefore the need to include a summary of contributions has been removed for schemes which, on the first day of the scheme year, had at least 20 participating employers.
The amendments were brought about by UK Statutory Instrument 229 of 2016 and apply to the pension scheme accounts approved on or after 1 April 2016.
Going concern considerations
Going concern is a concept which does not translate easily to pension scheme accounts. Pension scheme accounts are stewardship accounts primarily intended to record and report on scheme investments, with the trustees having a fiduciary duty towards the beneficiaries of the scheme. However, the going concern basis is assumed in the preparation of pension scheme accounts unless a decision has been made to wind up the scheme or an event triggering its wind up has occurred.
In the context of pension scheme accounts, being closed to future accrual does not in itself constitute a decision to wind up a scheme.
The Pensions SORP continues to state that “…the basis of preparation of the financial statements does not refer to the going concern basis unless the trustees or employer have taken the decision to wind up the scheme or have no realistic alternative to do so….”
Additional wording has been added to the Pensions SORP (2018) to highlight circumstances where there are no material uncertainties but disclosure of the going concern basis is needed in order to give a ‘true and fair’ view. For example, where a scheme is in the Pension Protection Fund (PPF) assessment period and is expected to leave the assessment period and continue as a closed scheme.
Expanded guidance is set out in the Pensions SORP (2018) on the implications for the going concern basis of a pension scheme entering the PPF assessment period. It may appropriate to continue preparing accounts on a going concern basis, in which case the trustees should be considering if a material uncertainty should be disclosed. Equally, there may be circumstances where the going concern basis is no longer appropriate and where the trustees consider this to be the case, the financial statements need to be prepared on a cessation basis.
PRAG has issued additional guidance, Going concern and pension scheme financial statements (April 2018). The guidance is only available to members of PRAG and can be downloaded from the members’ area of the PRAG website.
Legal status and scheme address
The Pensions SORP (2018) clarifies that FRS102 section 3.24 requires the disclosure of certain constitutional information.