Accounting by pension schemes under FRS 102

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Big changes are in the pipeline for the accounts of private sector trust-based pension schemes. For periods commencing on or after 1 January 2015, a new Pensions Statement of Recommended Practice (SORP 2015) applies to the preparation of scheme accounts.

SORP 2015, published by the Pensions Research Accountants Group (PRAG), replaces the Pensions SORP (revised May 2007).

The Pensions SORP has been updated to reflect the changes to UK GAAP arising from the implementation of Financial Reporting Standard (FRS) 102: The Financial Reporting Standard applicable in the UK and the Republic of Ireland and the withdrawal of all previous standards.

FRS 102 primarily applies to unlisted entities and is based on the International Accounting Standards Board's International Financial Reporting Standard for small and medium-sized entities (IFRS for SMEs).

Unlike old UK GAAP, FRS 102 includes requirements which are specific to 'retirement benefit plans', covering the presentation of accounts, the basis of valuing scheme assets and treatment of actuarial liabilities along with more extensive disclosure requirements.  In addition, pension schemes must also comply more broadly with the requirements of FRS 102.

The SORP 2015 brings together these requirements with extant legislative requirements to "recommend particular accounting treatments and disclosures with the aim of narrowing areas of difference and variety between comparable entities".  Trustees and accounts preparers need to have regard to FRS 102 and laws and regulations as the primary source of requirements for pension scheme accounts.

In preparing SORP 2015, PRAG's main aim was not to extend the accounting and disclosure requirements beyond what was necessary to comply with FRS 102 except where additional recommendations were considered proportionate and appropriate.

Main changes

The main changes being introduced by SORP 2015 are:

  • Investment reports.  Typically narrative investment reports, within the trustees' report, have been lengthy and not scheme specific in terms of market overview and performance.  SORP 2015 now requires that investment reports focus on the circumstances and requirements of the scheme itself, with more general economic and market conditions restricted to what is necessary for gaining an understanding of the scheme's own circumstances.
  • Investment valuation disclosures.  FRS 102 introduces a fair value hierarchy for financial instruments and the SORP extends this to all investments held at fair value.  Unfortunately, the fair value hierarchy is not consistent with the hierarchy which applies under International Financial Reporting Standards (IFRS).  The differences are summarised in the table below.

Fair value determination: comparison with IFRS

IFRS FRS 102 SORP 2015

Level 1

Quoted prices

Category A

Quoted prices

Category A

Quoted prices

Level 2

Observable inputs other than quoted prices

Category B

Recent quoted prices

Category B

Recent quoted prices

Category C

Valuation technique

Category C(i)

Valuation technique: observable inputs

Level 3

Unobservable inputs

Category C(ii)

Valuation technique: unobservable inputs

Under SORP 2015, pension trustees have the option of preparing investment valuation disclosures for Category C to provide additional transparency by distinguishing between investments determined using observable inputs and unobservable inputs.

  • Investment risk disclosures.  FRS 102 requires disclosure of the nature and extent of credit and market risks in respect of financial instruments at the end of the reporting period and the disclosure of specific aspects of a scheme's risk management arrangements.  The SORP recommends that these disclosures are extended to all investments held at fair value.
  • The recognition and measurement of annuities.  Annuities held in the name of the trustees are to be reported at the value of the related obligation.  Under SORP 2007, annuities could be reported at nil value.  However, this approach is not permitted under FRS 102 and applies to both defined benefit and defined contribution schemes.
  • Actuarial liabilities disclosures.  FRS 102 requires actuarial liabilities to be disclosed within the trustees' report.  In addition to the amount of the liabilities, the methodology and assumptions used to measure the liabilities are to be disclosed.   There is no requirement to update the amount of liabilities at the end of each reporting period and it is sufficient to report the liabilities from the most recent scheme funding valuation.  Where a scheme holds annuities, liabilities covered by these need to be included in the trustees' report.
  • Transaction costs disclosures.  SORP 2015 recommends that direct transactions costs are disclosed by type of cost and by main class of asset.  This reflects the increasing trend in transparency.  It is possible that the scope of these disclosures could be extended by the Department of Work and Pensions following its consultation 'Improving transparency in workplace pensions: transaction costs disclosure' which closed on 2 March 2015.

Other developments

Investment disclosure guidance

PRAG and the Investment Association have published guidance on investment disclosures to supplement the requirements of the SORP 2015.  The Practical Guidance: Investment Disclosures includes guidance on the classification of assets under the fair value hierarchy.  The guidance was launched at PRAG's summer meeting, at the Royal Over-Seas League, in London, on 25 June 2015.

Compliance with the guidance is not required in order to comply with SORP 2015.  However, it is as an authoritative source which is intended to drive consistency of practice.

Audited accounts regulations

The Occupational Pensions Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 are still in place.

The regulations require certain disclosures to be made about the schemes investments and other assets.  These disclosure requirements are outdated and do not have to be complied with in order to comply with SORP 2015.  It is anticipated that these regulations will be amended in time for schemes to avoid having to provide two sets of disclosures.

Practical considerations

Read insights from pension professionals and scheme auditors on some practical considerations for preparing trustees' reports and scheme accounts under SORP 2015 and under FRS 102.

PRAG members

PRAG members should have received a printed copy of the Pensions SORP 2015 and have access to an electronic copy via the PRAG website.  Details of how to purchase copies of SORP 2015 are also available on the PRAG website. The PRAG/IA guidance is available to PRAG members on the PRAG website.

Topics

  • Thought leadership
  • Pensions

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