Financial Reporting of Pension Schemes

John Griffin

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The new Pensions SORP which provides guidance for producing pension scheme accounts was launched on 25 November 2014 following the publication of FRS 102. The Pensions SORP needs to be taken into account for accounting periods starting from 1 January 2015.

The key new requirements include:

• Disclosure of investment risks and the associated risk management practices
• Disclosure of approach to valuing investments
• Valuation of annuities (previously excluded from the accounts)
• Cost analysis of transaction types

Disclosure of investment risks

Trustees will need to explain the nature and extent of investment risks, quantify the risk exposures, explain how they arise and set out their policies for risk management. Further information to that in the SIP may be required.  These disclosures need to meet the requirements of the SORP, and to reflect the investment strategy of schemes and governance processes in place to mitigate risk.

Valuation hierarchy disclosures using a “fair value hierarchy”

Investments will need to be classified using a tiered “fair value hierarchy” according to the ease with which a market valuation can be obtained for the investment. The new SORP provides guidance on applying the hierarchy, and it is different to the FRS valuation hierarchy based on level 1, 2 and 3 previously used; this means that fund managers/custodians will need to have processes in place to provide this information. This new approach will incur additional costs for the industry.

Valuation of annuities

Previously, annuities that match liabilities could be excluded from the scheme’s assets. The new SORP requires that they are valued either on a scheme funding basis or an appropriate insurer’s valuation. Where material – which will depend on an in-depth calculation – trustees will need to ask their actuary or insurers to provide a valuation on this basis.  In addition, DC schemes that hold annuities will either have to use the services of actuaries or obtain valuation from their annuity providers.

Cost analysis of transaction types

Following increasing focus on a need for transparency, fees and costs charged by fund managers now need to provide unbundled direct transaction costs by type. This includes transaction costs and investment expenses are deducted within the funds, which are not currently separately disclosed in accounts. This may require significant changes to fund manager systems to provide the necessary information. Otherwise, managers will need to improve the information they provide to trustees about their costs; this information can then be reviewed by the trustees and their advisors as part of their governance arrangements.

Action

Some of the additional work required to comply with the new SORP will be significant, and early planning will be vital to accommodate the new SORP requirements. Trustees should arrange with their auditors to set up planning meetings to ensure they have appropriate strategies in place to meet these new requirements.

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