Since the Statement of Recommended Practice Financial Reports of Pension Schemes (2015) (“the SORP”) was published, there have been a number of amendments to the accounting standard FRS102 – The Financial Reporting Standard applicable in the UK and Republic of Ireland (“FRS102”) arising from both users experience of implementing FRS102 and its first, triennial review. The SORP has been updated in 2018 (“SORP 2018”) to reflect these, together with changes in relevant legislation.
The SORP 2018 is applicable for years commencing on or after 1 January 2019. Early adoption is permitted although schemes must disclose this. As many schemes are already following the practices included in the SORP 2018, early adoption is likely to be the preferred course of action.
What has changed?
FRS102 has always required the disclosure of comparative information (in respect of the comparative period) for all amounts presented in the financial statements. However, it has been common practice to omit some comparative disclosures, particularly in respect of hybrid schemes: for example, only including scheme total comparative values on the face of the Fund Account.
The SORP 2018 has been amended to remind readers of the requirements of FRS102. In the case of hybrid schemes, it includes a practical suggestion to include the comparatives in a note if there are too many columns to comfortably fit on the face of the Fund Account or Net Assets Statement.
There remain two exceptions: a comparative investment reconciliation table for the prior period is not required and the derivative disclosures do not require comparative for the key contract disclosures that are required for the current period (for example, the type of contract, the period covered by the contract and the nominal value – see paragraph 3.10.6 of the SORP 2018 for further details).
FRS102 allows reduced disclosures in the accounts of small entities and there has been some discussion as to whether the same regime could be applied to smaller pension schemes. However, there is difficulty in applying the FRS102 definition of a “small entity” to pension schemes and the needs of each member in respect of the accounts do not differ merely due to the size of the scheme. As a result, the SORP 2018 “does not believe the Small Entities regime set out by FRS102 is applicable or relevant to pension scheme financial reporting”.
Although it was best practice for Master Trusts to follow the previous SORP, the SORP 2018 now specifically brings them within scope.
There was an anomaly in the previous version of FRS102 where it did not include the title for ‘payments to and on account of leavers’ in the list of items to include in the Fund Account. This has now been corrected, although the ordering of the items in FRS102 is not in line with current industry practice.
Guidance has now been provided on benefits where member decisions are pending at the period end. Previously, information on contingent liabilities in FRS102 was the only available guidance. In the case of such benefits, the SORP 2018 recommends that the existence of such benefits is disclosed in the notes to the financial statements with an indication of the amounts involved (if known). It also suggests that the notes explain when they will be accounted for – that is, on the date the member decision is received by the scheme.
Members are liable for taxation payable on benefits that exceed the lifetime or annual allowances. Where the trustees agree to settle the tax on behalf of the member, the SORP 2018 recommends that this is reported separately in the notes to the financial statements. Schemes have a choice as to how they account for the tax payable: it can be expensed (as the cost is paid through reducing the benefit payment to the member) or accrued as a debtor that is recovered from the member when their benefit is paid.
A statement has been added to confirm that amounts expensed should exclude recoverable VAT.
Investment Fair Value Hierarchy
The transitional option to use categories a, b and c has been removed from the fair value hierarchy (“FVH”) disclosures and the SORP 2018 now requires the use of levels 1, 2 and 3. The fair value methodology remains unchanged, which requires fair value to be determined using categories a, b, c basis. This leads to the anomaly of a scheme having to fair value its investments on the basis of categories a, b, c but disclose the same investments in their accounts under levels 1, 2, 3.
Our recommendation would be to ensure that whoever is providing you with the required disclosures (normally, your investment consultant or manager) understands that now they need to provide you only with these disclosures using levels 1, 2 and 3.
Guidance taken from the joint PRAG/Investment Association publication on investment disclosures has been amalgamated in to the SORP 2018. This provides guidance on the allocation between the three levels.
The FRS102 description of valuation techniques (used when valuing investments under category c) has been amended to include using a price “in a binding sale agreement”. This could impact investment property where a sale agreement has been agreed post year end, for example. In such cases, the FVH of the investment is likely to move from Level 3 to Level 2 as the inputs to the valuation have become “observable”.
Concentration of investments
The requirement to disclose details of investments over 5% of the total value of the net assets of a scheme has been updated to remind users that there is no need to ‘look through’ pooled investment vehicles to the underlying investments. The holdings in the pooled investment vehicles themselves should be disclosed unless the trustee “controls the investment mandate of the pooled investment vehicle”, at which point the ‘look through’ basis should be used.
Where the accounts are being prepared for the Pension Protection Fund assessment period, the SORP 2018 has a reminder that the disclosures for investments must follow the Pension Protection Fund (Valuation) Regulations 2005 as these include some disclosures that have been removed for all other schemes.
Common investment funds (“CIFs”)
Guidance for CIFs has been updated so that the trustees of the CIF decide whether it is a Financial Institution (“FI”) (as per FRS102). If it does, the CIF will have to follow the disclosure requirements for FIs as required by FRS102 and the SORP 2018 recommends that they also follow the disclosure requirements of the SORP 2018. If it is not a FI, then the SORP 2018 recommends that it follows the pensions investment disclosure requirements around the Fair Value Hierarchy and risk disclosures as if it were a pension scheme.
Guidance has been expanded around the circumstances that schemes may find themselves in when entering the Pension Protection Fund (“PPF”) assessment period (following an insolvency event in the employer). It can be particularly difficult to assess the going concern status of such a scheme and the SORP 2018 now confirms that it is the likelihood of the scheme winding up (either on being transferred to the PPF or outside of the PPF) that determines whether the scheme can be considered a going concern or not.
Where there is a material uncertainty - such as where the funding levels are uncertain at the time the accounts are prepared - then the trustees must consider whether to adopt the going concern basis to prepare their accounts and disclose details as appropriate.
The definition of related parties has been revised in FRS102 so the SORP 2018 has followed and included an “entity, or a member of a group of which it is part, provides key management personnel services to the reporting entity (eg the scheme)…” as a further related party. This means that where trustees’ (who are considered “key management personnel”) services are provided through a corporate entity (such as a trustee company), that company falls to be a related party. Separate disclosure of transactions with the trustee company is required.
Details about a scheme
Certain information is required by FRS102 in respect of identification of the financial statements and the SORP 2018 has interpreted this for pension schemes and recommends that disclosures include:
- The fact that the scheme is established as a trust;
- The legal jurisdiction in which it is established; and
- The address for enquiries (which is already required to be included under Regulation).
Most schemes already provide such information.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.