Accounting body pushes government to scrap outdated reporting regs
Industry body Pensions Research Accountants Group, together with the Financial Reporting Council, has had initial discussions with the government on jettisoning out-of-date requirements for pension scheme reporting to make way for its own enhanced disclosure regime.
After a seven-year gap, Prag published last week its latest statement of recommended practice for putting together documents including scheme reports and annual accounts, in light of the FRC’s revised reporting standards for the UK and Ireland, FRS 102, coming into force next year.
Three key reporting changes
- Investment risk: Schemes are required to disclose how their assets are exposed to various risks including credit risk and currency risk, and explain how the risks fit into their investment strategy.
- Valuation hierarchy: Reports are expected to take on FRS 102's framework for valuing assets, from category A for highly liquid, easily priced assets to category C for illiquid assets where value has to be estimated.
- Declaring annuities: Especially important in the case of buy-ins, where bulk annuities are held as a scheme asset, trustees are now required to disclose annuities on a gross basis, as the previous exemption was lifted. PRAG acknowledges this will lead to "additional costs".
The approach requires schemes to give enhanced disclosure on the risks they are running across their investment portfolios, as well as building extra layers into how they declare the value of their assets.
This extra workload has been criticised by some trustees and consultants for the costs it could incur, but the creators of the code, along with other industry experts, have insisted extra transparency is necessary.
Kevin Clark, chair of the Prag working group which wrote the recommendations, said any extra burden could be more than outweighed if the Department for Work and Pensions removed the audited accounts regulations created in 1986.
“If you take that away, that creates time savings and space for the new disclosures that [FRS] 102 brings along,” he said, adding that on a “net basis” there would be no extra work required.
Transparency costs
The most hotly debated change announced in the statement (see box) asks schemes to disclose their investment risks across their asset classes and strategies, which poses particular difficulty for pooled funds and diversified strategies.
In these cases, schemes are called upon to take either a “look-through” strategy, where they calculate the exposures of underlying assets, or to treat the allocation – for example hedge funds – as an asset in its own right and calculate its risk exposures at fund level.
The second important element is the valuation hierarchy. Here the FRC has come under fire for using its own valuation levels – which were then adapted by Prag for its recommendations – rather than the widely used terms of reference of the international financial reporting standards.
Andrew Penketh, head of pensions at accountancy Crowe Clark Whitehill, said a simple quantification of the risk exposure will not help schemes or those using the reports, and instead the focus should be on how a scheme’s funding position would respond to shifts in economic conditions.
He said: “It has got to a position where we really need to question what we are doing and make sure the information that is being provided is of some use.”
He also criticised the usage of an alternative valuation hierarchy, and added to calls for the FRC to change its structure to match the IFRS. “It is different, but I don’t think it is adding any value being different,” Penketh added.
The advisory firm recently ran an industry seminar where nine in 10 of the scheme trustee, manager and adviser delegates (92 per cent) said the investment risk analysis will be both a burden and an additional cost for schemes.
A similar proportion (88 per cent) agreed the FRC should amend its valuation hierarchy, and three-quarters said disclosure of investment risk will add “little value” to scheme accounts.
An FRC spokesperson said the valuation hierarchy issue will form part of the three-year review of its new accounting standard, to be held in 2018, adding: “FRS 102 was subject to substantial consultation before implementation and we have an agreed cycle in place to consult on proposed future amendments.”
Fiona Baldwin, head of pensions audit at advisory firm Grant Thornton, said the necessity for greater disclosure, as scheme investments become more sophisticated, had to be weighted against the extra work created for schemes.
“We are in a different place in pension schemes to where we were – there is more focus on governance, there is more focus on use of scheme assets,” she said, adding it was “sensible” that accounts should reflect that. The disclosure consultation closes on July 16.