Practical Pension Scheme Accounting: Are you up to date?

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The new pensions SORP is now in place and Crowe Clark Whitehill are authors of “Practical Pension Scheme Accounting”, a book that provides guidance on the implementation of the new SORP requirements. It includes guidance on, changes that have already been made to the SORP and regulations, further SORP that are due shortly and guidance on the new DC (Defined Contribution) Chair’s Governance Statement. The publication provides the accounts preparer with everything in one place, as it covers all aspects including anticipated changes.

“Practical Pension Scheme Accounting”  is relevant to all those involved in the preparation of the report and accounts under the new SORP, including pension managers, accounts preparer of in-house pensions departments or third party administrators and trustees. Investment advisors will be interested in the book where they are asked to assist with some of the new investment disclosure requirements. The book will also help auditors to increase their understanding of the new requirements.

The key new requirements are in relation to additional investment disclosures, particularly investment risk and the valuation hierarchy. The book provides guidance on these new requirements, together with example disclosures, including options from the minimum to comply with the SORP, to options to help make the report and accounts more meaningful.

There are proposed changes to the valuation hierarchy for years commencing on or after 1 January 2017, with the option to early adopt and it is expected that most trustees and accounts preparers will want to take advantage of the option. The book provides guidance on these changes, which are expected to come in March/April 2016.

There is a requirement to value annuity policies which could previously be valued at nil under the old SORP. The publication highlights factors to consider when assessing whether annuities need to be valued and the approaches to valuing them.

The new SORP was completely rewritten to take account of the changes introduced by Financial Reporting Standard, FRS 102 and there are a number of areas of change. “Practical Pension Scheme Accounting” includes a disclosure to help ensure that all of these changes are complied with. Example accounts are used in the book to set out the minimum disclosures to comply with the SORP.

Written in a user friendly way, the book takes the reader through the steps involved in the accounts preparation process. There is a lot of information that needs to be pulled together in order to prepare the accounts, particularly with the additional new requirements. The book explains the information that is needed. It takes a look at the various parties involved throughout process to ensure all relevant parties are involved in the right way. There are key checks within the relevant sections of the book. These act as useful prompts for accounts preparers when checking that information has been reported correctly.

An extract from the book is included below:

9.1.6        Bonds

Bonds are normally valued using valuation techniques from observable market data. However, where highly liquid bonds are exchange traded, the quoted price can be used. The valuation method should be disclosed.

Bonds should be accounted for at the clean price rather than their dirty price so any interest income associated with the bond should be recorded separately. The indexation element which is paid on maturity of the bond is included in the value of the bond.

The accounts preparer will be required to obtain details of all bonds held by the scheme during the year, including the holdings and latest available price, at the year end. This information should be obtained from the investment manager (or global custodian, where one is appointed). The basis of valuation is disclosed in the accounting policies, which the accounts preparer must ensure are accurate.

Example disclosure 9.9 – Bonds accounting policy

Bonds are stated at their clean price, where applicable, including the indexation element which is payable on maturity. Accrued interest is excluded from the market value of fixed income securities and is included in investment income receivable.

 

It will also be necessary for the accounts preparer to ensure bonds are appropriately included in the following notes to the Financial Statements:

  • Fair value hierarchy (see para 9.1.1 for further information regarding fair value hierarchy). In general, bonds are valued using valuation techniques such as average of broker prices, and therefore are categorised as (c(i)). For some highly liquid exchange branded bonds, market quotes can be obtained and in these cases it may be appropriate to categorise the bonds as category (a). In all cases the valuation method should be disclosed. Likewise exchange traded bonds would be categorised as level 1 under IFRS, however bonds valued based on an average of broker prices would be categorised as level 2. Where bond prices are based on an average of broker prices and these bonds are highly liquid and the entity can sell the bond at the price quoted at the year end date (on that date), in an active market, one view is that these bonds could be included in level 1 (see para 9.1.1.1).
  • Risk disclosures (see para 9.1.14 for further information regarding risk disclosures). Bonds are subject to interest rate risk and credit risk. Although not a requirement, schemes may want to include brief disclosures with regard to inflation risk, where they hold investments such as indexed linked bonds. Disclosures would also be required under ‘currency risk’ where overseas bonds are held by the scheme.

At the time of writing this publication, regulations require further analysis of bonds between quoted and unquoted. It is expected that this requirement will be removed in the future (see Appendix 2). The trustees may feel it would be useful to split bonds in the notes to the Financial Statements between overseas and the UK if this helps to explain currency risk and/or currency hedging.

Purchases in the investment reconciliation table will consist of the purchase price of any new bonds obtained during the year plus direct transaction costs, with sales consisting of the sales proceeds of bonds less direct transaction costs. Interest bought and sold on investment purchases and sales should be accounted for separately to the capital purchase or sale, it should be reported through income on bond securities in the Fund Account (SORP, paragraph 3.8.32). The accounts preparer should obtain reports from the investment manager confirming income for the year. The accounts preparer would also be expected to perform a high level review of bond movements to ensure they appear appropriate, given the investment strategy, scheme events during the year and performance reported in the Trustees’ Report.

Key checks

  • A reconciliation has been prepared of the value of bonds held at the start of the year, transactions during the year and the value of bonds held at the end of the year.
  • Bonds are valued using valuation techniques from observable market data.
  • Market price used for bonds traded on a recognised exchange.
  • Prices used at the year end date.
  • Prices used are clean and do not include accrued interest. Indexation paid on maturity will be included in the price.
  • Appropriate disclosures made where prices are stale.
  • Income purchased and sold is recorded via the Fund Account.
  • A full year’s income has been accounted for.
  • Accounting policies are complete and accurate.
  • Risk and fair value hierarchy disclosures include bonds.

 


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