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 changes detailed in the new SORP are mandatory for accounting periods commencing 1 January 2015 and comparative data is required.
The key new requirements cover:
- Investment risk disclosures
- Valuation hierarchy disclosures
- Valuation of annuities (previously excluded from the accounts)
- Cost analysis of transaction types
Investment risk disclosures
Trustees will be required 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. The Statement of Investment Principles will provide much of the information, however, further information is likely to be required. It is vital that these disclosures not only meet the requirements of the SORP, but also reflect the investment strategy of schemes and the governance processes in place to mitigate risk. These new investment disclosures will create challenges for trustees, pension managers, third party administrators and investment professionals involved in the preparation of the financial statements.
Valuation hierarchy disclosures
Another requirement is to analyse investments according to a tiered valuation hierarchy according to the ease with which a market valuation is obtained for the investment. This hierarchy is different to the International Financial Reporting Standards valuation hierarchy based on level 1, 2 and 3 which is currently adopted by listed companies and means that fund managers and custodians will have to put in place new processes and systems to provide this information. This new approach will add to the cost burden for the industry and the use of two systems is likely to cause confusion.
Valuation of annuities
Under the current SORP, annuities that match liabilities can be valued at nil. The new SORP requires that such annuities are valued either on a scheme funding basis or an appropriate insurer’s valuation. Where material, trustees will need to ask their actuary or insurers to provide a valuation on this basis, and the valuation will need to be updated yearly or rolled forward, adding cost burdens to impacted schemes. Whether or not the annuities are material or not will be very difficult to foresee without an in-depth calculation. There is also an issue here regarding DC schemes that hold annuities as they do not have actuaries. These schemes will either have to use the services of actuaries or obtain valuation from their annuity providers. Schemes with 31 December year ends will need to ensure they obtain their first valuation as at 1 January 2014 for comparative purposes. As this date is almost one year ago, ensuring that such valuations can be obtained sooner rather than later is vital.
Cost analysis of transaction types
Following increasing focus on fees and costs charged by fund managers of pension schemes there is now a requirement to analyse unbundled direct transaction costs by type to provide greater transparency. There is already an existing requirement to disclose investment management fees, but only if they are paid directly by schemes. If transaction costs and investment expenses are deducted within the funds, these expenses are not separately disclosed in accounts, leading to a significant lack of transparency. Further transparency in pension scheme accounts would require major changes to fund manager systems to provide the necessary information. Without this, real transparency will only be achieved by improving the information that fund managers are required to provide trustees about their costs. This information can then be reviewed by the trustees and their advisors as part of their governance arrangements.
Early planning is crucial to ensure that the new SORP requirements are implemented smoothly. Trustees should set up SORP planning meetings with their auditor at the earliest opportunity to ensure they have strategies in place to meet the requirements and have requested the appropriate information from the relevant parties.