Pension Scheme Audits - What you need to know

A pension scheme audit is an important annual step for pension schemes. But the audit is not a tick box exercise.

As the pensions industry continually changes, pension trustees require reliable, high-quality audits, that are reflective of those changes. Further, the expectation is that pension scheme audits be managed professionally, delivered on time, and with good communication throughout the process.

As a specialist accountancy firm in pension scheme audits, we have gathered our core, topline, insights, views, and recommendations, below, to help pension trustees, administrators, and secretaries better understand what to look for when recruiting a pension scheme auditor. We hope you find it useful.

Pension Scheme Audit - close up of two people's hands checking information on a laptop screens

Why is a Pension Scheme Audit Needed?

Starting with the basics, a pension scheme audit is needed as pension scheme trustees have a regulatory duty to ensure that their pension scheme is effectively run and in the best interests of its members. Within this, a pension scheme audit helps in these areas:

Regulatory compliance

Trustees need to ensure that their pension scheme complies with various legal and regulatory requirements set out by bodies like The Pensions Regulator (TPR) and UK financial reporting standards. A pensions scheme audit helps confirm that the scheme's financial statements are accurate and comply with these standards. A crucial element for maintaining the scheme's integrity and avoiding potential legal issues.

Financial health and accuracy

The pension scheme audit provides an independent assessment of the scheme's financial health, ensuring that the financial records are accurate, and the scheme is financially stable. This helps trustees make informed decisions about the scheme's management and give members confidence in the scheme's ability to provide their benefits.

Risk management

Through the audit process, potential risks and issues will be identified, which allows trustees to address concerns proactively and thereby reduce the risk of financial mismanagement and errors that could affect the scheme's ability to meet its obligations.

Transparency and trust

A pension scheme audit demonstrates to scheme members and other stakeholders that the scheme is being managed transparently and competently. This builds trust and reassures members that their pensions are secure. A fundamental element for overall confidence in the pension system.

Decision making

The insights gained from an audit aid trustees in making better decisions regarding the scheme's management, investments, and future strategy. It provides a solid foundation of accurate financial information, which is essential for effective governance and strategic planning.

In summary, for UK pension scheme trustees, an audit is not just a legal requirement; it's a critical component of good governance and effective scheme management. It ensures compliance, enhances transparency, aids in risk management, and supports informed decision-making, all of which are crucial for safeguarding the interests of the scheme's members.

Who Needs a Pension Scheme Audit?

In the UK, specific pension schemes are legally required to undergo an audit to ensure they adhere to regulatory standards and financial accuracy. Here's who is typically compelled to have a pension scheme audit:

Occupational pension schemes

These schemes are required to have an annual audit if they have two or more members. This requirement comes under the Pensions Act 1995, which mandates audits for most occupational schemes to ensure they are managed correctly, and their financial reports are accurate.

Defined Benefit (DB) and Defined Contribution (DC) schemes

Although these would normally fall under the above, it is still worth highlighting that large DB and DC schemes, regardless of whether they are open, closed, or in wind-up, must undergo audits. The audit ensures that the financial statements reflect a true and fair view of the scheme's financial status.

Public Sector pension schemes

Given their scale and the public interest involved, these schemes are also subject to rigorous audit requirements to ensure transparency and accountability.

Master Trusts

These are subject to specific regulatory standards set out by The Pensions Regulator, including audit requirements. Master trusts must demonstrate they meet the criteria for authorisation, which includes being subject to an annual audit.

Who Does NOT Need a Pension Scheme Audit?

Some pension schemes may be exempt from the requirement for an annual audit. For example:

Small pension schemes

There are exceptions for certain small schemes, such as those with fewer than twelve members and which are self-administered, where all the members are trustees, and certain conditions are met.

Executive pension plans

Individual or executive pension plans, where the scheme has only one member, typically do not require an audit.

Who Needs to be Involved in a Pension Scheme Audit?

For a pension scheme audit in the UK, several key parties need to be involved to ensure the process is thorough, accurate, and compliant with regulatory standards:

Auditor

A qualified independent pension scheme auditor is an obvious first step. The auditors must have the appropriate knowledge, experience, and qualifications to conduct the audit effectively. The auditor examines the financial statements, assesses compliance with relevant laws and regulations, and evaluates the scheme's internal controls.

Trustees

The scheme's trustees play a vital role in the audit process. They're responsible for appointing the auditor and ensuring that the audit is conducted in accordance with relevant regulations. Trustees must provide the auditor with access to necessary documents and information and address any issues or recommendations the auditor identifies.

Scheme Administrator

The administrator, who may be internal or an external provider, is responsible for the day-to-day management of the pension scheme. They need to ensure that accurate and complete records are maintained and provide the auditor with the necessary information and documentation related to the scheme's operations, investments, and transactions.

Actuary

If the pension scheme is a defined benefit scheme, an actuary will also be involved in the audit process. The actuary's role is to assess the scheme's liabilities, valuation assumptions, and ensure that the actuarial information provided in the financial statements is accurate and in compliance with relevant standards.

Sometimes, legal advisors are involved to provide guidance on compliance with pension regulations and legislation, especially if complex legal issues are identified during the audit.

Investment Manager

If the pension scheme has external investment managers, they might also be involved, providing information on the scheme's investments and performance.

Scheme Members

While not directly involved in the audit process, scheme members are key stakeholders. They receive the audited accounts and reports, which provide transparency and reassurance about the scheme's financial health and governance.

The collaboration of these parties ensures that the pension scheme audit is comprehensive, providing assurance that the scheme is being managed effectively, in compliance with legal and regulatory requirements, and in the best interests of its members.

When is a Pensions Scheme Audit needed in the UK?

In the UK, a pension scheme audit is typically required annually. The timing and frequency of these audits are governed by specific regulations and the individual scheme's rules. Here's a general overview of when a pension scheme audit is needed:

Annual requirement for a Pension Scheme Audit

Most pension schemes must have their accounts and financial statements audited each year. This annual audit is essential to ensure that the scheme's financial statements are accurate and comply with the relevant legal and financial reporting standards.

After the End of Scheme Year

The audit usually takes place after the end of the scheme's financial year. The exact timing can vary, but it's generally conducted once the scheme's annual accounts are prepared, giving the auditor the information they need to perform their review.

In preparation for Annual Reports

The results of the audit are included in the scheme's annual report, which is shared with members, trustees, and relevant regulatory bodies. The report provides transparency about the scheme's financial health and compliance with regulations.

Special circumstances

Besides the regular annual audit, a pension scheme might also need an audit in special circumstances, such as when the scheme is being wound up, undergoing significant changes, or if there are concerns about its management or financial health.

Regulatory Compliance

The requirement for an audit is part of the scheme's compliance with regulations set by The Pensions Regulator. Adhering to these requirements helps ensure the scheme is managed in the best interests of its members.

For trustees and managers of pension schemes, it's crucial to be aware of the specific audit requirements that apply to their scheme, as these can vary based on the scheme's size, type, and other factors. Ensuring timely and effective audits is a key part of maintaining the scheme's compliance and financial health.

How Long Does a Pension Scheme Auditor have to Audit the Scheme?

Account preparation

The timeframe for completing a pension scheme audit in the UK is typically guided by specific regulations and the rules of the pension scheme itself. Generally, once the scheme's financial year ends, the trustees have seven months from the scheme year-end to prepare the annual accounts during which they must prepare the accounts and have them audited.

Pension Scheme Audit completion

After the accounts are prepared, the auditor will need to complete their work. While there isn't a specific legal timeframe for the audit to be completed, it's typically expected to be finalised within a few months after receiving the final accounts. The goal is to have the audit done in time for the accounts to be approved by the trustees and filed with the relevant authorities, if necessary.

Filing deadlines

In terms of regulatory requirements, the audited accounts need to be incorporated into the annual report. This report, including the audited accounts, must be completed within seven months of the scheme year-end for defined benefit and defined contribution schemes under The Pensions Regulator's guidance.

Communication with Members

After the annual report is finalised, it should be shared with the scheme members, typically within seven to nine months of the scheme year-end, depending on the specific scheme rules and regulatory requirements.

It's essential for trustees to plan the audit timeline carefully and coordinate with the auditor to ensure that the audit is completed within the seven month timeframes. Delays in the audit process can lead to issues with regulatory compliance and could affect the transparency and trust that scheme members have in the management of their pension scheme.

What is a Pensions Scheme Audit?

While we have discussed many areas of a pension scheme audit, we have not addressed what one is.

A pension scheme audit is a formal review of a pension fund's financial statements and operations, conducted by an independent auditor. It's designed to ensure that the financial records accurately reflect the scheme's financial status and that the scheme is being managed in accordance with the applicable laws, regulations, and its own policies. Here's a breakdown of what a pension scheme audit involves:

Financial statement accuracy

The auditor examines the pension scheme's financial statements to verify their accuracy and ensure they present a true and fair view of the scheme's financial position. This includes checking assets, liabilities, income, and expenditures.

Regulatory compliance

The audit assesses whether the pension scheme complies with relevant laws and regulations, including those set by TPR. This ensures the scheme is adhering to the required standards for pension management and reporting.

Internal controls and processes

The auditor evaluates the effectiveness of the scheme's internal controls and operational processes. This is to ensure that the scheme is managed efficiently and effectively, with appropriate checks and balances in place to mitigate the risk of errors, fraud, or mismanagement.

Investment oversight

For schemes with investment portfolios, the audit may also review how investments are managed, ensuring that investment policies are followed and assessing the risk and return profile of the investments.

Pension Scheme Audit Reporting

After the audit, the auditor produces a report that outlines their findings, including any discrepancies or areas of concern. This report is then shared with the scheme's trustees and, often, with scheme members as part of the annual report.

Transparency and trust

By providing an independent assessment of a pension scheme's financial health and compliance, the audit enhances transparency and helps build trust among scheme members, reassuring them that their retirement savings are being managed properly.

The ultimate goal of a pension scheme audit is to protect the interests of the scheme members by ensuring that the scheme is financially sound, well-managed, and compliant with all relevant requirements.

How is a Pensions Scheme Audit Carried Out?

A pension scheme audit is a detailed and structured process carried out by an independent auditor. The auditor's role is to verify the financial statements of the pension scheme, ensuring they are accurate and comply with the relevant accounting standards and regulations. Here's a step-by-step overview of how a pension scheme audit is typically carried out:

Planning and preparation

The audit begins with the auditor understanding the pension scheme's nature, the complexity of its operations, its financial environment, and the applicable regulatory framework. The auditor will also plan their work based on an assessment of the risks associated with the pension scheme's financial reporting.

Gathering documentation for a pension scheme audit

The auditor collects all relevant financial records, investment reports, contribution records, benefit payments, and other pertinent documents. This information is crucial for verifying the financial transactions and the balances shown in the financial statements.

Evaluating internal controls

The auditor assesses the scheme's internal controls to determine their effectiveness in preventing and detecting errors and fraud. This involves understanding the processes in place for authorising transactions, safeguarding assets, and ensuring the accurate recording and reporting of financial data.

Testing transactions and balances

The auditor conducts tests on various transactions and balances. This might include testing contributions received, benefits paid out, investment valuations, and the allocation of assets and liabilities. The auditor selects samples of transactions and balances to verify their accuracy and to ensure they are recorded in accordance with the relevant accounting standards.

Assessing investment valuations

For schemes with investment portfolios, the auditor will review the processes for valuing investments and test the accuracy of the investment valuations at the reporting date. This may involve confirming investment holdings with third parties and assessing the methods used to determine fair values.

Reviewing actuarial valuations

In defined benefit schemes, the auditor works closely with actuaries to understand the assumptions and methods used in the scheme's actuarial valuations. The auditor assesses whether the actuarial assumptions are appropriate and whether the scheme's liabilities are accurately reported.

Ensuring compliance with regulations

The auditor checks compliance with the legal and regulatory framework governing pension schemes, including the requirements set by The Pensions Regulator.

Reporting

Upon completing the audit, the auditor prepares a report that outlines their findings, including any issues or discrepancies identified during the audit. This report is presented to the pension scheme's trustees and may also be included in the scheme's annual report to its members.

The audit process is crucial for ensuring the integrity and transparency of pension scheme operations and financial reporting, ultimately safeguarding the interests of the scheme's members.

What are the Possible Outcomes from a Pension Scheme Audit?

The possible outcomes of a pension scheme audit can vary based on the auditor's findings regarding the scheme's financial statements, compliance with regulations, and the effectiveness of its internal controls. Here are the key types of outcomes you might see from a pension scheme audit:

Unqualified (Clean) opinion

This is the best outcome, where the auditor concludes that the pension scheme's financial statements give a true and fair view of its financial position and have been properly prepared in accordance with the relevant accounting standards and legal requirements. It means the scheme is likely well-managed and compliant with regulations.

Qualified opinion

If the auditor has reservations about certain aspects of the financial statements, but these issues are not pervasive, they may issue a qualified opinion. This indicates that, except for the effects of the matter to which the qualification relates, the financial statements give a true and fair view.

Adverse opinion

This is a severe outcome where the auditor believes that the financial statements do not give a true and fair view of the scheme's financial position due to significant misstatements. This outcome can raise serious concerns about the scheme's financial management and reporting.

Disclaimer of opinion

If the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, they may issue a disclaimer of opinion, stating that they do not express an opinion on the financial statements. This could occur if the scheme's records are incomplete or if the auditor is unable to confirm certain information.

Identification of weaknesses

The audit might identify weaknesses in the pension scheme's internal controls or issues with compliance that need to be addressed, even if these don't affect the opinion on the financial statements. The auditor will report these findings to the trustees, often in a management letter, recommending improvements.

Compliance insights

The audit provides insights into the scheme's compliance with legal and regulatory requirements, highlighting areas where the scheme may need to improve its practices to meet the standards set by The Pensions Regulator.

Operational recommendations

While the primary focus is on financial and compliance aspects, the audit may also uncover opportunities for the scheme to enhance its operational efficiency, investment strategies, or governance practices.

The outcome of the audit informs the scheme's trustees, members, and other stakeholders about the scheme's financial health, governance, and compliance status, guiding future decisions and actions to ensure the scheme's ongoing effectiveness and security for its members.

Things to Look Out for in Your Pension Scheme Audit.

When reviewing your pension scheme audit, there are several key areas and issues to pay close attention to, ensuring that your scheme is not only compliant but also well-managed and secure for its members. Here are some important things to look out for:

Audit opinion

The auditor's opinion in the audit report is a crucial element. A clean (unqualified) opinion is what you aim for, indicating that the financial statements are accurate and comply with relevant standards. Be wary of any qualified, adverse, or disclaimer opinions, as these indicate issues or limitations in the financial statements.

Compliance with regulations

Ensure that the audit confirms the scheme's compliance with all relevant legal and regulatory requirements. Non-compliance can lead to penalties and undermine the trust of scheme members.

Accuracy of Financial Statements

The financial statements should accurately reflect the scheme's financial status, including assets, liabilities, income, and expenditures. Discrepancies or inconsistencies could indicate underlying issues.

Internal controls

The audit should assess the effectiveness of the scheme's internal controls. Weaknesses or deficiencies in internal controls can increase the risk of errors or fraud, affecting the scheme's financial integrity.

Investment performance and strategy

If your scheme includes investments, the audit should evaluate whether the investment performance aligns with the scheme's objectives and strategy, and whether investments are being managed in accordance with the scheme's investment policy.

Actuarial Assumptions (for Defined Benefit Schemes)

For defined benefit schemes, the actuarial assumptions used to calculate liabilities should be reasonable and in line with industry standards. Unreasonable assumptions can significantly affect the reported financial position.

Contributions and benefits

Verify that contributions received and benefits paid are accurately recorded and in line with the scheme rules. Any discrepancies could affect the scheme's funding level and financial health.

Risk management

The audit should identify any financial or operational risks the scheme faces and whether adequate measures are in place to manage these risks effectively.

Management letter

Besides the formal audit report, pay attention to any management letter or other communications from the auditor. These often contain observations and recommendations for improving the scheme's operations and controls.

Action on previous recommendations

If there were recommendations from previous audits, check whether appropriate actions have been taken to address them. Failure to act on audit recommendations can lead to recurring issues and increase the scheme's risk profile.

By paying attention to these areas, trustees and scheme managers can gain valuable insights into the scheme's operations, financial health, and compliance status, enabling them to make informed decisions and take necessary actions to safeguard the interests of the scheme's members.

A Checklist for Appointing a Pension Scheme Auditor

When appointing a pension scheme auditor, it's crucial to ensure that you select a qualified, experienced professional firm. One that can provide a thorough and compliant audit. Here's a checklist of things to consider during the appointment process:

Qualifications and accreditation

Confirm that the audit firm holds the necessary qualifications and is accredited to conduct pension scheme audits. They should be recognised by a relevant professional body e.g. Institute of Chartered Accountants in England and Wales.

Experience in pension scheme audits

Look for auditors with specific experience in pension schemes, as this area requires specialised knowledge. Ask about their experience with schemes similar to yours in terms of size and type (defined benefit, defined contribution, etc.).

Understanding of regulations

Ensure that the audit firm is up-to-date with the latest pension legislation and regulatory requirements. Such as the new General Code of Practice. They should demonstrate a thorough understanding of the Pensions Act, the role of The Pensions Regulator, and any other relevant guidelines.

Reputation

Research the audit firm's reputation in the industry. This can include seeking references, reviewing testimonials, or checking if they have faced any disciplinary actions.

Independence

The pension scheme auditor must be independent of the scheme's administration and management to ensure an unbiased audit. Verify that there are no conflicts of interest that could affect the audit firms objectivity.

Pension scheme audit approach

Discuss the auditor's approach to pension scheme audits, including how they plan to assess risks, their process for testing and validation, and how they handle potential issues or discrepancies.

Communication

Good communication is essential. The auditor should be willing to maintain open and clear communication with the scheme's trustees and managers throughout the audit process.

Resources and support

Ensure that the audit firm has sufficient resources and expertise to conduct the audit efficiently and effectively, particularly if your scheme is large or complex.

Fees for pension scheme audits

Obtain and compare fee proposals from potential auditors. While cost is an important factor, it shouldn't be the sole basis for your decision. Consider the value and quality of the audit service provided.

Terms of Engagement

Review and agree on the terms of engagement, which should clearly outline the scope of the audit, the responsibilities of both parties, the timeline, and any other relevant details.

Continuous Professional Development

Check that the auditor's team engages in continuous professional development to stay current with changes in accounting standards, pension legislation, and best practices.

Post-Audit support

Consider whether the auditor offers support after the audit is completed, such as guidance on implementing recommendations or addressing identified issues.

By carefully considering these factors and conducting due diligence, you can select a pension scheme audit firm that will provide a thorough, compliant, and insightful audit, contributing to the effective governance and management of your pension scheme.