Review of the form and content of pension scheme report and accounts
Comments from ACCA
August 2006
ACCA is pleased to comment on the discussion paper on the above. These comments have been prepared with the input of members of ACCA’s Pensions Committee, which comprises senior members of ACCA with long experience of pensions matters from the perspectives of employer, trustee, auditor and investment adviser.
Our main reaction to the paper is that the various proposals to re-structure the annual report and accounts would compress too much diverse information into one document. The danger, as we see it, is that in trying to address the information needs of various different classes of stakeholder in a single format, we will end up with a document which lacks coherence and which is likely to confuse as much as it informs. A document revised on the lines proposed would make the scheme annual report much larger and more difficult to read for the layman.
While the proposed approach may conceivably satisfy the requirements of the stakeholders listed in Appendix 3, we do not believe that it would suit the scheme members. Already, it is our experience that very few scheme members read and understand the full report, given its detailed technical content. Expanding its content way beyond its current parameters would make any aim of engaging with members through the report more difficult to achieve. The likelihood is, therefore, that the expanded report would become ostensibly a compliance-orientated document and any character it might currently have as a document in which trustees account for their stewardship to the members would be diluted.
An additional issue to consider with this proposal would be time and cost – the cost of increased work for auditors and actuaries, and increased time spent by trustees and administrators in justifying the full content of the report to the auditors. If the audit firm is being asked to sign off the report and accounts in full, then this elongated process would be inevitable.
We consider that the process of revising the SORP and regulations on pension scheme reporting needs to address the fact that there are already too many disclosure requirements which are of little or no interest or usefulness to members. The extraction of key data from the main report and presenting it to members in the form of a summary statement is – along with the production of personal benefit statements - a more productive means of conveying information to members.
Our reactions to the specific consultation questions are as follows:
Q1 Do you agree with our analysis of the relative strengths and shortcomings of the trustees’ annual report?
We accept that little information is currently supplied concerning the strength of the employer’s covenant and the specific funding position of the scheme. But there is as yet no agreed conceptual framework for assessing the strength of the employer’s covenant, for assessing how trustees are meeting scheme specific funding requirements and for quantifying risks to members.
Q2 Do you agree with our analysis of the relative strengths and shortcomings of pension scheme accounts?
We accept that members have a legitimate interest in the ‘big picture’ concerning the security of their scheme and their own pension. But as with question 1, there is as yet no agreed conceptual framework for assessing this matter. A requirement to disclose the funding position in particular would lead to extensive and costly deliberations between the actuaries and the auditors.
We agree that sufficient information should be made available to users of a pension scheme’s accounts to enable them to understand not only what has happened in the past financial period but also to take a view on the state of its financial health, particularly with respect to it being able to meet its future obligations (most of which are not currently reflected in financial statements). But it is necessary to bear in mind what is and what is not possible for pension schemes to quantify and report. For example, future obligations and investment returns cannot be precisely quantified; there would also be difficulties (and possibly conflicts of interest) in expressing an opinion - or even obtaining the information in the first place – on the quality of an employer’s covenant. We also query how any scheme could be expected to quantify the ‘likelihood’ that the pension promise would be met.
Q5 Are we correct in our assessment that the onus should shift from comprehensive disclosure in the scheme return to a more prescriptive set of disclosures in the scheme report and accounts?
As stated above, we consider that there is a risk that diverting essentially compliance-orientated information to the report and accounts would lead to the creation of a document which lacked coherent focus and purpose.
Q6 For DB scheme members, will the ABS alone (in its proposed form) provide members with enough information to make an informed choice about their pension provision or is more information required? And, if so, where should this information be given?
The ABS should be sufficient.
Q7 For DB scheme members, will the SFS provide members with enough information to appreciate the level to which the scheme is funded or is more information required? And if so, where should this information be given?
We do not consider that the time and effort which schemes are having to commit in preparing this statement is likely to provide information that most members will understand or find useful.
Q8 For members of DC schemes, does the SMPI fully meet the members’ information needs concerning the ‘value’ of the fund administered ion their behalf?
Yes.
Q9 Is the one size fits all solution of unabbreviated report and accounts to all members a proportionate approach to take?
As stated above, we have doubts about whether the development of a ‘one size fits all’ approach to the content of the report is going to be helpful to members.
With regard to the proposal in section 7.2 that the scheme accounts should be sent to all members of the scheme, we are not convinced that there is a need for this, particularly if the content of the report is to be expanded on the lines proposed. As stated above, we doubt whether many active members currently read the report and understand its contents. There is no evidence of any significant demand from members to see the full report. We would not therefore wish to see imposed on schemes another administrative obligation which would be seen as a waste of effort. Perhaps a compromise solution would be for schemes to inform members, through benefit statements in the case of pensioners and on cessation of employment in the case of deferred members, that the report will be made available to them each year should they request it. If the report is placed on the company’s web site, deferred members and pensioners could be referred to where it is to be found.
Q10 In drawing on certain aspects of best practice in good governance for trustee bodies in the not-for-profit sector?
We agree with the proposal to include a governance statement in the report and accounts, and with the suggestion that accountability as regards risk assessment and internal controls is a relevant matter for members. As referred to under the heading of potential drawbacks, however, we suspect that many would become standardized and produced each year without a great deal of thought.
Q12 Do you consider that removal of miscellaneous compliance disclosures (the compliance statement) as a compensatory measure for inclusion of a governance statement provides the appropriate balance of disclosure?
Yes.
Q13 Would the inclusion of actuarial liabilities within the primary financial statements of the scheme add value to the reader?
We do not believe that estimates of actuarial liabilities would add value to the reader. As the discussion paper itself points out, there are a number of different valuation bases and assumptions which can be utilised in calculating the actuarial liability. Given the absence of any agreed single framework for this exercise, any disclosures could be misleading.
Q14 Do you agree that there would be a significant additional cost from the inclusion of the actuarial liabilities on the face of the net assets statement or in the notes and, if so, do you think the benefits outweigh the cost?
Yes – there would be additional costs for schemes with no real benefits.
Q15 For DB schemes, is the right place for disclosure of information on funding and the employer covenant in the financial statements of the pension scheme or can existing disclosure mechanisms be further developed to meet this need?
The right place for additional disclosures is probably the summary funding statement. There are concerns about commercial confidence about those members who have left the employer for a competitor organisation.
Q16 Should the recovery plan be included in the report and accounts or should these simply be signposted in the financial statements?
We are not convinced that members would benefit by this information being included in the report and accounts. If the information is to be include, then it should be in summary form.
Q17 For DC schemes, do you anticipate practical difficulties in shifting the emphasis from a generic investment report to a more focused disclosure in the trustees’ annual report?
Yes.
Q18 Given the importance of good governance, should any exemptions apply to smaller occupational schemes and if so are limits, based on the number of scheme members, appropriate?
For practical reasons we believe there should be exemptions.
In respect of several of the proposed new disclosures, the more demands that are placed on trustees the more homogenized is likely to be the output. The principle behind the proposals for more disclosure would be understandable if the intention was to ensure that the trustees did not fail in their responsibilities, but it is doubtful whether many of the proposed statements would provide the members, and other users of the report and accounts, with meaningful information. The only sure way of doing this would be to be much more prescriptive about the form and content of the statements targeting scheme specific data, thus trying to forestall the standard approach.