Half of pension schemes believe their pension liabilities should form part of their annual accounts and be subject to audit, according to a KPMG survey of 250 major pension schemes with assets ranging from £100m to over £1bn.
But the other half take the opposite view, finds the KPMG survey.
And according to KPMG, this divergence of opinion presents a challenge to accounting standards setters in determining the rules for pensions accounting.
Kevin Clark, associate partner in Pensions Audit at KPMG in the UK, commented: “This split opinion reflects the range of views in the marketplace and the results suggest that a flexible approach from the Accounting Standards Board when it provides guidance on pension scheme accounting next year would be welcomed.”
Accounting for pension scheme liabilities
Currently only scheme investments and scheme transactions are included in scheme financial statements and subject to an annual audit with the liabilities being dealt with in the actuarial valuation.
The Accounting Standards Board (‘ASB’) is currently developing proposals to bring UK accounting into line with International Financial Reporting Standards. Under international accounting there are three options for dealing with actuarial liabilities:
1. include in the financial statements to create a balance sheet;
2. include in the financial statements as notes;
3. or attach to the financial statements as a separate report.
The ASB has indicated they will provide guidance on pension scheme accounting in an exposure draft to be issued early this year. The results of the KPMG survey suggest that a flexible approach, incorporating the options available under international accounting rules, would be widely supported.
There has been considerable deliberation about whether the actuarial liabilities should form part of the annual audited accounts to give a more rounded picture of the financial situation of pension schemes.
The Pensions Regulator, the Pensions Research Accountants Group (setters of the Statement of Recommended Practice on financial reports of pension scheme) and the Accounting Standards Board have all conducted reviews on this matter, with varying views and outcomes.
Issues around incorporating liabilities into the audited balance sheets of pension schemes
Incorporating liabilities into the audited balance sheets of pension schemes brings both advantages and disadvantage summarised below:
- The scheme accounts will be more useful to users as they will disclose the overall financial position of the scheme, thus showing how trustees have managed the overall financial affairs of the scheme as well as their stewardship of scheme assets
- Including liabilities in the accounts will open up the actuarial valuation to professional independent scrutiny by an annual audit. Currently only scheme assets are subject to audit.
- It may enable trustees and sponsors to manage their schemes better through more comprehensive financial reporting of scheme financial affairs.
- A scheme accounting liability is likely to be different from liabilities determined for the purposes of scheme funding and employer pension reporting and could therefore add to confusion
- It will add additional expense to the scheme running costs through additional accounting and audit requirements
- It will add additional complexity to scheme accounts and, given the low take up of scheme accounts, provide limited value to members
Kevin Clark concluded: “Unfortunately, there doesn’t seem to be a ‘one size fits all’ approach here but hopefully the ASB can find a solution that can accommodate the varying needs of differing pension schemes.”
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To download a copy of the report, please click here (PDF 832 KB)
For further information please contact:
Margot Cowhig, KPMG Corporate Communications
Tel: 0207 694 4246 Mobile: 07920 274856: email@example.com
KPMG Press Office: 0207 694 8773
KPMG Pensions Assurance
KPMG currently audits the accounts of over 900 UK pension schemes. It has a UK-wide pensions audit practice and provides additional assistance to pension schemes via pensions assurance, tax, investment, restructuring, and trustee and corporate consultancy services.
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with nearly 11,000 partners and staff. The UK firm recorded a turnover of £1.6 billion in the year ended September 2010. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 150 countries and have more than 138,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.