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UK Pension Schemes Divided On Accounting Rules

by Robert Lee,, London

19 January 2012

UK pension schemes are divided over whether their pension liabilities should form part of their annual accounts and be subject to audit, according to a new KPMG survey.

The issue was revealed in a KPMG survey of 250 major pension schemes with assets ranging from GBP100m (USD154m) to over GBP1bn. KPMG found that half of those questioned believed liabilities should be audited, while the remaining half took the opposite view. Currently only scheme investments and scheme transactions are included in scheme financial statements and subject to an annual audit, with the liabilities instead dealt with in the actuarial valuation.

The Accounting Standards Board (ASB) is developing proposals to bring UK accounting into line with International Financial Reporting Standards. KPMG points out that under international accounting there are three options for dealing with actuarial liabilities. These are: to include in the financial statements to create a balance sheet; to include in the financial statements as notes; or to attach to the financial statements as a separate report.

KPMG believes that the divergence of opinion highlighted by its survey 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.”

The survey threw up a number of potential advantages and disadvantages in incorporating liabilities into the audited balance sheets of pension schemes. Among the advantages is the fact that the scheme's 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. In addition, including liabilities in the accounts will open up the actuarial valuation to professional independent scrutiny by an annual audit. Finally, the change may enable trustees and sponsors to manage their schemes better through more comprehensive financial reporting of scheme financial affairs.

On the other hand, KPMG points out that 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. The new requirements will also add additional expense to the scheme running costs through additional accounting and audit requirements, and add additional complexity to scheme accounts and, given the low take-up of scheme accounts, provide limited value to members.

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.”

The ASB is expected to provide guidance on pension scheme accounting in an exposure draft early this year.

TAGS: tax | investment | pensions | accounting | audit | United Kingdom | international financial reporting standards (IFRS) | financial reporting | standards

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