COVID-19: Guidance on pension scheme financial reports and audit
New guidance from ICAS, ICAEW and PRAG on the implications of COVID-19 on pension scheme financial reports and audit.
- ICAS, ICAEW and PRAG have published new joint guidance on pension scheme reports and financial statements, and related matters in the context of the COVID-19 pandemic.
- Consideration of going concern in the preparation of pension scheme financial statements requires greater focus due to COVID-19.
- Auditors should be considering the impact of the COVID-19 pandemic on all aspects of the audit and communicating with pension scheme trustees about these as appropriate.
The guide is intended to support pension scheme trustees and pension scheme auditors navigate the additional challenges they are likely to experience as a result of the COVID-19 pandemic.
The guide is relevant to private sector occupational defined benefit (DB) and defined contribution (DC) trust-based pension schemes in the UK, including hybrid schemes and master trusts, applying Financial reports of pension schemes: A statement of recommended practice (the Pensions SORP), published by the Pensions Research Accountants Group (PRAG).
Pension schemes and their auditors should continue to apply existing standards and guidance and keep up to date with new COVID-19 related announcements and guidance from the Financial Reporting Council (FRC) and The Pensions Regulator (TPR).
To date TPR has announced easements in its approach towards the reporting duties of trustees in certain areas, including the completion of audited financial statements and chair's statements. However, these easements do not currently apply to periods ending on or after 31 December 2019.
The guide covers a wide range of topics including:
- responsibilities for reporting to TPR
- the impact of the COVID-19 pandemic on the control environment of pension schemes
- the trustees' report and the chair's statement
- going concern and the trustees' assessment of going concern
- accounting for scheme investments
- events after the end of the reporting period
- audit issues
- the auditor's statement about contributions.
Responsibilities for reporting to TPR
There is no relaxation of trustees' responsibilities under the notifiable events regime and those running DC master trusts must continue to comply with their significant and triggering events duties.
In relation to the duties of trustees and scheme advisers to report matters of material significance, these should be viewed in light of TPR announcements regarding the relaxation of its approach towards trustees' reporting duties.
The impact of the COVID-19 pandemic on the control environment of pension schemes
The preparation and audit of pension scheme annual reports, including scheme financial statements, will be impacted by changes in the control environment in which schemes operate; the extent of the impact of the COVID-19 pandemic on the control environment of a scheme will depend on its reporting period end date.
For example, a scheme with a period end date of 31 December 2019 may not have experienced any COVID-19-related impacts on its control environment in the period to that date. However, it may have done subsequently and this may be relevant to elements of its annual report, including the financial statements.
The trustees' report and the chair's statement
Trustees should reflect on the impact of COVID-19 from a governance perspective on the content of their trustees' report and other narrative elements of the annual report, such the Chair's statement.
The going concern basis of preparation and the trustees' assessment of going concern
Consideration of going concern in the preparation of pension scheme financial statements requires greater focus due to COVID-19.
The trustees' are responsible for undertaking the going concern assessment and the assessment must meet the requirements of both the Financial Reporting Standard in the UK and Republic of Ireland (FRS 102) and the Pensions SORP.
The specific circumstances which need to exist for pension scheme financial statements not to be prepared on a going concern basis remain unchanged. However, it is likely that more schemes may need to disclose a material uncertainty relating to going concern due to the impact of the COVID-19 pandemic on the scheme.
Accounting for scheme investments
Financial instruments, including investments, must be held at fair value in the scheme's statement of net assets.
There are indications that obtaining asset valuations for periods ending on or after 31 March 2020 will be challenging for some asset classes; for example, illiquid assets such as commercial property or private equity investments.
Where reliable valuations cannot be obtained, trustees and the scheme's auditor should be discussing the implications for the scheme's financial statements early in the production process. In these circumstances, the auditor may need to consider alternative audit procedures.
Trading conditions at the reporting date need to be considered to ensure that investments are disclosed appropriately as level 1, 2 or 3. For example, where market data is not available for investments normally classified (and disclosed) as level 2, it may be appropriate to re-categorise these at the reporting date as level 3.
A narrative disclosure should be included to explain the reason for any change in level from the previous year.
Trustees will need to review the nature and extent of risks arising from financial instruments and update the scheme's fair value hierarchy investment risk disclosures, for example, to:
- Emphasise their commitment to taking a long-term rather than short-term approach to the scheme's investment strategy.
- Refer to circumstances where de-risking elements in the scheme's investment strategy have mitigated falls in the value of certain assets.
- Report on any change in approach to investment risk as a consequence of the COVID-19 pandemic.
- Identify and explain any non-compliance with the scheme's statement of investment principles.
Events after the end of the reporting period
For pension schemes with accounting periods ending on 31 December 2019, the COVID-19 pandemic in 2020 is likely to be a non-adjusting event.
For subsequent reporting dates, schemes will need to judge how much of the impact of the COVID-19 pandemic should be considered to arise from non-adjusting events.This will be highly dependent on the reporting date, and the specific circumstances of the scheme.
For a pension scheme, a non-adjusting event after the end of the reporting period could be:
- The significant decline in the value of investments.
- The reduction or suspension of deficit recovery contributions or contributions for future service.
- A delay beyond the statutory deadline for completing the triennial actuarial valuation and agreeing a schedule of contributions and, where applicable, a recovery plan based on that valuation.
- The insolvency of the sponsoring employer.
Auditors should be considering the impact of the COVID-19 pandemic on all aspects of the audit and communicating with pension scheme trustees about these as appropriate. The guide highlights some of the key issues scheme auditors will likely need to address in respect of:
- strategies and plans
- materiality in planning and performing the audit
- internal controls, assessing risks of material misstatement and accounting estimates
- written representations
- going concern, including the application of the September 2019 revision of ISA 570 (UK)
- using the work of an auditor's expert
- subsequent events
- the auditor's report, including the auditor's opinion
- audit firms' own risk management arrangements over signing auditor's reports.
Fundamental to the audit is the requirement to obtain sufficient appropriate and reliable audit evidence in order to complete the audit, form an opinion on the financial statements and issue an auditor's report. Audit evidence, and the documentation of that evidence, is therefore a theme throughout the ‘Audit issues’ section of the guide.
In addition to applying the ISAs (UK), pension scheme auditors should continue to refer to Practice Note 15 (revised): The Audit of Occupational Pension Schemes in the UK (November 2017) (PN15) as authoritative guidance.
The auditor's statement about contributions
In undertaking work in relation to the auditor's statement about contributions, the auditor will need to know whether contributions to the scheme have been impacted by:
- the reduction or suspension of deficit recovery contributions or future contributions (DB only)
- changes in pensionable earnings
- the furloughing of employees under the UK government's Coronavirus Job Retention Scheme.
Sufficient appropriate and reliable audit evidence about contributions to the scheme should be gathered as part of any audit work on the fund account.
Where contributions have not been paid in accordance with the schedule of contributions, or, in the case of a DC scheme, the scheme's payment schedule during the reporting period, the auditor will need to consider the implications for their statement and whether in the course of their work they have identified any matters of material significance to report to TPR.
Our Guide should be read in conjunction with the most up-to-date guidance from TPR, the FRC and others relevant to the preparation of scheme annual reports and financial statements and audit.