Auditing any defined benefit pension scheme assets, liabilities and disclosures in an entity’s accounts is rarely straightforward.
As the FRC noted in its 2018 report on findings of Audit Quality Reviews in this area, it encompasses several of the more complex aspects of auditing, including auditing significant accounting estimates, and the use of service organisations, management’s experts and auditor’s experts.
Appropriate focus by auditors on pension schemes also has a part to play in maintaining trust in audit – after all, pension scheme deficits in particular have been prominent in recent corporate failures.
With this considered, early planning is crucial in allowing the auditor to accumulate sufficient appropriate audit evidence. This reduces the risk of duplication, plus time and costs spiralling for not only the auditor, but entity management, pension scheme trustees and their service organisations.
Defined benefit pension schemes, and their trustees, are independent of the entity and its management. This has considerable implications for the audit of the entity. While the auditor is engaged by the sponsor entity, other third parties will have been engaged by the pension scheme trustee or trustees, who are independent of the sponsor entity. As such, other permissions and authority will be required in order to obtain information relevant to completing the audit work.
One of the first steps an auditor can take is to gain a detailed understanding of the parties involved. That way, audit requests can be directed to the right recipients, in the right way, on a timely basis, and with appropriate permissions.
To help auditors on this journey, ICAEW’s Audit and Assurance Faculty has produced a new web page describing the relationships between these parties, and exploring good practice in managing auditor requests.
In developing this guidance, the Faculty has engaged widely with stakeholders, seeking input from our own technical auditing committees, ICAEW’s Pensions Sub-Committee, the Pensions and Lifetime Savings Association, and ICAEW’s Quality Assurance Department (QAD). Contributors have included sponsor auditors and actuaries, plus scheme auditors, trustees, administrators and CFOs.
“We were pleased to engage with ICAEW on the development of the guide”, said Tiffany Tsang, Head of DB, LGPS and Investment, Pensions and Lifetime Savings Association. “Our members have responded positively to it. This piece of work will help to provide more clarity to ICAEW members, PLSA members, and others in this challenging and demanding area.”
Some of the key messages include:
- Schemes and their trustees are independent of the entity and entity management and should be treated as such.
- Understanding the structure of the pension scheme at the planning stage will help ensure audit queries are managed appropriately, and minimise superfluous requests. For example, are assets held centrally by a custodian or managed directly by investment managers?
- Sponsor entity management should be the first avenue for audit requests – they should hold much of the information necessary for completion of the audit work.
- Having said that, direct confirmations from third parties provide stronger audit evidence and will need to be requested on a timely basis, but will need to be requested through entity management.
- Some schemes may hold many investments, managed by many investment managers – it may not be possible for the auditor to receive breakdowns of all the assets, and the auditor will need to consider their approach carefully to ensure they understand where the risks lie.
- Where the trustees give permission for the sponsor auditor to communicate with the scheme auditor, the sponsor auditor may be able to use information received from the scheme auditor to help minimise duplicative requests to the trustees and the trustees’ service organisations.
- Where the employer is part of a multi-employer scheme, a higher degree of judgment is likely to be required by entity management and the sponsor auditor, in determining whether the entity’s share of assets and liabilities is reasonable. A higher degree of judgment might also be evident in the later years of reliance on ‘rolling forward’ a triennial valuation.
The guide can be found here.
We would be interested in hearing from you on particular challenges you have experienced, and your thoughts on how the process could be improved – especially with respect to addressing the split of assets and liabilities in multi-employer schemes. Please send comments to firstname.lastname@example.org.
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