Understanding more about common requests for information can make them easier for pension scheme trustees to deal with. Helen Pierpoint and Amelia Pickard share some insights.
A key part of a pension scheme trustee’s role is to deal with information requests from auditors. To assist pension scheme trustees, this article lists and explains some of the more common requests for information that trustees may receive from pension scheme auditors and the auditors of the sponsoring entity.
The following non-exhaustive list will offer insights for trustees on what is behind information requests concerning:
- sponsor entity actuaries, pension scheme actuaries and membership records;
- the full member data file;
- investment asset valuation reports;
- assurance reports;
- scheme cash flow data; and
- bank confirmations and statements.
As outlined in a companion article on ways to reduce the burden on pension scheme trustees, understanding what’s behind common information requests from different auditors can help trustees to manage these efficiently.
Actuaries and membership records
Actuaries appointed by and contractually obligated to the sponsor entity are engaged to perform an annual valuation of the defined benefit (DB) pension obligation. The scope of work performed by this actuary is distinct from that of the pension scheme actuary. Sponsor actuaries advise on assumptions and assist sponsor entity directors in preparing an annual valuation of DB pension liabilities. Scheme actuaries are appointed by the trustees to ascertain the present value of future payments to settle pension obligations as well as the valuation of scheme assets, usually on a triennial basis, with annual updates in intervening years.
Understanding what’s behind common information requests from different auditors can help trustees to manage these efficiently
While pension scheme trustees are not generally involved in the sponsor auditor’s dealings with the sponsor actuaries, sponsor auditors are likely to also need to obtain information directly from the scheme actuary, who may require trustee approval before they can release this. Sponsor auditors may also want to verify the source data provided to management’s actuary with reference to membership records held by the pension scheme.
Source data may include the number of active members, deferred members, pensioners and their pension status. Sponsor entity auditors may seek to reconcile this information – which feeds into the calculation of DB liabilities – to pension scheme records. They may also seek to check a sample of scheme member details to scheme membership documents, such as transfer forms, retirement option forms and death certificates.
All of this requires a request for information from whomever manages membership records. Managers of membership records may be the sponsor entity in-house, pension scheme administrators, or annuity providers. The trustees may therefore be called on to facilitate the provision of this information as they are the ones who are contractually connected to these parties.
The full member data file
It is increasingly common for sponsor auditors to request the member data file in full. They may seek to reconcile it to the sponsor’s payroll data (for active members) or use it to select samples for further testing.
These full member data files are large and can take time and expense to obtain if they are not held in-house by the sponsor entity. The General Data Protection Regulation (GDPR) may also be a factor, as the full member data file is very likely to contain GDPR-sensitive information. Where trustees and service organisations maintain membership records, both are data controllers. However, trustees will normally be the subject of such data requests from auditors since the service organisation will need trustee authority to release data on membership records.
Auditors will not be interested in all data fields contained in the full member data files – only those relevant to their work on the liability calculation. It may therefore be possible for some member data – such as member addresses – to be redacted as appropriate to preserve confidentiality. Trustees can discuss with sponsor management and auditors which data elements are and are not required for the purposes of the sponsor audit.
The Pensions Regulator has a useful webpage helping trustees to manage their data protection duties.
Investment asset valuation reports
Pension scheme investments are significant to the valuation of the net DB pension asset or liability. Investment managers (and/or custodians) may already provide periodic valuations and transaction statements to scheme trustees and administrators. They usually form a part of the audit file delivered to scheme auditors.
However, direct, external confirmation of the relevant period investment balance provides valuable evidence for sponsor auditors who will ask trustees, through sponsor entity management, to authorise investment managers (and/or custodians) to release this information to them directly.
Best practice is for trustees to ensure that the authority covers the valuation report and transactions statements as well as any assurance reports and bridging letters (described below).
This process works well for non-complex investments such as equities, bonds and certain pooled investment vehicles. However, where the valuation involves a degree of estimation such as for more complex pooled investment vehicles, annuities and longevity swaps, sponsor auditors may engage their own expert to assist in reviewing the data and assumptions underlying the valuation.
Neither scheme nor sponsor auditors can simply take the scheme investment valuation reports or membership data provided by third parties at face value
An auditor’s expert can be either internal or external to the audit firm and has expertise which the auditor does not. A sponsor auditor’s expert with actuarial qualifications may be engaged to review the annual defined benefit liability calculation and related notes and disclosures included in the sponsor financial statements. This, in turn, has been prepared by management’s own actuary. Both scheme and sponsor auditors may also engage experts to assist in the audit of certain fair value investments, such as annuities, unquoted investments and longevity swaps.
Assurance reports
Neither scheme nor sponsor auditors can simply take the scheme investment valuation reports or membership data provided by third parties at face value without assessing whether the controls underlying the preparation of such information have been designed and are operating effectively throughout the financial period.
Auditors and trustees often obtain assurance over such matters by obtaining AAF 01/20 assurance reports on the controls in place over third-party activities.
Sponsor auditors can, through sponsor management and scheme trustees, request these reports. This is important wherever possible to reduce the need for a more direct audit of the third party’s controls, which can be time-consuming, expensive and impractical.
If an assurance report does not cover the entirety of the sponsor entity’s financial period, a ‘bridging letter’ is sought, attesting to the fact that the control environment has not materially changed during the period not covered by the report.
Bank statements and bank confirmations are key to scheme and sponsor auditors and obtaining them requires trustee input
If such a letter is not forthcoming, sponsor auditors may want to discuss with trustees the quality of the services provided, and review performance reports received by trustees from investment managers or scheme administrators during the gap period.
Scheme cash flow data
As some types of scheme cash inflow and outflow are disclosed in the financial statements, auditors will often plan to directly test the data, which is usually held by the scheme administrator. Auditors will wish to confirm whether cash transactions have been classified correctly, recorded accurately and recognised in the correct period.
The scheme administrator may need authorisation from either the trustees or sponsor management to release this information to the auditors. Auditors will then generally select a sample of transactions from the cash flow records and agree the details to bank statements (see below).
Bank confirmations and statements
Pension schemes may well have cash as part of the asset base. As with investment valuations, bank statements and bank confirmations that are independently obtained constitute high-quality audit evidence. Bank statements and bank confirmations are key to scheme and sponsor auditors and obtaining them requires trustee input.
Bank statements that cover the relevant reporting period can be sourced directly through the trustees via sponsor management. Confirmation of a scheme’s bank balances at the reporting date will need to come directly from the scheme’s bank(s) to the sponsor auditors. Trustees will need to authorise this. Electronic confirmations are now common but written confirmations are still sometimes required for various reasons.
Timing is often an issue with bank confirmations. No matter how a confirmation is requested, banks vary in the time taken to respond. This is one of the many reasons why early planning is crucial. Trustees can play their part by responding promptly to online portal requests or by ensuring that an appropriate authority letter is with their banks.
Helen Pierpoint, Technical Manager, Audit and Assurance Faculty, ICAEW
Amelia Pickard, Technical Manager, Audit and Assurance Faculty, ICAEW
More ICAEW resources
Efficient pensions audits for trustees: relationships matter – how effective planning and communication between management, auditors and trustees can reduce the trustees’ burden of information requests.
