Under the terms of the revised International Standards on Auditing applicable for accounting periods commencing on or after 17 June 2016 auditors are required to explicitly note whether the accounts have been prepared on a going concern basis.
Audit reports must state whether the use of the going concern basis of accounting is appropriate when considering the period of, at least, 12 months from the date of the approval of the financial statements. This requirement applies to both trading entities and pension schemes.
Pension scheme financial statements are prepared in accordance with Financial Reporting Standard 102 (‘FRS102’) and the Statement of Recommended Practice, Financial Reports of Pension Schemes (2018) (‘SORP’). FRS102 notes that ‘an entity is a going concern unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so’. The SORP in turn considers that the appropriate comparative to the liquidation of a corporate entity would be the winding up of a pension scheme.
Accordingly, the SORP appears to recommend that a pension scheme should be accounted for as a going concern, unless the trustees or employer(s) have formally agreed to wind up the scheme or have no realistic expectation that this can be avoided. This would include any cessation events as formally laid out in the respective trust deed and rules.
Where trustees are aware of events or conditions that would lead them to conclude that it was not possible to avoid the winding up of the scheme – for example if the scheme entered into a pension protection fund assessment period – then they should prepare the accounts on the cessation basis, not as a going concern, and the auditor may choose to draw attention to that via an ‘emphasis of matter’ paragraph in their report.
Actions trustees could undertake to ascertain whether their scheme is a ‘going concern’
The following are possible trigger events which could affect the trustees’ view as to the going concern basis of preparation of the scheme’s accounts or material uncertainty disclosure:
trustees have decided to wind up the scheme
notice has been served by the employer to wind up the scheme
the employer has terminated contributions
the employer has experienced an insolvency event or the trustees are aware that one is planned
the employer’s statutory accounts have not been prepared as a going concern or material uncertainty is disclosed in the auditor’s report
the employer has failed to comply with its duties under the trust deed and rules
the regulator has ordered that the scheme be wound up.
Once the trustees have formed their opinion as to whether there are any circumstances that could affect their view as to the going concern basis of preparation of the scheme’s accounts or material uncertainty disclosure, this should be recorded in the minutes of the trustee meeting, outlining the rationale for reaching that conclusion.
The scheme’s auditor will need to obtain appropriate evidence to support these conclusions, which may take the form of a letter of representation from the trustees, similar to the terms of the letter of representation prepared by holding and/or parent companies to support the going concern considerations for corporate group audits.
However, we do not consider that the auditor would need to review a copy of any covenant assessment report prepared for the trustees in all circumstances, given that it is not prepared for this purpose and is often prepared under strict confidentiality agreements. The auditors will have access to trustee minutes, as usual, and be able to see the discussion and conclusions reached by the board on the strength of the covenant (regardless of whether the trustee has used an independent covenant adviser) to support the going concern assessment without the need to get into the detail of the detailed covenant assessment report prepared by the trustees’ covenant adviser, unless:
the auditors consider that the conclusion reached by the trustees, based on the evidence they have reviewed, is incorrect, or
the trustees have concluded that they do not consider that the scheme could continue on a going concern basis.
The assessment of the strength of the covenant afforded to a scheme by its employers is normally undertaken for the purpose of the scheme’s triennial valuation process or due to circumstances arising from specific transactions or events and may be based on information provided by the employer under the terms of a confidentiality/non-disclosure agreement.
Covenant assessments are not undertaken to assess an employer’s solvency for audit purposes in the 12 month period immediately following the proposed signing of the scheme accounts and should not be considered as a proxy for other more time relevant considerations.
Obviously if the covenant assessment concludes that the on-going solvency of the employer and/or any wider group is in doubt, the trustees should take account of this when concluding as to whether the employer may be able to continue to support the scheme’s funding requirements in the next 12 months. However, the trustees should be aware that the conclusion in the covenant assessment may be out of date and additional up to date information may need to be sought if circumstances have materially altered.
Proposed list of questions trustees may wish to consider
We summarise below a list of issues that we believe trustees should take account of when considering the going concern question in relation to their pension scheme:
Is the scheme in financial difficulties, such that it is reasonable to assume that it will enter a PFF assessment period in the next 12 months? For example, has the employer terminated the payment of contributions or is it significantly in arrears/late in the payment of contributions due?
Should the scheme require additional funding, is there any evidence to indicate that the employer could not afford to make additional cash contributions, or that such a requirement would jeopardise the solvency of the employer?
Are the trustees aware that the employer (or any key businesses in a wider group) has experienced an insolvency event, begun the process to negotiate a CVA, or that such an event is planned?
Have the employer’s accounts been prepared under a basis other than going concern, or include a material uncertainty disclosure?
Are the trustees aware of any plans by the employer to wind up the scheme in the foreseeable future?
Have the trustees themselves reached a formal decision to start to wind up the scheme?
Has The Pensions Regulator ordered that the scheme be wound up?
Are the trustees aware of any events that could trigger a wind up of the scheme in accordance with the terms of the trust’s deed and rules?
Has the employer failed to comply with its duties under the trust deed and rules?
Are the trustees aware of any material uncertainties that could impact on their assessment of the scheme’s status as a ‘going concern’?
Trustees will need to record in the minutes of their trustee meeting the information considered and outline the rationale underlying the decision they have reached. The evidence subsequently required by the scheme’s auditor should, in turn, be both proportionate and appropriate to the conclusion reached by the trustees.
We consider that in most cases where going concern is not considered an issue, this evidence could take the form of a letter of representation, similar to the terms of the letter of representation prepared by holding and/or parent companies to support the going concern considerations for corporate group audits. Where concerns are raised as to whether a going concern conclusion is appropriate, the scheme’s auditor may wish to review underlying documentation, for example the employer’s forecasts or a covenant assessment report. However, this should be the exception rather than the default requirement, as it is likely to add materially to both the time needed to complete the audit and the cost.