Guidance was released on 2 June 2020 for pension scheme trustees and auditors dealing with the impact of COVID-19. Neil Knights summarises the key points.
The Institute of Chartered Accountants in England and Wales (ICAEW), Institute of Chartered Accountants of Scotland (ICAS) and the Pensions Research Accountants Group (PRAG) have published joint guidance on 'pension scheme reports and financial statements, and related matters in the context of the COVID-19 pandemic'. This provides helpful guidance to both trustees and auditors in obtaining audited accounts in the current environment. Key aspects of the guidance cover the following:
- Impact on the control environment of schemes (both outsourced and in-house teams)
- Narrative disclosures for trustees to consider in their annual report and accounts
- Going concern, the trustee assessment and likely audit challenge thereof (DB, DC and Master Trusts)
- Obtaining fair values for investments in the current market conditions, particularly for the 31 March 2020 year-end date
- Likely increased use of “emphasis of matter” paragraphs in audit reports to draw attention to areas of material uncertainty on asset values or going concern
- Consideration of subsequent events disclosure for issues arising post year-end
- Audit issues likely to impact audit plans and work required to obtain sufficient audit evidence
- Potential impact on pension scheme contributions due to deficit deferral (DB only) or Coronavirus Job Retention Scheme issues affecting normal contributions (DB and DC)
In addition to the key areas noted in the bullets above, a clear theme running through the guidance is that trustees need to understand the impact of potentially weakened employers in respect of both their own and an associated scheme’s going-concern assessments, given the implications for sponsors arising from the current circumstances.
Going-concern considerations for DB pension schemes
The guidance states that:
“Going-concern considerations for DB schemes
"The trustees will need to obtain good-quality information from the sponsoring employer about the strength of the employer covenant and about the sponsoring employer’s exposure to solvency and liquidity risks to support the assessment. Trustees have a regulatory responsibility to consider the strength of the employer’s covenant (whether through an external covenant adviser or internally) and up-to-date information in this respect will be relevant to their assessment of going concern. This may also include the employer’s financial statements, where these have been recently signed.”
However, employer insolvency does not necessarily mean that the financial statements should not be drawn up on a going-concern basis. In relation to this, the guidance for pension schemes states that:
“The insolvency of an employer does not necessarily mean that it is no longer appropriate to prepare the financial statements on a going-concern basis, or that a material uncertainty relating to going concern exists, for example, if the scheme has reached self-sufficiency and is expected to be so for a period of at least 12 months after the financial statements are signed off. However, it would still be appropriate to disclose the insolvency of the sponsoring employer in order for the financial statements to give a true and fair view.”
Implications for pension scheme trustees and auditors
Prior to approving financial statements, trustees and auditors of pension schemes will need to consider the strength of, and developments in, the employer’s financial position; most likely with the support of the trustees’ covenant assessment advisor.
As the pension scheme guidance makes clear, there are key issues, not only in assessing the position, but also in the disclosure necessary, given the commercial sensitivities associated with going concern considerations:
“Where the employer is experiencing financial difficulties and disclosure of going concern issues in the scheme financial statements could be sensitive or prejudicial to the financial position of the employer, for example, if negotiations with the employer and creditors, and possibly PPF and TPR, are on-going but not public, it would be good practice for the trustees to engage with the employer, and other parties if appropriate, at an early stage to make them aware of the going concern disclosure requirements in the scheme financial statements, so all interested parties are aware of the requirements and can manage them appropriately within statutory timeframes." (Paragraph 5.5)
What this means for pension scheme trustees
In summary, trustees of pension schemes should seek early input from their covenant adviser to help them monitor the employer’s financial position, thereby supporting the going-concern assessment needed for the pension scheme audit.
Given the level of economic uncertainty currently being seen in most markets, employers may not yet have a full understanding of how quickly their underlying business will return to its previous revenue and profit levels, or if this will ever be achieved in the future. As such, demanding detailed forecasts now may not be the most practical way forward.
A two-stage approach
It would be more pragmatic to use a two-stage approach, with an initial review designed to ascertain whether there are any fundamental long-term issues likely to be faced by either the employer or the sector in which it operates, and a more detailed review undertaken later as better information becomes available.
This staged approach should ensure that additional strain is not unnecessarily placed on management in these difficult times, unless the underlying signs are such that any substantial delay would have a critical and detrimental long-term impact on the position of the pension scheme.