Issued by the Pension Research Accountants Group (PRAG), the ED of the Statement of Recommended Practice Financial Reports of Pension Schemes (SORP) has been significantly updated to reflect changes in accounting standards, regulations and the pension industry since the previous SORP on pension scheme financial reporting was published in 2007.

The ED contains a number of key changes including the requirement for pension schemes to include annuities at the value of the related obligation; disclosure of determination of fair value of investments in accordance with a fair value hierarchy; disclosures in relation to investment credit and market risks; and the reporting of subsidiaries held as part of an investment portfolio at fair value and not consolidated in the financial statements.

A number of these changes relate to new requirements under FRS 102, which has removed the exemption previously available under the Audited Accounts Regulations and 2007 SORP to value annuity policies at nil.  However, if a scheme enters the Pension Protection Fund (PPF), annuity income is redirected to the PPF who take over payment of pensions, which may be restricted to PPF limits. PRAG says that as a result it seems appropriate for scheme financial statements to recognise annuities on a ‘gross’ basis, since the current ‘net’ approach is not supported by the substance of the arrangement.

The draft SORP extends the disclosures on the approach to determining fair value of financial instruments set out in FRS 102 to cover all scheme investments which includes investment property and recommends a distinction between those valued using market observable data and those valued using non-observable data. PRAG notes that the fair value hierarchy required by FRS 102 is not consistent with the fair value hierarchy under IFRS and this may require providers of investment accounting information to provide two different analyses of investment valuations.

FRS 102 requires new disclosures on investment risks arising on financial instruments which the draft SORP extends to all scheme investments including investment property. PRAG notes that a particular area of challenge for pension schemes is the application of risk disclosures to pooled investment vehicles, which it says is the most complex part of the proposed new SORP, and where it says it is suggesting a ‘pragmatic’ approach that is consistent with trustees’ intentions.

The draft SORP recommends that where a scheme has investments in subsidiaries a summary of the underlying net assets are disclosed. FRS 102 does not require the production of consolidated financial statements for pension schemes, but a scheme may do so if it holds shares in subsidiaries which are not held exclusively for resale.

The draft SORP also recommends shortening and simplifying existing guidance on accounting for defined contribution arrangements as this is now well established in the mainstream of pension scheme accounting. With regard to new auto-enrolment schemes, PRAG has taken a pragmatic approach to accounting for the first contribution due for auto-enrolled employees and recommends opt-out payments made by the scheme are reported as an item of expenditure in the Fund Account.

In addition PRAG has consulted with the Department for Work and Pensions to seek amendments to current statutory reporting requirements to bring them into line with current accounting standards, and is working with the Investment Managers Association (IMA) to consider the information requirements going forward. The ED therefore  removes outdated prescriptive statutory disclosures which were originally introduced in 1986 in relation to investments (for example equity, fixed interest public sector, fixed interest other and index linked securities analysed between quoted and unquoted and UK and overseas) and disclosure of pooled arrangements between property/other and unit trusts/managed funds.

Bob Hymas, PRAG chairman, said: ‘This revision provides an opportunity to make pension scheme financial reporting more relevant in the context of today’s accounting and industry practices. To get the most from this process PRAG welcomes comments from all parties who have an interest in pension scheme financial reporting’.

The ED is available on the PRAG website here http://www.prag.org.uk/12/text/1/files/PensionSORPExposureDraft.pdf   

The deadline for feedback is 16 July 2014 and comments should be sent to [email protected]

New accounting standards and the revised SORP will be applicable for accounting periods commencing on or after 1 January 2015. Early adoption is permitted.