FRC highlights room for improvement in the audit of pension disclosures

The Financial Reporting Council, in its role as the regulator of company audits, has published a report, The Audit of Defined Benefit Pension Obligations.  This gives findings from its review of the audits of pension scheme obligations in the accounts of 51 large companies.  The report finds that improvement was required in at least one aspect of the pensions audit work in almost half of the accounts reviewed.  Only eight audits were identified as having no areas for improvement.

The report also highlighted that in half of the audits reviewed, the valuation of the defined benefit obligation, and in particular the key assumptions used, was identified by the audit team as a “significant risk of material misstatement”.

The FRC suggests that auditors should improve their auditing of pensions figures by, for example:

• Assessing the risk for the more sensitive assumptions and planning and performing appropriate procedures for the valuation of pensions
• Considering, evidencing and in some cases communicating to the audit committee the financial impact of key assumptions at the optimistic or pessimistic end of the acceptable range, along with the auditor’s view of whether the assumptions are at the appropriate place in the range
• Where the IAS 19 valuation of the defined benefit obligation has been calculated by adjusting and rolling forward the last triennial actuarial valuation, clearly evidencing the audit work done on this roll forward; and
• Identifying different categories of investment assets and obtaining sufficient audit evidence to support the valuation of each

Comment

As highlighted in LCP’s Accounting for Pensions 2018 report, UK pension obligations can be large compared to the companies who sponsor them, and a wide range of assumptions is currently being used to value them.  This report from the FRC will no doubt prompt additional scrutiny of how pension schemes are valued and reported in company accounts and where assumptions sit within an acceptable range.

MPs call for “incremental changes” to pensions tax relief

A recent Treasury Select Committee report takes a critical look at a number of aspects of saving for retirement, including the current operation of tax relief on pensions, the Lifetime ISA (LISA), auto-enrolment, the state pension triple lock and planning for retirement following the introduction of the defined contribution (DC) pension freedoms in 2015.  Its concern is that millions of people are still likely to under-save for their pensions, many to a significant extent.

The report asserts that “there is widespread acknowledgement that tax relief is not an effective or well-targeted way of incentivising saving into pensions” and so Government may want to consider whether there is need for fundamental reform.  But it suggests that incremental changes such as “replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution“ should improve the situation.

The report is enthusiastic in its endorsement of auto-enrolment, noting that it has, to date, been enormously successful.  However, it also highlights the urgent need to bring the self-employed into the automatic enrolment system, and suggests the Government consider increasing contributions, potentially by automatically increasing contribution rates in line with pay rises, to further reduce the number of under-savers from its current level of 12 million estimated in the Government’s Automatic Enrolment Review 2017.

The Committee notes that it has received strong criticism of LISAs, which were launched in April 2017 (see Pensions Bulletin 2017/15).  Complaints about their complexity, perverse incentives, lack of complementarity with the pensions saving landscape and apparent lack of popularity lead the report to recommend they should be abolished.

The Government has committed to maintaining the “triple lock” (which raises the state pension annually by the highest of price inflation (CPI), average earnings growth or 2.5 per cent) to the end of this Parliament, but the report notes that maintaining it in the longer term is unsustainable.  The Committee recommends that the next auto-enrolment review should explore options for private savings to make up the shortfall that could result if the triple lock were abandoned in future.

The report devotes its final chapter to the 2015 DC pension freedoms and concerns that many people do not understand or engage with the choices available to them.  The Single Financial Guidance Body is suggested as a saviour for this problem, with mid-life MOTs and the encouraging of more people to take up the advice or free guidance options available to them as possible measures.  The FCA should consider introducing a strong form of default guidance before allowing people to access their pension pots, whilst default investment pathways and consumer protection should also be improved.

Comment

The MPs’ thoughts make for an interesting insight into the direction in which Government policy is being encouraged to head.

Auto-enrolment comes out as the retirement saving poster child, whilst the very traits of member inertia and non-engagement that have helped make it a success are lamented when it comes to freedom and choice.  We can only hope that any future pensions taxation changes are made as part of a holistic and thoughtful review and resuscitate “simplification” as a key aim.  We also note that the poor LISA sales seen so far should not necessarily lead to the conclusion that residence and retirement savings cannot be happy bedfellows.

Master trusts: Supervision and enforcement policy unveiled by the Pensions Regulator

The Pensions Regulator has launched a consultation on its supervision and enforcement policy for master trusts.  As a reminder, the Regulator will have responsibility to authorise and supervise master trusts.

The consultation sets out the Regulator’s principles for supervision and how it will enforce against master trusts.  On the former point it will have both a “routine supervision” regime and an “additional supervision” regime for “master trusts with higher perceived risk”.  Master trusts subject to the most intensive supervision will be allocated a named supervisor.

The Regulator’s enforcement regime includes fixed and escalating penalty notices and the possibility of criminal prosecution in the most extreme cases.  If it is no longer satisfied that a master trust continues to meet the authorisation criteria, it is possible that authorisation will be withdrawn.

The consultation closes on 23 August.

Comment

Master trusts currently have more than 10 million members between them (according to the Regulator), and this number is expected to continue to grow, so diligent regulation is clearly important to protect members.  Given the criticism in recent months it will be interesting to see what balance the Regulator strikes between walking softly and using a big stick.

Fine may be bitter for brewery to swallow

The Pensions Regulator has secured its sixth criminal conviction in connection with individuals or organisations not providing information to it.

This latest conviction was against Samuel Smith Old Brewery and its chairman Humphrey Smith after information connected with the 2015 valuation of some of the company’s final salary pension schemes was not handed over (see Pensions Bulletin 2018/17).

At Brighton Magistrates’ Court company chairman Humphrey Smith was fined £8,000 and Samuel Smith Old Brewery was fined £18,750.  They were also ordered to pay £1,240 in costs and victim surcharges.

Comment

The size of these fines is meant to act as an incentive to anybody else to provide information to the Regulator when (appropriately) requested.  As can also be seen from this case (and others) fines can be directly imposed on an individual so will personally impact those involved.  Given the talk of increasing the Regulator’s bite in the recent Government White Paper, it may be Humphrey Smith and the brewery escaped relatively unscathed compared to future cases.

Overseas transfer numbers fall again

The number of transfers to Qualifying Recognised Overseas Pension Schemes (QROPS) fell again in the 2017/18 tax year to just 4,700 (totalling £740 m) according to HMRC figures published this week.  That compares to 9,700 (£1,220 m) in the previous tax year, and a high of 20,100 (£1,760 m) in 2015/16.

Comment

This halving of overseas transfers during the year could easily be caused by the introduction of the overseas transfer charge (see Pensions Bulletin 2017/11) for certain transfers from March 2017.

HMRC Pension schemes newsletter 101

HMRC’s 101st pension schemes newsletter covers a number of largely administrative topics.

Among other things, the newsletter reminds readers of reporting requirements for master trusts and HMRC’s powers on registration and de-registration for these, particularly highlighting the change in regime from 1 October 2018.

There is an item on the timescale (or lack thereof) for HMRC to decide whether or not to accept an application to register a pension scheme, a reminder that HMRC’s Annual Allowance calculator is up and running again (and dependent on the member ensuring they put in the correct information), more on the challenges of managing relief at source in the context of Scottish rather than rest-of-UK residence and some process points for administrators wanting to register a new scheme using the Manage and Register Pension Schemes service.

In addition, the newsletter releases the latest statistics on use of pension flexibility and also on the pattern of transfers made to QROPs (see article above).

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.