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PRAG – an update on activity

Summer 2011

Financial reports of pension schemes

The concern has diminished for the time-being, so there only needs to be brief comment at this juncture.  PRAG maintains its opposition to the inclusion of the liability based on both “soft issues” and technical argument.  To just touch on perhaps the key “soft issue” – quite simply, the inclusion of the liability is more likely to confuse members than add to their understanding.  This is not a matter of knowledge; it is a matter of information overload and potentially different values being provided for different purposes.

Clear and consistent communication of complex issues in financial statements is one of PRAG’s objectives.   The Statement of Recommended Practice “Financial Reports of Pensions Schemes” was last revised in May 2007 and the SORP Working Party will be re-convening soon to establish what changes, if any, are required.  Their deliberations are likely to consider the output of some of the other working parties:

Investment working party – Two important papers have been published by the working party.  The first was to provide help for the preparers of accounts when considering the valuation of investments.  This includes suggested questions to consider when investing in hedge funds and other less transparent investment vehicles.  As trustees’ investment strategies develop, this will be particularly helpful.

The second paper provides ideas on how to maintain clarity when providing information about the investment strategy.  The statutory disclosures in accounts and investment reports do not always convey a pension scheme’s true exposure to different asset classes as this is not apparent due to the use of pooled investment vehicles, derivatives and hedge funds.  The paper explains how the economic shape of the portfolio can be disclosed.  Of course, as well as providing insight into the strategy, it also provides transparency around the risks.

SPV Working Party – Over recent years there has been an interest in alternative pension scheme funding arrangements and the use of Special Purpose Vehicles (“SPVs”) is one of the latest innovations.

The high level guide, to be published soon, is aimed at trustees, sponsoring employers and preparers of pension scheme and company accounts who are new to these arrangements. It will help users understand the reasons why trustees and employers enter into such arrangements, how they might be structured and covers some of the associated legal, tax, valuation and accounting principles.  Practical issues in respect of these structures are also considered.

Insurance Working Party – Another group established in response to particular issues, in this case the use of buy-ins and longevity swaps by pension schemes. The diversity and complexity of these types of risk transfer arrangements has potentially led to a variety of interpretations on how best to account for them. Clear and uniform presentation and disclosure by accountants, actuaries and others is an objective of the working party.

But the work of PRAG is not just limited to financial reports of pension schemes.  For nearly 10 years the Summary Reports Working Party has been encouraging the sharing of best practice for member communications.   PRAG believes that it is now more important than ever to engage members of pension schemes with targeted and relevant information.

The Internal Controls Working Party has published ideas on the types of controls that may be appropriate for the different transaction streams in a pension scheme.  These are intended to help trustees enhance their operating procedures and achieve the level of governance expected by the Pensions Regulator.
VAT is a potential source of leakage from a pension scheme.  In the current environment it is essential that schemes are VAT efficient.  The VAT Working Party will be producing guidance that covers the basics and also emphasises the importance of good communication between the employer, the trustees and the administration teams to enable an efficient and effective VAT recovery process.

VAT is also a risk area following the introduction of the new penalty regime and the guidance will also cover the governance that all employers and trustees should have in place.