THE AUDIT OF PENSION SCHEMES

Transcription

1 THE AUDIT OF PENSION SCHEMES

2 This helpsheet is designed to assist firms in the audit of occupational pension schemes in the United Kingdom. Pension scheme audits can vary in size and complexity, and there is often a public interest element to them. This, combined with the specialist requirements that must be met, increases the risks to auditors when carrying out the audit of a pension scheme. The ICAS Audit Monitoring (ICAS AM) team regularly review pension scheme audits to ensure that the specialist aspects have been properly addressed and often find that these are not approached in a consistent manner. This helpsheet aims to assist firms in the consideration of particular areas of interest, including developing an understanding of pension scheme related risks; compliance with laws and regulations; appropriately tailored engagement letters; and audit reports. A summary of the different categories of pension scheme is included at Appendix 1 A summary of the regulatory framework relating to the audit of a pension scheme, including when a pension scheme is required to be subject to an audit can be found at Appendix 2. How to develop an effective approach to the audit of pension schemes Whilst pension scheme audit clients can vary in size and nature, many can be small and low risk in comparison to other clients, yet it is crucial that they are allocated sufficient time and resource and that they are approached with the same rigour and professional scepticism as other audits. There are some factors that firms should consider in developing an effective audit approach to the audit of their pension scheme clients, including: Audit Procedures Firms have choices regarding specialist audits either purchase a specialist set of audit programmes or tailor purchased/ internally developed standard company programmes. In the experience of ICAS AM, firms using specialist programmes tend to have a greater level of compliance, as the other options require firms to dedicate significant time and resource to ensuring a tailored set of programmes remain up to date. Whatever option is taken, it is important that these procedures are fully applied to all relevant audit clients, as specialist aspects apply regardless of the size of the scheme.

3 Disclosure checklists There are a considerable number of specific Pensions SORP disclosures required in the accounts of a pension scheme, and given the potential complexities of the disclosures (e.g. employer related investments) it is recommended that firms utilise a relevant disclosure checklist. In the experience of ICAS AM, the use of a disclosure checklist results in a better standard of accounts. Training It is crucial that RIs remain up to date with changes in legislation or regulations affecting their clients and this should be demonstrated in their training records. Firms are reminded that International Education Standard 8 (IES8) requires that engagement partners ensure that necessary specialist knowledge is obtained and maintained. Attendance at a pension audit course is still one of the most effective ways of maintaining specialist audit competence, however there are other available options, including webinars and other on-line training solutions. What are the common pitfalls to look out for in pension scheme audits? There are a number of areas that ICAS AM would advise pension audit teams to keep in mind when conducting such audits. The following are those most commonly identified on monitoring visits: Agreement of client engagement terms Signed engagement letters should be received prior to the commencement of the audit engagement, and the following should be considered when addressing this ISA 210 requirement: At first appointment: the trustees or managers of a scheme forward a Notice of Appointment to the auditors specifying: The date from which the appointment is to take effect; To whom the auditors are to report; and From whom the auditors will take instructions; At first appointment: auditors must acknowledge the Notice of Appointment within one month of its date of receipt. This should be done after the firm has conducted its own client acceptance procedures; The engagement letter should refer to the most up to date pension legislation. The correct references are to the Occupational Pension Schemes (Scheme Administration) Regulations 1996 ( Scheme Administration Regulations ), the Pensions Act 1995 and Pensions Act 2004 ;

4 The letter should refer to the most recent auditing standards, being the International Standards (ISAs) (UK and Ireland); and The letter should also refer to reporting responsibilities to The Pensions Regulator (TPR), including the duty and right of auditors to report to The Pensions Regulator. Appendix 4 of the APB Practice Note 15 contains example paragraphs for insertion in pension scheme audit engagement letters. Pension scheme specific laws and regulations ISA 250A requires auditors to identify, and consider the impact of, key laws and regulations relevant to an audit client. In the audit of pension schemes firms should: Identify and consider the impact of all up to date and relevant legislation in relation to the pension scheme, including, where relevant: The Occupational Pension Schemes (Scheme Administration) Regulations 1996 ( Scheme Administration Regulations ); The Pension Schemes Act 1993; The Pensions Acts 1995, 2004, 2008, and 2011, where relevant; The Pensions SORP 2007; and The Money Laundering Regulations 2007; Review and consider requirements of pension schemes rules and/or trust deed; and Review the responsibilities of trustees under general trust law and the Pensions Acts. Note that the Pensions Acts do not spell out how trustees, employees and others must meet legal requirements. Instead, this is covered in The Pension Regulator s Codes of Practice, which sets out how a wellrun scheme would meet relevant requirements. As these are codes of practice rather than regulations, trustees can choose to do things differently as long as the alternative action meets legal requirements. The above laws and regulations, and any others relevant to the pension scheme, should be identified and considered in the risk assessment process at the planning stage of the audit. At the fieldwork and completion stages the auditor should then consider whether the pension scheme is in compliance with these, and identify the impact of any instances of non-compliance. Some of the audit procedures that ICAS AM would expect to see on a pension scheme audit file would include, but are not limited to: a review of contributions and expenditure compliance against scheme rules and other conditions; general enquiries of trustees / management;

5 a review of the governing documents and consideration against the pension schemes activities in the accounting period; a review of any correspondence with TPR; and a review of trustee minutes. In addition to the above, firms are reminded that there is a duty to report matters of material significance to The Pensions Regulator. One serious issue, and a potential civil breach of the 1995 Act, is failure by trustees or managers to obtain audited financial statements within 7 months of the scheme year end. The auditor must consider whether there is a need to report to the TPR where this failure is caused by poorly maintained records and should have procedures in place to monitor this. Further guidance on this duty is included in Practice Note 15. Understanding the pension scheme and its risks Obtaining an understanding of an audit client is the key requirement of ISA 315. Practice Note 15 provides guidance on this, and listed below are some of the areas that should be considered. Firms are advised to utilise Practice Note 15, and this list, to ensure sufficient understanding is obtained of: the audit and accounts requirements; the nature of the Scheme and documentation; Scheme governance; the supporting and participating employers; Scheme administration; investments; Other advisors; reporting responsibilities; the assessment of controls over key risks; the accounting systems and controls, and adequacy of books and records; risk assessments at the assertion level; and the audit response to risks. Some of the most effective planning that ICAS AM sees is where a detailed audit planning memorandum has been prepared. Such a document helps to ensure all the key areas are covered and provides useful, informative, commentary on the audit approach and significant risks identified. If an audit team decides to prepare such a document, it is important to ensure that this has not merely been carried forward from the previous year, but that additional thought and consideration is given in the current year.

6 Communication with the client and consideration of fraud risks The requirements in ISA 240 and ISA 260 are the same as those in the audit of trading companies. However, it can sometimes be more difficult to undertake direct communication with pension scheme trustees. As a result, ICAS AM often see that there has been communication with those charged with the day to day administration of the pension scheme, but not necessarily with trustees or those charged with governance. Firms are advised to ensure that adequate planning is carried out to meet the requirements and that there is evidence of communication with the trustees, including discussions on fraud risks and controls. Practice Note 15 refers to this in paragraph 164: Some trustee bodies of occupational pension schemes operate their relationship with the auditor through individuals such as a professional trustee or the secretary to the trustees, or there may be a tiered approach to communication, with the detailed matters being communicated to an audit committee (or similar group) and less detailed matters being communicated with the trustee body. It may therefore be difficult to ensure that oral communication is transmitted to all trustees and written communication may also be necessary. Obtaining and documenting audit evidence In the development of a pension scheme audit plan all relevant financial statements assertions and risks require to be addressed, including: Contributions To ensure contributions are accurately and completely paid over in accordance with the schedule of contributions/payment schedule and on a timely basis. Potential audit work may include a review and validation of the controls operated by the administration team, detailed testing of payrolls and timeliness via a review of cashbook/bank. The work on contributions affects the determination of planning materiality, as often this work involves additional focus on the more detailed aspects of the transactions than perhaps in the rest of the audit (such as payment dates and amounts). Benefits and membership To ensure benefits are calculated correctly in accordance with the Trust Deed, that any bulk transfers are accounted for in the correct period, and that benefits are only paid to bona fide pensioners.

7 Potential audit work may include analytical review of pensioner payroll, a review of transactions to member files, consideration of authorisation procedures and calculations, a review of bulk transfer agreements and a review of the results of any existence exercise. Investments To ensure investments exist, are completely recorded and are correctly valued. Potential audit work may include a review of the controls in place to monitor investment/custodian arrangements, obtaining third party confirmations, a review of investment reconciliations, tests of valuation of listed investments against third party sources and a review of service organisation controls reports (AAF/ FRAG 21) to identify any control weaknesses. Global economic downturn The Trustees should understand how these issues affect their investment managers and the potential impact on the portfolio. Auditors may be required to perform additional work around the valuation of investments, including review of underlying investments and movements in value between the year-end and the signing date. The importance of recording audit evidence properly cannot be stressed enough. Firms can help themselves by using a standard format for their working papers, which encourages staff to record why they have carried out a particular audit test, what work they have actually performed, the results achieved and conclusions drawn. ISA 230 specifically states that: The auditor should prepare the audit documentation so as to enable an experienced auditor, having no previous connection with the audit, to understand: (a) The nature, timing, and extent of the audit procedures performed to comply with ISAs (UK and Ireland) and applicable legal and regulatory requirements; (b) The results of the audit procedures and the audit evidence obtained; and (c) Significant matters arising during the audit and the conclusions reached thereon. Consideration of service organisations and reliance on an expert Pension schemes and their trustees will often use service organisations such as accountancy firms, fundraisers, trust administrators, and investment managers. ISA 402 is clear that there should be

8 consideration of the controls within the service organisation, the terms of the arrangement with the pension scheme, the supervision and control by the trustees, and the consideration of the impact of this on audit risk. Similarly, it is common for auditors of pension scheme audit clients to require the involvement of experts, or to rely on the work of a management expert. These can commonly be in relation to investment and property valuations and investment management. ISA 500 and ISA 620 state there should be documented consideration of the experts professional competence, qualifications, experience or objectivity. Further, firms are required to document whether they consider the scope of the expert s work to be adequate; or how they have evaluated the appropriateness of the expert s work. Audit firms must ensure that these areas are considered at the planning stage and that any experts or service organisation are identified at this time. It is not sufficient to identify them during the course of the audit, as comprehensive planning should identify that experts will need to be involved and demonstrate the impact on the firm s assessment of risk and planned work. Management representation letters The key factor to address here is to obtain a signed letter of representation before the audit report is signed. In addition, written representations should not be relied upon where substantive evidence should have been available. Appendix 5 of Practice Note 15 provides extracts from examples of a representation letter which might be different to those included in the example representation letter included in ISA (UK and Ireland) 580, and may include representations covering: the type and nature of the pension scheme; that scheme rules and documentation are up to date; disclosure of all correspondence with the regulator; and material accounting estimates. Auditors statement on contributions The scheme s auditor is required to give a statement on the contributions payable to the scheme during the scheme year. The revised Practice Note 15 requires this to be a separate report from the audit report and the statement is not an audit opinion. Some trust deeds may also require the auditors to report on whether the contributions are paid in accordance with the rules of the scheme.

9 Example reports are included in Appendix 6 to Practice Note 15: For defined benefit schemes, the auditor s statement refers to the schedule of contributions; For defined contribution schemes, the auditor s statement refers to the Payments Schedule (under S 87 of PA 1995) Statements of contribution/payment schedules do not normally include AVCs (Additional Voluntary Contributions) or special contributions; and For hybrid schemes, both the defined contribution and the defined benefit parts must have their own schedules of contribution/payment schedule. If there is no such schedule for the defined contribution part then the auditor will require to qualify their statement and assess whether contributions have been paid on the basis of the scheme rules and the actuary s recommendations. If the employer fails to pay contributions in accordance with the Schedule of Contributions or Payment Schedule, both trustees and auditors need to consider whether to report to the TPR. What are the common disclosure issues in pension scheme annual reports and accounts? There are some common matters identified on monitoring visits: The Trustee Report should include disclosure of the trustees who served in the year, professional advisors, details on the membership of the scheme including the nature and number of members, any employer related investments, information on how the schemes investments have performed and a note of the trustee s policy on the custody of investments. Accounting policies should be relevant to the pension scheme and the main issues identified relate to the income policy not covering other income, no policy on benefits payable; no policy on the valuation of assets, no policy for investment managers expenses; investment policies which don t reflect the actual investments held and incorrect SORP references. The notes to the accounts should include disclosure of employer related investments, investment manager expenses (including nil statements), a membership reconciliation or disclosure if there had been no movements in the year, and disclosure of auditor remuneration or a statement that the cost was borne by the employer and not the scheme. The auditors statement on contributions should follow the wording in Practice Note 15. The SORP should be referred to in the presentation of the accounts. Other matters to consider when a firm audits a pension scheme When a firm has pension scheme audit clients ICAS AM would also advise that the following areas, (all of which are include in their reviews when conducting a monitoring visit) are considered:

10 The auditor s report on a pension scheme The auditor s report should refer to the most relevant and up to date legislation, as outlined in the laws and regulations considerations above, and should refer to the most up to date auditing standards, being the current ISAs. ICAS AM would also advise firms to refer to the APB Bulletin 2010/2 Compendium of Illustrative Auditor s Reports on United Kingdom Private Sector Financial Statements for periods ended on or after 15 December 2010 (Revised). This Bulletin, at Appendix 9, contains an example audit report for use in the audit of occupational pension schemes in the United Kingdom. A copy of the bulletin can be accessed here. Firm s annual return (FAR) The firm should ensure that the audit client list on the FAR correctly reflects the total number of pension scheme audits conducted by the firm. The audit compliance review (ACR) When selecting files for cold file review, as part of the ACR, firms are advised to include pension scheme audits as a representative sample of audit work conducted. Additional assistance from ICAS and useful references: Members with any query in relation to the information held in this helpsheet can contact Audit Monitoring by telephone on The ICAS Practice Review Service provides support to registered auditor firms. It offers a variety of services on all aspects of audit regulation, which can be tailored to meet the needs of your firm, and provides standard audit programmes that may be useful for your firm. For more information on any of these services, contact Linda Laurie on or llaurie@icas.org.uk. The Audit Monitoring team, on an annual basis, publish an Annual Report detailing key findings from the visits carried out during the year. Around 50 firms are visited each year and this provides a useful summary of the most common weaknesses on audit files, including those of specialist entities. A copy of the 2012 Annual Report can be downloaded here The APB Practice Note 15, and the Bulletin 2010/2, referred to in this helpsheet can be accessed at the FRC website.

11 A copy of the 2007 SORP is not available on the internet but can be ordered from the Pensions Research Accounts Group (PRAG) here The Accounting and Auditing team are happy to receive queries on these and many other issues. Members should submit their queries via to: Further helpsheets on other specialist audits have also been prepared and these can be accessed here LINKS More information on The Pensions Regulator can be found on their website at: A copy of the SORP can be ordered from the Pensions Research Accounts Group (PRAG), at: Audit News can be accessed here The APB Practice Note 15, and the Bulletin 2010/2 can be accessed at: Further helpsheets on other specialist audits can be accessed here

12 APPENDIX 1 The different categories of pension scheme There are a number of different categories of pension scheme. The type and nature of pension scheme should always be thoroughly investigated at the outset of any audit, in conjunction with a review of the scheme s trust deed. Category of scheme Occupational pension an arrangement an employer uses to provide benefits for their employees when they leave or retire The amount paid out to the employee on retirement will depend on the type of scheme and reflect either the contributions put in or the number of years service and the final salary of the employee (defined benefit scheme); Group personal pension schemes and stakeholder schemes personal plans in individual member s names, where the employer simply acts as an administrator. The policyholder contributes to the plan, the money is invested and a fund is built up. The amount of pension payable when the policyholder retires is dependent upon the amount of money paid into the scheme, how well the investment funds perform and the annuity rate at the date of retirement (defined contribution scheme). Relationship to state scheme: Contracted in members of the scheme will be entitled to full pension benefits under the Social Security legislation, but have to pay higher NI contributions; Contracted out in addition to benefits under their occupation scheme, members of the scheme receive the basic state pension. Funding: Funded the liabilities of the scheme are funded by a separate pool of assets; Unfunded the employer does not set up a separate pool of assets, but pays liabilities as they fall due. Benefits: Defined benefit future benefits are defined in advance based on the salary and length of service; Money purchase (defined contribution) the contributions rather than the final benefits are fixed. The final benefit will depend on the amount contributed and the performance of the related investments; Hybrid scheme defined as those that include a combination of defined benefit and defined contribution benefits.

13 Investment of funds: Managed fund the scheme uses insurance company pooled funds for their investments. The assets may be invested in accordance with a contract in a range of funds similar to unit trusts; Self-administered scheme the funds are run by the trustees, who usually appoint a third party to deal with matters, such as a stockbroker or merchant bank. The trustees are free to invest in any form of investment permitted by the trust deed; A small self-administered scheme (SSAS) usually less than 12 members. Usually members are connected and the scheme it is set up to provide benefits to directors and a small number of employees. Such schemes can be very flexible and include investments such as loans to an employer, purchase and leaseback property or purchase of shares. There are, however, limits on the investment and borrowing to stop this flexibility from being abused, and there are strict wind-up rules; Insured pension scheme pays premiums to a life insurance company, normally in the form of insurance policies. If it s a defined contribution scheme these are often set up individually for the benefit of each individual member and called ear-marked schemes. Ear-marked scheme schemes under which all the benefits other than death benefits are money purchase benefits, secured by one or more policies or insurance/annuity contracts specifically allocated to the provision of benefits for individual members (or any other person who has a right to benefits under the scheme.); Additional Voluntary Contribution (AVC) an arrangement run by scheme trustees. The majority of these are money purchase, which means that contributions are invested, usually with an insurance company, to build up a fund. An AVC arrangement run through an employer s pension scheme is known as an in-house AVC scheme. The employer normally bears the cost of administration of this scheme and so costs tend to be lower than topping up pensions through other means. Free Standing AVC s (FSAVC) - This is similar to a money purchase AVC but is provided by external providers.

14 APPENDIX 2 The regulatory framework relating to the audit of a pension scheme The Pensions Regulator The Pensions Regulator (TPR) came into force on 6 April 2005, replacing the Occupational Pensions Regulatory Authority (OPRA). It has wider powers than OPRA, and its objectives are: to protect the benefits of members of work-based pension schemes; to promote good administration of work-based pension schemes; and to reduce the risk of situations arising that may lead to claims for compensation from the Pension Protection Fund (established to pay compensation to members of certain schemes with insufficient assets). The top priority for TPR is to tackle risks to members benefits and it has a range of powers that it can use to intervene and help put things right, where necessary. It has the power to prohibit trustees if it is satisfied that they are not fit and proper persons to be pension scheme trustees (via a prohibition order). It also maintains a register of corporate and individual professional trustees, which it now uses where it has the power to intervene in making trustee appointments (section 7 of the Pensions Act 1995). More information on TPR can be found on their website here Pension scheme financial statements The form and content of pension scheme financial statements are specified in the Occupational Pension Schemes (Requirements to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 (SI 1996/1975) (the Audited Accounts Regulations ) amended by the Occupational Pension Schemes (Administration and Audited Accounts) (Amendment) Regulations However, the Regulations governing pension scheme financial statements cover basic contents, including the requirements for trustees or managers to obtain audited accounts within 7 months of the scheme year-end, and the auditor s statement on contributions. Key legislation relevant to pension schemes is detailed in the laws and regulations section below, however the following are the key matters that auditors should consider when undertaking such an audit:

15 When is a pension scheme required to be subject to an audit? There are varying degrees of external scrutiny in relation to different types of pension schemes, and this can be complex, as the following table, which summarises the audit requirements, demonstrates: Nature of pensions scheme A free standing AVC/FSAVC scheme A group personal pension scheme An unapproved or nonstatutory scheme An unfunded scheme A public service or quasiofficial scheme A scheme providing death-only benefits with no accrued rights A scheme with fewer than two members. A money purchase SSAS in which all members are trustees and can act only on unanimous agreement. An ear-marked scheme of the type that holds investments only in the form of individually allocated insurance policies. A relevant ear-marked scheme (a money purchase scheme where the benefits are secured by one or more insurance policy, and all members are trustees). All other money purchase and defined benefit schemes. Any scheme where an exemption would have applied but the scheme trust deed and rules require an audit. Audit requirement No audit requirement. No audit requirement, unless there are deferred members who are not trustees. Required to appoint an auditor to make a statement on the scheme s contributions during the year. No audit or statement on contributions required. Require an audit within seven months of the year end and a payment schedule. An audit is required, however the audit report is not presented under legislation and there is no requirement for a contributions audit. Financial Reports of Pension Schemes A Statement of Recommended Practice (2007) The Pensions SORP applies to all schemes preparing true and fair accounts, but does not apply to unfunded schemes; FSAVCs; stakeholder schemes that are not trust based; and group personal pensions.

16 The Pensions SORP sets out recommendations which to represent current best practice on the form and content of the financial statements of pension schemes. The SORP recommendations apply to all financial statements of pension schemes which are intended to give a true and fair view, including those prepared for the minimum funding requirement. While recommendations are intended to reflect current best practice, the Regulations, and FRS 18 Accounting Policies, require a statement confirming whether the financial statements of a pension scheme have been prepared in accordance with the SORP, and an indication of any material departures from this. In addition, the Pensions SORP provides a framework for the preparation of the Trustees Annual Report. A copy of the SORP is currently not available via a free download, however it can be ordered from the Pensions Research Accounts Group (PRAG) on their website here APB Practice Note 15 The audit of occupational pension schemes in the UK (Revised) The Practice Note gives guidance on the application of International Standards on Auditing (ISAs (UK and Ireland)) to the audit of pension schemes in the UK. The Practice Note will be referred to throughout this helpsheet and firms are advised to ensure that they are familiar with this prior to undertaking any pension scheme audits. A copy of the Practice Note can be accessed here

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