15 Practice Note THE AUDIT OF OCCUPATIONAL

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Practice
Note
15
(Revised)
THE AUDIT OF OCCUPATIONAL
PENSION SCHEMES IN THE
THE UNITED KINGDOM
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THE AUDITING PRACTICES BOARD
The Auditing Practices Board (APB), which is part of the Financial Reporting Council
(FRC), prepares for use within the United Kingdom and Republic of Ireland:
Standards and guidance for auditing;
Standards and guidance for reviews of interim financial information performed by
the auditor of the entity;
Standards and guidance for the work of reporting accountants in connection with
investment circulars; and
Standards and guidance for auditors’ and reporting accountants’ integrity,
objectivity and independence
with the objective of enhancing public confidence in the audit process and the quality
and relevance of audit services in the public interest.
The APB comprises individuals who are not eligible for appointment as company
auditors, as well as those who are so eligible. Those who are eligible for appointment
as company auditors may not exceed 40% of the APB by number.
Neither the APB nor the FRC accepts any liability to any party for any loss, damage or
costs howsoever arising, whether directly or indirectly, whether in contract, tort or
otherwise from any action or decision taken (or not taken) as a result of any person
relying on or otherwise using this document or arising from any omission from it.
The purpose of Practice Notes issued by the APB is to assist auditors in applying
auditing standards of general application to particular circumstances and industries.
Practice Notes are persuasive rather than prescriptive. However, they are indicative of
good practice, even though they may be developed without the full process of
consultation and exposure used for auditing standards.
This Practice Note, when finalised, will replace Practice Note 15: The audit of
occupational pension schemes in the United Kingdom (Revised), which was issued in
March 2007.
# Financial Reporting Council Limited 2011
ISBN 978-1-84798-419-7
The APB is part of the Financial Reporting Council Limited a company limited by guarantee.
Registered in England number 2486368.Registered Office: 5th Floor, Aldwych House,
71-91 Aldwych, London WC2B 4HN
PRACTICE NOTE 15
THE AUDIT OF OCCUPATIONAL PENSION SCHEMES IN
THE UNITED KINGDOM (Revised)
Contents
Page
Preface
3
Introduction
5
Legislative and regulatory framework
6
The audit of financial statements
15
ISAs (UK and Ireland)
200 Overall Objectives of the Independent Auditor and the Conduct of an
Audit in accordance with International Standards on Auditing (UK and
Ireland).
15
210 Agreeing the Terms of Audit Engagements
17
240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements
23
250 Section A – Consideration of Laws and Regulations in an Audit of
Financial Statements
Section B – The Auditor’s Right and Duty to Report to Regulators in the
Financial Sector
29
35
260 Communication with Those Charged with Governance
50
265 Communicating Deficiencies in Internal Control to Those Charged with
Governance and Management
52
300 Planning an Audit of Financial Statements
54
315 Identifying and Assessing the Risks of Material Misstatement Through
Understanding the Entity and its Environment
57
320 Materiality in Planning and Performing an Audit
72
330 The Auditor’s Responses to Assessed Risks
74
402 Audit Considerations Relating to an Entity Using a Service Organisation
76
500 Audit evidence
83
520 Analytical Procedures
84
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540 Auditing Accounting Estimates, Including Fair Value Accounting
Estimates, and Related Disclosures
86
550 Related Parties
93
570 Going Concern
95
580 Written Representations
98
600 Special Considerations – Audits of Group Financial Statements
(Including the Work of Component Auditors)
101
620 Using the Work of an Auditor’s Expert
103
700 The Auditor’s Report on Financial Statements
104
720 Section A – The Auditor’s Responsibilities Relating to Other Information
in Documents Containing Audited Financial Statements
108
The Auditor’s Statement about Contributions (the Statement)
110
Liaison with the Scheme Actuary
119
Appendices
1
List of principal relevant legislation
121
2
The legal and regulatory framework
123
3
List of publications
140
4
Illustrative examples of appointment and resignation letters and
paragraphs for engagement letters
143
5
Illustrative extracts from example of representation letter
155
6
Illustrative examples of Auditor’s Statements about Contributions and
other reporting situations
158
7
Illustrative example statement of trustees’ responsibilities
163
8
Impact of the scheme benefit structure on risk
166
9
Non-statutory audit appointments
170
10
Definitions
174
11
Some significant topics relevant to audits of occupational pension
schemes
176
2
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PREFACE
This Practice Note contains guidance on the application of auditing standards issued by the
Auditing Practices Board (APB) to the audit of occupational pension schemes established
under the Pensions Acts in the United Kingdom. Much of the guidance will also be of
assistance to auditors of public sector pension schemes, although these schemes are subject
to different financial reporting frameworks and different legislation. Auditors of public sector
schemes (and other statutory schemes established under separate statute) need to be aware
of the particular legislative requirements relating to the scheme concerned.
The Practice Note is intended to assist auditors in applying the requirements of, and should be
read in conjunction with, International Standards on Auditing (ISAs) (UK and Ireland), which
apply to all audits undertaken in the United Kingdom in respect of accounting periods ending
on or after 15 December 2010. This Practice Note sets out the special considerations relating
to the audit of occupational pension schemes which arise from the individual ISAs (UK and
Ireland). The Practice Note does not and is not intended to provide detailed guidance on
the audits of occupational pension schemes, so where no special considerations arise
from a particular ISA (UK and Ireland), no material is included.
Audits of occupational pension schemes may only be carried out by a registered auditor or
other person approved by the Secretary of State for Work and Pensions. The Pensions
Regulator (TPR) is the regulatory body responsible for the regulation of work-based
occupational pension schemes, adopting a risk-based approach to regulation and is able to
make use of a wide range of powers, as detailed in the Pensions Act 2004. Codes of Practice
and other TPR guidance are relevant to auditors of occupational pension schemes and of
particular importance is the ‘‘Reporting breaches of the law’’ Code of Practice.1
The trustees of occupational pension schemes are required to meet the general provisions of
trust law (taking into account the particular circumstances of pension schemes) and to comply
with the provisions of the Pension Schemes Act 1993 (PSA 1993) and the Pensions Acts 1995
and 2004 (‘‘PA 1995’’ and ‘‘PA 2004’’). In addition, the activities of occupational pension
schemes are subject to HM Revenue & Customs (HMRC) regulations and financial services
legislation. Scheme auditors need to be aware of the accounting and auditing implications of
these requirements.
The principal amendments and additions made to Practice Note (PN) 15: ‘‘The audit of
occupational pension schemes in the United Kingdom’’ (Revised) are in respect of new ISAs
(UK and Ireland) which have been published since it was last issued in 2007. References to
ISAs (UK and Ireland) have been updated for the new clarified standards which are applicable
to audits of financial periods ending on or after 15 December 2010. This has led to the need for
1
A full list of all Codes of Practice together with any supporting guidance is available at
www.thepensionsregulator.gov.uk
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new sections in respect of ISA (UK and Ireland) 265 Communicating Deficiencies in Internal
Control to Those Charged with Governance and Management and ISA (UK and Ireland) 540
Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related
Disclosures.
This Practice Note has been prepared with advice and assistance from staff of TPR and is
based on the legislation and regulations in effect at 31 January 2011.
4
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INTRODUCTION
1.
The purpose of this Practice Note is to give guidance on the application of International
Standards on Auditing (ISAs) (UK and Ireland) to the audit of occupational pension
schemes in the United Kingdom. The following paragraphs identify the special
considerations arising from the application of the requirements of ISAs (UK and Ireland)
to the audit of occupational pension schemes, and suggest ways in which these can be
addressed. Extracts from ISAs (UK and Ireland) are indicated by grey-shaded boxes
below. This Practice Note does not contain commentary on all of the requirements
included in the ISAs (UK and Ireland) and reading it should not be seen as an
alternative to reading the relevant ISAs (UK and Ireland) in their entirety. In addition,
where no special considerations arise from a particular ISA (UK and Ireland), no
material is included.
2.
A registered auditor is required to comply with ISAs (UK and Ireland) when conducting
audits. This principle applies in the context of occupational pension schemes in the
same way as to entities in any sector, irrespective of their size, but the way in which ISAs
(UK and Ireland) are applied needs to be adapted to suit the particular characteristics of
the entity audited. For example, an engagement to provide an auditor’s statement about
contributions does not constitute an audit but the guidance provided in this Practice
Note relating to certain ISAs (UK and Ireland) is still relevant (see paragraph 22 below).
3.
There are a variety of ways of providing pensions in the UK. Most occupational pension
schemes in the UK are required to produce annual financial statements and to appoint a
scheme auditor to report on those financial statements and on the payment of
contributions to the scheme. There are some exemptions from the statutory audit
requirement, including certain small schemes and funded unapproved schemes2. In
addition, auditors of certain insured schemes are required by statute only to report on
contributions paid to the scheme, and do not report on the scheme’s financial
statements. Where statutory provisions do not require an audit, a scheme’s trust deed
and rules may still require its financial statements to be audited: however; a trust deed
may not derogate from the statutory provisions in this regard.
4.
The guidance in this Practice Note is written primarily for audits of financial statements of
occupational pension schemes carried out to meet the requirements of pensions
legislation. However, the guidance is also applicable to audits undertaken solely under
the terms of a scheme’s trust deed or other agreement requiring an auditor to provide a
similar report, including requests from trustees where the scheme is otherwise exempt
2
The Occupational Pension Schemes (Scheme Administration) Regulations 1996 (SI 1996 No.1715) (as
amended) define those schemes where the requirements under the PA 1995 to appoint auditors (and
actuaries) do not apply.
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from audit or for financial statements prepared other than at the normal scheme yearend.
5.
Similar considerations apply to the audits of Common Investment Funds (‘‘CIFs’’) which
are usually set up under trust and require an audit under their trust deed.
LEGISLATIVE AND REGULATORY FRAMEWORK
6.
Occupational pension schemes operate within a framework of law and regulation which
is complex and differs in a number of respects from that applicable to commercial
enterprises. This framework involves both trust law and specific statutory provisions, set
out primarily in PSA 1993, PA 1995 and PA 2004 and Regulations made under those
Acts. Funded schemes are usually established under trust law or (generally in the case
of public sector schemes) under specific statute, and for a non-statutory scheme to
obtain registered scheme status, it is essential that it is established under ‘‘irrevocable
trusts’’. To the extent necessary to carry out their audits, it is essential for auditors of
occupational pension schemes to have a good understanding of current pensions
legislation and associated regulations, including accounting and taxation aspects. In the
case of public sector schemes, this extends to the specific requirements applicable to
each scheme, which may differ in a number of respects from the requirements of PA
1995 and PA 2004.
Occupational pension schemes – key characteristics
7.
The general duties and powers of pension scheme trustees are essentially the same as
those of other trustees. The principal elements of their responsibilities under trust law
and statute are the proper management of funds provided by employees and their
sponsoring employers during the course of their employment so as to provide pension
benefits and, subsequently, the payment of these benefits to those entitled to them.
8.
Benefits at retirement may be provided by an employer on a funded basis or on an
unfunded ‘‘pay-as-you-go’’ basis. The latter involves payment by the employer of
pension commitments out of the employer’s available resources when the employee has
retired: the provision of pensions in this way involves no advance funding. No
requirements exist for the audit of such arrangements (unless they are established under
a specific statute), and they are not considered in this Practice Note.
9.
Broadly, funded occupational pension schemes fall into two principal types,
differentiated by the way in which pensions payable are determined. These are defined
benefit schemes and defined contribution schemes. In defined benefit schemes, the
pension to be paid is determined in advance, for example, by reference to average or
final pensionable pay levels. By contrast, in defined contribution schemes (also called
money purchase schemes), the amount to be paid is determined by the extent of funds
available when an individual pension commences. Hybrid or mixed benefit schemes
may also be established, combining both forms of benefits.
6
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10.
In the case of schemes providing defined benefits, determining the extent of future
obligations to pay pensions and of the funding necessary to meet those obligations
requires actuarial assessment. Trustees of such schemes are therefore required by
statute to appoint a scheme actuary to report on the funding required and the security of
accrued and prospective rights of scheme members.
11.
Trustees or managers of defined contribution schemes are not normally required to
appoint a scheme actuary, although they may take actuarial advice to assess the
potential level of benefits available and/or the potential level of contributions required to
fund a particular level of benefits. Some but not all defined contribution schemes buy
annuities from third parties to avoid uncertainty and the ongoing obligation to pay
pensions.
12.
Trustees of nearly all funded occupational schemes, irrespective of the method of
funding, are required by regulations made under PA 19953 to make available to
members an annual report. The content of the annual report varies with the type of
scheme. It generally comprises the following:
(a) a trustees’ report, giving a review of the management of the scheme, membership
statistics and developments during the period;
(b) an investment report, reviewing the investment policy and performance of the
scheme;
(c) (i) for schemes that have had a Scheme Specific Funding (‘‘SSF’’) actuarial
valuation, a copy of the certificate from the scheme actuary as to the adequacy
of contributions and a copy of the latest Summary Funding Statement prepared
by the trustees; or
(ii) for new schemes that have yet to have a SSF valuation, a statement and
certificate from the appointed scheme actuary;
(d) financial statements showing a true and fair view of the financial transactions of the
scheme during the period and of the disposition of its assets and recognised
liabilities at the end of the period;
(e) an independent auditor’s report on the financial statements;
(f) a trustees’ summary of contributions;
(g) an independent auditor’s statement about contributions payable to the scheme.
The annual report may also include a compliance statement, containing administrative
disclosures required by law or made voluntarily.
3
The Occupational Pension Schemes (Disclosure of Information) Regulations 1996, SI 1996 No.1655
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Although PA 1995 refers to auditors as ‘‘professional advisers’’ of the trustees, a scheme
auditor is required by the Act to be independent of the scheme, and the auditor’s function is to
provide an objective opinion on the scheme’s financial statements and a statement about
contributions.
13.
As indicated above, the statutory regime applying to occupational schemes is complex
and forms of scheme are diverse. In addition, because the activities of a scheme are
governed by trust law, the scheme auditor needs to be aware of the principal terms of
the deed or other instrument establishing the scheme and the scheme rules. The
statutory regime and trust law have a significant effect on the scheme auditor’s work, as
do other factors concerning the way in which scheme trustees fulfil their responsibilities.
Financial statements
14. The form and content of a pension scheme’s financial statements are specified in the
Occupational Pension Schemes (Requirement to obtain Audited Accounts and a
Statement from the Auditor) Regulations 19964 (‘‘the Audited Accounts Regulations’’).
These require scheme trustees to obtain financial statements which:
(a) contain specified information, set out in the Schedule to the Audited Accounts
Regulations; and
(b) show a true and fair view of the financial transactions of the scheme during the
scheme year and of the amount and disposition as at the end of the scheme year of
its assets and of its liabilities, other than liabilities to pay pensions and benefits after
the end of the scheme year.
15.
The Audited Accounts Regulations require the trustees to state whether the financial
statements have been prepared in accordance with the most recent applicable version
of the Statement of Recommended Practice ‘‘Financial Reports of Pension Schemes’’
(‘‘the Pensions SORP’’)5 and to indicate any material departures from its guidance. The
Pensions SORP supplements general accounting principles set out in Financial
Reporting Standards, indicating best practice in accounting and financial reporting by
pension schemes. Consequently, it is normally necessary to follow the guidance in the
Pensions SORP in order for pension scheme financial statements to show a true and fair
view.
16.
The nature of applicable accounting requirements and their effect on auditor’s reports
are considered in more detail in the Practice Note’s section on ISA (UK and Ireland) 700
‘‘The Auditor’s Report on Financial Statements’’.
4
5
8
The Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from
the Auditor) Regulations 1996, SI 1996 No.1975, as amended.
Issued by the Pensions Research Accountants Group (PRAG) in accordance with the Accounting
Standards Board’s code of practice for the development and issue of SORPs.
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Contents of the auditor’s report on pension scheme financial statements
17. The responsibilities of pension scheme auditors reflect the nature of schemes’ financial
statements.
18.
Occupational pension scheme financial statements exclude estimates of future pension
benefits payable. In the case of defined benefit schemes, information about the extent of
liabilities for future benefits and the adequacy of the scheme’s funding are included in
the section of the annual report dealing with actuarial matters. Thus, the Audited
Accounts Regulations do not require a scheme auditor to express an opinion as to
whether the financial statements of a pension scheme prepared by or on behalf of its
trustees show a true and fair view of its state of affairs but whether the financial
statements obtained by the trustees show a true and fair view of the scheme’s:
(i) financial transactions and assets; and
(ii) liabilities, other than liabilities to pay pensions and benefits after the end of the
scheme year.
The need to assess future liabilities does not arise in the financial statements of defined
contribution schemes.
19.
A scheme auditor’s statutory responsibilities under PA 1995 do not require the auditor to
undertake work to determine whether the trustees’ report or other sections of the
scheme’s annual report are properly prepared6. The scheme auditor’s professional
obligations under ISAs (UK and Ireland) are discussed in the section of the Practice Note
dealing with Section A of ISA (UK and Ireland) 720 ‘‘The Auditor’s Responsibilities
Relating to Other Information in Documents Containing Audited Financial Statements’’.
Reporting on contributions
20. The Audited Accounts Regulations require the scheme auditor to provide a statement as
to whether or not in the auditor’s opinion contributions have in all material respects been
paid at least in accordance with the payment schedule for defined contribution schemes
or the schedule of contributions (as certified by the scheme actuary) for other schemes.
The work undertaken by the scheme auditor in respect of contributions takes into
account both the auditor’s obligation to report its opinion on the financial statements
and, separately, to report whether contributions have in all material respects been paid
at least in accordance with the schedule of contributions or payment schedule. This
affects the determination of performance materiality and may result in a different level of
materiality to that used in relation to the scheme’s financial statements.
6
However, a breach of requirements relating to the annual report may give rise to a statutory duty to
report directly to the Pensions Regulator.
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21.
A failure to meet the requirements for payment of contributions may be of material
significance to TPR and therefore reportable under the statutory duty discussed in the
section dealing with Section B of ISA (UK and Ireland) 250 ‘‘The Auditor’s Right and Duty
to Report to Regulators in the Financial Sector’’. Guidance on providing the auditor’s
statement is set out in the ‘‘Auditor’s Statement about Contributions’’ section later in this
Practice Note.
22.
Although the work leading to an auditor’s statement about contributions does not
constitute an audit, nonetheless the following guidance given in this Practice Note will
normally still be relevant as the report states that reasonable assurance is given:
terms of engagement: ISA (UK and Ireland) 210 and Appendix 4
quality control: ISA (UK and Ireland) 220
reporting to TPR: ISA (UK and Ireland) 250, Section B
planning the examination of contributions: the general requirements of ISA (UK and
Ireland) 300
consideration of materiality: ISA (UK and Ireland) 320
obtaining evidence to support the statement about contributions: ISA (UK and
Ireland) 500
trustees’ representations: ISA (UK and Ireland) 580 and Appendix 5
reporting on contributions: Appendix 6
other reporting responsibilities: ISAs (UK and Ireland) 250 – Section B, 260 and 265.
Reporting by auditors of earmarked schemes
23. Certain types of insured money purchase schemes (defined by the Audited Accounts
Regulations and referred to in those Regulations and this Practice Note as ‘‘earmarked
schemes’’) are exempt from the requirement for audit7. The auditor of such a scheme is
required under the legislation to report only on the contributions made to the scheme, as
explained in paragraphs 55 to 60 of Appendix 2 to this Practice Note.
Reporting direct to TPR
24. Details of the legal and regulatory framework applicable to occupational pension
schemes are set out in Appendix 2 to this Practice Note. The auditor of a pension
scheme is not required to examine or form an opinion on a scheme’s compliance with all
relevant laws and regulations. Instead, ISA (UK and Ireland) 250 – Section A
‘‘Consideration of Laws and Regulations in an Audit of Financial Statements’’ requires
7
10
See SI 1996 No.1715 and SI 1996 No. 1975, as amended (most recently by the Occupational Pension
Schemes (Administration and Audited Accounts) (Amendment) Regulations 2005, SI 2005 No. 2426).
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the auditor to design audit procedures to obtain sufficient audit evidence regarding
compliance with the provisions of those laws and regulations generally recognized to
have a direct effect on the determination of material amounts and disclosures in the
financial statements. The auditor is also required to perform specific procedures to help
identify instances of non-compliance with other laws and regulations that may have a
material effect on the financial statements.
25.
In addition to reporting on a scheme’s financial statements, a scheme auditor appointed
under PA 1995 is required by section 70 of PA 2004 to consider reporting directly to TPR
breaches of law which affect the pension scheme. The obligation to report under section
70 does not require the scheme auditor to undertake additional work directed at
identifying matters to report over and above that which is necessary to fulfil the auditor’s
obligations under the Audited Accounts Regulations to report on a scheme’s financial
statements and/or on the contributions it has received. The scheme auditor is therefore
not required to put into place arrangements to detect matters to be reported under
section 70; the auditor’s obligation is limited to reporting those which come to its
attention. The auditor should nevertheless be alert to breaches relevant to the service or
services the auditor is providing.
26.
The decision to report will depend whether there is reasonable cause to believe there
has been a breach of the law and, if so, whether the breach is likely to be of material
significance to TPR. This obligation also applies to the scheme auditors of those
earmarked schemes which are not required to prepare audited financial statements and
where the scheme auditor is making a statement about contributions.
27.
Guidance on the interpretation of the term ‘‘of material significance’’ is set out in the
section dealing with Section B of ISA (UK and Ireland) 250 ‘‘The Auditor’s Right and Duty
to Report to Regulators in the Financial Sector’’. In addition, examples of matters that
TPR would consider to be of material significance are set out in TPR’s supporting
guidance to Code of Practice 01 – Reporting breaches of the law.
Going concern
28. The nature of the scheme auditor’s statutory opinion and the extent of involvement of the
scheme actuary mean that the nature of the scheme auditor’s work in relation to going
concern differs from that normally undertaken in relation to a commercial entity.
29.
The principal liabilities of a defined benefit scheme consist of obligations to pay future
pensions, the extent of which are assessed by the scheme actuary rather than the
scheme auditor. Such liabilities do not arise in defined contribution schemes, as the
benefits payable are determined by the extent of funds available and prevailing annuity
rates. Nevertheless, the going concern basis is assumed in the preparation of the
financial statements of pension schemes. Consequently, the scheme auditor needs to
make enquiries of the trustees in order to determine whether they are aware of factors
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which may make it necessary to wind up the scheme or which may lead to the scheme
entering the Pension Protection Fund (PPF) assessment period.
30.
This aspect of the scheme auditor’s work is discussed further in the section dealing with
ISA (UK and Ireland) 570 ‘‘Going Concern’’.
Reliance on third parties
31. Trustees of occupational pension schemes – who do not necessarily have first hand
actuarial, accounting or other relevant experience – frequently rely on advice or services
from experts in order to fulfil their responsibilities to safeguard the interests of scheme
members. PA 1995 also requires trustees to appoint professional advisers in certain
areas and to ensure that such advisers are appropriately qualified.
Reliance on third parties – actuaries
32. To provide the actuarial skills needed to determine funding requirements of a defined
benefit scheme, trustees of such schemes are, in all but a few cases, specifically
required by statute to appoint a scheme actuary to provide them with necessary
valuations and advice. Consideration of how the certified schedule of contributions has
been implemented, in response to advice from the scheme actuary, consequently forms
an important element of the work undertaken by the scheme auditor in order to report on
contributions to a defined benefit scheme.
33.
When forming an opinion on the view shown by an occupational pension scheme’s
financial statements which have been prepared in accordance with the SORP, the
scheme auditor is not required to express an opinion as to the completeness or
accuracy of the long-term liabilities determined by a scheme’s actuary; the actuary’s
certificate and statement are the responsibility of the scheme actuary. However, as set
out in the Auditors’ Code and ISA (UK and Ireland) 720: The Auditor’s Responsibilities
Relating to Other Information in Documents Containing Audited Financial Statements,
the scheme auditor does not permit its name to be associated with information materially
inconsistent with the auditor’s report or which the auditor considers to be misleading.
The scheme auditor therefore normally seeks to discuss with the scheme actuary any
matters of mutual interest.
34.
The statutory duty to report matters of material significance to TPR applies to the scheme
actuary, the trustees and all others who are involved in the administration of a scheme,
as well as to the scheme auditor. Consequently, a scheme auditor who becomes aware
of a matter which may be reportable considers whether to discuss the circumstances
with the scheme actuary and/or the trustees where this may assist the auditor in forming
its opinion as to whether to report to TPR.
35.
To facilitate effective liaison, the scheme auditor and scheme actuary seek agreement
from the trustees of a scheme to communication between them as part of the terms of
engagement when accepting appointment. Further commentary concerning liaison with
12
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the scheme actuary is set out in a separate section of this Practice Note (see paragraph
368 onwards).
Reliance on third parties – investment managers and custodians
36. Investments form the principal asset of a pension scheme, and income from investments
is an important element in ensuring that the scheme can meet future pension
obligations. The level of funds available and the expected future yield are also important
elements of the scheme actuary’s valuation of a defined benefit scheme.
37.
PA 1995 provides for trustees to appoint investment managers to undertake the
management of the funds available for investment. The trustees nevertheless retain
ultimate responsibility for the proper use of the scheme’s funds and are specifically
required to determine the investment policy appropriate to a particular scheme’s
circumstances. This policy is set out in the trustees’ Statement of Investment Principles
and is often summarised in the annual report to scheme members.
38.
The scheme auditor performs procedures to obtain evidence that investments and
income from investments due to the scheme which are reflected in its financial
statements are not materially misstated. When trustees have appointed an investment
manager or custodian to undertake work on the scheme’s behalf, the scheme auditor
considers the system of controls operated by the trustees over the service provider.
39.
Issues relating to obtaining sufficient appropriate evidence when the trustees have
delegated some of their functions to investment managers or custodians are discussed
in the section dealing with ISA (UK and Ireland) 402 ‘‘Audit Considerations Relating to an
Entity Using a Service Organization’’.
Reliance on third parties – scheme administrators
40. Trustees of pension schemes may delegate aspects of administration (although not
ultimate responsibility), including record keeping and matters relating to contributions
and benefits to a third party (including the sponsoring employer – see below). In such
cases, the scheme auditor normally obtains direct access to the relevant records of the
third party in order to obtain relevant audit evidence, as discussed in the section dealing
with ISA (UK and Ireland) 402.
Reliance on third parties – sponsoring employers
41. In many cases, the relationship between the scheme and the sponsoring employer may
consist only of contractual arrangements relating to the establishment of the scheme.
However, in the case of ongoing schemes, the sponsoring employer may also provide
administrative services. Such services will be the subject of a separate contract between
the employer and the trustees.
42.
Where trustees delegate administrative work to the sponsoring employer (or to another
service provider), the scheme auditor assesses the controls established by the trustees
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over the work being carried out to ensure inter alia the completeness and accuracy of
records maintained by the sponsoring employer (or other service provider) on behalf of
the scheme.
Ethical Standards
43. APB Ethical Standards for Auditors apply in the audit of financial statements, including
those of occupational pension schemes. Particular issues that the audit engagement
partner of a pension scheme has regard to when assessing possible threats to the
independence and objectivity and the nature and extent of the safeguards to be applied
include:
any professional relationships which the audit engagement partner or the audit firm
have with organisations that contribute to the scheme (e.g. whether the firm also
audits the sponsoring employer);
non-audit services provided to the trustees of the scheme by the firm (e.g.
accounting, actuarial, administrative and risk management services), and
non-audit services provided to the sponsoring employer by the firm.
The APB Ethical Standards include a small number of additional requirements that apply
to the audits of listed companies8. Paragraph 42 of ES 1 (Revised) requires that an audit
firm shall establish policies and procedures which set out circumstances in which these
additional requirements apply to the audits of non-listed entities. Such policies and
procedures take into consideration criteria set by the audit firm, such as the nature of the
entity’s business, its size, the number of its employees and the range of its stakeholders.
These may include some occupational pension schemes.
8
14
These are listed in paragraph 41 of ES 1 (Revised).
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THE AUDIT OF FINANCIAL STATEMENTS
This Practice Note applies to those ISAs (UK and Ireland) that are effective for audits of
financial statements for periods ending on or after 15 December 2010. This includes
audits of the financial statements of occupational pension schemes. The purpose of the
following paragraphs is to identify the special considerations arising from the application
of certain requirements of ISAs (UK and Ireland) to the audits of occupational pension
schemes, and to suggest ways in which these can be addressed (extracts from ISAs (UK
and Ireland) are indicated by grey-shaded boxes below). This Practice Note does not
contain commentary on all of the requirements included in the ISAs (UK and Ireland) and
reading it should not be seen as an alternative to reading the relevant ISAs (UK and
Ireland) in their entirety. In addition, where no special considerations arise from a
particular ISA (UK and Ireland), no material is included.
ISA (UK AND IRELAND) 200: OVERALL OBJECTIVES OF THE INDEPENDENT
AUDITOR AND THE CONDUCT OF AN AUDIT IN ACCORDANCE WITH
INTERNATIONAL STANDARDS ON AUDITING (UK AND IRELAND)
This ISA (UK and Ireland) deals with the independent auditor’s overall responsibilities when
conducting an audit of financial statements in accordance with ISAs (UK and Ireland).
Specifically, it sets out the overall objectives of the independent auditor, and explains the
nature and scope of an audit designed to enable the independent auditor to meet those
objectives. It also explains the scope, authority and structure of the ISAs (UK and Ireland),
and includes requirements establishing the general responsibilities of the independent
auditor applicable in all audits, including the obligation to comply with the ISAs (UK and
Ireland). The independent auditor is referred to as ‘‘the auditor’’ hereafter. (paragraph 1)
In conducting an audit of financial statements, the overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, thereby enabling the
auditor to express an opinion on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting framework; and
(b) To report on the financial statements, and communicate as required by the ISAs (UK
and Ireland), in accordance with the auditor’s findings. (paragraph 11)
In all cases when reasonable assurance cannot be obtained and a qualified opinion in the
auditor’s report is insufficient in the circumstances for purposes of reporting to the
intended users of the financial statements, the ISAs (UK and Ireland) require that the
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auditor disclaim an opinion or withdraw (or resign)9 from the engagement where
withdrawal is possible under applicable law or regulation. (paragraph 12)
The auditor shall plan and perform an audit with professional scepticism recognising that
circumstances may exist that cause the financial statements to be materially misstated.
(paragraph 15)
44.
ISAs (UK and Ireland) include a requirement for the auditor to comply with the APB’s
Ethical Standards and relevant ethical guidance issued by the auditor’s professional
body in the conduct of any audit of financial statements, which apply equally to audits of
pension schemes. A fundamental principle is that practitioners should not accept or
perform work which they are not competent to undertake. The importance of technical
competence is also underlined in the Auditors’ Code issued by the APB, that is
appended to the APB’s Scope and Authority of Pronouncements (Revised) and states
that the necessary degree of professional skill demands an understanding of financial
reporting and business. Practitioners should not undertake the audit of occupational
pension schemes unless they are satisfied that they have or can attain the necessary
level of competence.
45.
Before commencing the audit of an occupational pension scheme, a firm ensures that it
has enough staff who have adequate knowledge and experience of such audits. Staff
involved in an audit of an occupational pension scheme will have a broad
understanding, commensurate with the individual’s role and responsibilities in the audit
process of:
9
16
the type of scheme being audited (e.g. defined benefit, defined contribution or
hybrid);
the status of the scheme (e.g. open, closed to new members, closed to future
accrual);
key risks affecting the scheme;
the scheme’s trust deed and rules;
relevant TPR Codes of Practice guidance; and
the principles of the Pensions SORP.
In the ISAs (UK and Ireland), only the term ‘‘withdrawal’’ is used.
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ISA (UK AND IRELAND) 210: AGREEING THE TERMS OF AUDIT ENGAGEMENTS
Objective
The objective of the auditor is to accept or continue an audit engagement only when the
basis upon which it is to be performed has been agreed, through:
(a) Establishing whether the preconditions for an audit are present; and
(b) Confirming that there is a common understanding between the auditor and
management and, where appropriate, those charged with governance of the terms of
the audit engagement.(paragraph 3)
The auditor shall agree the terms of the audit engagement with management or those
charged with governance, as appropriate. (paragraph 9)
Subject to paragraph 11, the agreed terms of the audit engagement shall be recorded in an
audit engagement letter or other suitable form of written agreement and shall include:
(a) The objective and scope of the audit of the financial statements;
(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of the applicable financial reporting framework for the preparation of the
financial statements; and
(e) Reference to the expected form and content of any reports to be issued by the auditor
and a statement that there may be circumstances in which a report may differ from its
expected form and content. (paragraph 10)
If law or regulation prescribes in sufficient detail the terms of the audit engagement referred
to in paragraph 10, the auditor need not record them in a written agreement, except for the
fact that such law or regulation applies and that management acknowledges and
understands its responsibilities as set out in paragraph 6(b). (paragraph 11)
46.
ISA (UK and Ireland) 210 requires that an engagement letter be obtained for all audit
appointments. This requirement supplements that included in PA 1995 whereby trustees
are required to appoint the scheme’s auditor.
The appointment of the scheme auditor
47. Section 47(1)(a) of PA 1995 requires the trustees or managers of most occupational
pension schemes to appoint a scheme auditor. The Scheme Administration Regulations
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(SI 1996/1715, regulation 3), as amended, exempt a number of schemes from
appointing a scheme auditor (see paragraph 54 of Appendix 2).
Method of appointment under statute
48. To be effective, the appointment of a scheme auditor (or, where a scheme is exempt
from the requirement to appoint a ‘‘scheme auditor’’, the auditor) must be made in
accordance with the Regulations10. The trustees or managers of the scheme forward a
Notice of Appointment to the auditor specifying:
the date the appointment is due to take effect;
to whom the auditor is to report; and
from whom the auditor will take instructions.
49.
The date the appointment is due to take effect (‘‘the effective date’’) is at a future date.
The date of appointment does not become effective until the auditor has acknowledged
receipt of the Notice of Appointment. This being the case, a practical approach may be
for the Notice of Appointment to specify the ‘‘effective date’’ as being the date of the
auditor’s acknowledgement.
50.
It is important that the date of the scheme year-end should be established. It is desirable
for the Notice of Appointment to:
state the date of the scheme year-end. If the appointment is in relation to a scheme
year which has already ended the engagement terms should specify which scheme
year(s) will be subject to audit; and
be clear as to the name of the scheme to which the appointment is proposed. In the
case of an appointment covering a number of schemes, there should normally be
separate Notices of Appointment for each or, if particular circumstances warrant it, a
schedule detailing the separate schemes.
51.
For the appointment to be effective, PA 1995 requires the auditor to acknowledge receipt
of the Notice of Appointment within one month of its date of receipt. Appointment is not
effective unless and until this acknowledgement is sent by the auditor within the one
month period. As the date of acknowledgement makes the appointment effective from
that date, the auditor considers whether it is aware of any matters which may have arisen
since the effective date which may lead to an obligation to make a report to TPR.
52.
PA 1995 also requires the auditor to state that the auditor will notify the trustees or
managers immediately it becomes aware of the existence of any conflict of interest to
10 The Occupational Pension Schemes (Scheme Administration) Regulations 1996, SI 1996 No. 1715, as
amended.
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which the auditor is subject in relation to the scheme. In order to assist with identifying
conflicts of interest, some audit firms request trustees to provide representations on this
matter before they accept appointment, and obtain re-confirmation of the position in the
annual representation letter.
53.
An example Notice of Appointment and an example letter of Acknowledgement of
Appointment are set out in Appendix 4.
54.
The auditor will not send the acknowledgement until the auditor has completed preacceptance procedures including, for example:
considering the auditor’s competence to undertake the engagement (including the
ability to manage potential conflicts of interest, and knowledge of the laws and
regulations to which the scheme is subject);
establishing requisite knowledge of the client, including the nature of the scheme,
the names of the trustees and the previous auditor, any investment managers or
administrators, the scheme year-end, and obtaining a copy of the trust deed and
rules and the last set of audited financial statements; and
obtaining from the trustees a written notice of resignation made by the previous
auditor11, and corresponding with the previous auditor.
If the auditor does not acknowledge appointment within one month, the Notice of
Appointment ceases to be valid. The trustees or managers will then need to provide a
new Notice of Appointment.
55.
It will normally be beneficial for the auditor to have undertaken pre-acceptance
procedures and, at least in principle, agreed the terms of engagement with the trustees
before the Notice of Appointment is sent to the auditor. To facilitate this process, the
trustees may decide to notify the auditor of a proposed appointment prior to sending the
formal Notice of Appointment under the Regulations. This would allow the auditor to
progress acceptance procedures prior to receiving the formal notification, thereby
allowing the acknowledgement of the auditor’s acceptance to be submitted within one
month of receipt required by the Regulations.
56.
Once the appointment is effective, the scheme auditor finalises the engagement terms
with the trustees and documents these in an engagement letter. For further guidance on
this, see the section on engagement letters in Appendix 4.
11 The statement or declaration on resignation is to be given to the succeeding auditor by the trustees
rather than by the outgoing auditor. Regulations require that the statement or declaration should be
provided to the incoming auditor within 14 days from the date on which the trustees or managers
receive it or the date of the new appointment, whichever is the later. In practice, the incoming auditor is
likely to wish to have access to a statement or declaration before it accepts appointment.
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57.
January 2011
If the resignation, removal or death of a scheme auditor occurs, the Scheme
Administration Regulations require that a new appointment be made within three
months. Failure to appoint a new auditor within the three-month period may be a matter
of material significance to TPR. If an auditor is requested to accept appointment after
three months from the date when a previous auditor left office, or if there was no previous
auditor appointed under PA 1995 and the scheme is not a new one12, the breach will
need to be noted and may need to be reported to TPR.
The letter of engagement
58. The same basic principles used in drafting engagement letters apply in relation to the
audit of pension schemes as to the audit of any entity. Practical considerations arising
from the particular characteristics of pension schemes are considered below.
59.
The scheme auditor agrees the terms of the audit engagement with the trustees of the
scheme and addresses the letter of engagement to the trustees.
60.
The scheme auditor may consider ensuring that all the trustees receive a copy of the
letter, and establishing that the trustees agree to the terms of the engagement by asking
for a signed copy of the letter to be returned as confirmation of this. If the trustees are not
engaged in the day-to-day running of the scheme, the scheme auditor may wish to
request the trustees to send a copy of the engagement letter to the administrators,
together with a more detailed description of the audit work to be undertaken and any
client assistance to be given.
61.
The scheme auditor sets out the nature and scope of its audit obligations under PA 1995
so as to ensure trustees are aware of the extent of those responsibilities. In particular, the
auditor includes reference to its responsibility to report on the contributions payable to
the scheme and to the statutory duty to report to TPR in certain circumstances, making it
clear that the duty is to report matters if found, and does not involve undertaking
additional work to identify reportable matters.
62.
The scheme auditor does not have a right of access, under PA 1995, to information held
by third parties. Consequently, it is necessary for the scheme auditor to request such
information, when necessary for the external audit, through the trustees. The scheme
auditor therefore includes in the engagement letter a paragraph relating to access to
third parties to whom the trustees delegate particular functions, and to their records
relating to the pension scheme. The scheme auditor may require information from the:
administrator;
12 There is no time period in the PA 1995 for the appointment of an auditor by newly-constituted schemes.
Schemes are simply required to have one in place. Normally, appointments will take place as the
scheme is established as one of a series of adviser and service provider appointments by the trustees.
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investment manager(s);
custodian(s);
sponsoring employer – or employers where there is a multi-employer scheme – and
the sponsoring employer’s auditor;
scheme actuary.
63.
In view of the importance of the scheme actuary’s work to the information contained in a
scheme’s annual report, it is normally appropriate for the scheme auditor to obtain the
trustees’ agreement to direct dealings between the auditor and the scheme actuary,
both in terms of ongoing liaison regarding the affairs of the scheme and also in respect
of the scheme actuary’s and scheme auditor’s duty to report matters of material
significance directly to TPR, and to document this agreement in the engagement letter13.
64.
Regulations made under PA 1995 require the employer to notify the trustees, within one
month, of the occurrence of any event relating to the employer which there is reasonable
cause to believe will be of material significance to the trustees or the scheme’s
professional advisers in the exercise of their functions. The scheme auditor may wish to
include a term in the engagement letter requiring the trustees to undertake to inform the
scheme auditor of any matters which come to their attention which may be relevant to
the audit.
65.
Trustees may issue other reports to scheme members in addition to the annual report
required by statute. For example, they may provide summary reports and financial
statements, and periodic newsletters. Where this is the case, the engagement letter also
sets out the scheme auditor’s responsibilities, if any, in respect of such other reports.
66.
In certain circumstances, trustees may wish the scheme auditor to provide additional
reports, for example, reports to the HMRC or the Department for Work and Pensions or
to trustees of other schemes. Whilst the scheme auditor may initiate discussion of such
additional work, it is the responsibility of the trustees to identify the need for any
additional reports and to instruct the scheme auditor accordingly.
67.
Appendix 4 gives specimen paragraphs for engagement letters for:
(a) the audit of an occupational pension scheme required to obtain audited financial
statements under section 41 of PA 1995; and
(b) the auditor’s statement about contributions (with additional paragraphs for
earmarked pension schemes).
13 The ICAEW issued general guidance on this subject entitled TECH 02/08 – Actuaries’ and Auditors’
Inter-professional Communication – Pensions and Other Post-Retirement Benefits.
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68.
January 2011
The Appendix also includes details of the procedural matters to be followed when
fulfilling the requirements of PA 1995.
Resignation or removal of the auditor
69. The Scheme Administration Regulations require a written notice of resignation by the
scheme auditor which should contain either:
70.
a statement specifying the circumstances; or
a declaration of no circumstances.
The statement is made by the outgoing scheme auditor specifying any circumstances
connected with their resignation which, in its opinion, significantly affect the interests of
the members or prospective members of, or beneficiaries under, the scheme. Under the
Disclosure Regulations, the annual report must include a copy of any statement made
on resignation or removal in accordance with regulations made under section 47(6) PA
1995. Where the auditor knows of no such circumstances, and hence makes a
declaration to that effect, there is no requirement to include this declaration in the annual
report, although it is often included for the avoidance of doubt. The trustees are required
to provide a copy of the statement or declaration to the succeeding scheme auditor.
On recurring audits, the auditor shall assess whether circumstances require the terms of
the audit engagement to be revised and whether there is a need to remind the entity of the
existing terms of the audit engagement. (paragraph 13)
71.
22
The auditor considers annually whether changes to the legal and regulatory
requirements may require the terms of the engagement letter to be revised.
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ISA (UK AND IRELAND) 240: THE AUDITOR’S RESPONSIBILITIES
RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS
Objectives
The objectives of the auditor are:
(a) To identify and assess the risks of material misstatement of the financial statements
due to fraud;
(b) To obtain sufficient appropriate audit evidence regarding the assessed risks of material
misstatement due to fraud, through designing and implementing appropriate
responses; and
(c) To respond appropriately to fraud or suspected fraud identified during the audit.
(paragraph 10)
In accordance with ISA (UK and Ireland) 200, the auditor shall maintain professional
scepticism throughout the audit, recognising the possibility that a material misstatement
due to fraud could exist, notwithstanding the auditor’s past experience of the honesty and
integrity of the entity’s management and those charged with governance. (paragraph 12)
The auditor shall make inquiries of management, and others within the entity as
appropriate, to determine whether they have knowledge of any actual, suspected or
alleged fraud affecting the entity. (paragraph 18)
72.
Auditors of pension schemes are aware that the potential for fraud exists in all schemes.
Even if the auditor considers that the nature of pension schemes (not profit-making and
not trading) makes the risk of fraudulent financial reporting low, the risk of
misappropriation of assets remains. Professional scepticism therefore remains key.
Unless all of those charged with governance are involved in managing the entity, the
auditor shall make inquiries of those charged with governance to determine whether they
have knowledge of any actual, suspected or alleged fraud affecting the entity. These
inquiries are made in part to corroborate the responses to the inquiries of management.
(paragraph 21)
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In accordance with ISA (UK and Ireland) 315, the auditor shall identify and assess the risks
of material misstatement due to fraud at the financial statement level, and at the assertion
level for classes of transactions, account balances and disclosures14. (paragraph 25)
73.
The trustees of a pension scheme are responsible for ensuring that the assets and
revenues of the scheme are adequately safeguarded against the effects of fraud through
the implementation of appropriate controls. This legal responsibility remains with
trustees even if they have delegated some or all of their executive functions to third
parties.
74.
Examples of types of fraud which may occur in the context of a pension scheme include:
75.
misappropriation of assets;
deliberate non-payment of contributions (employee/employer) to the scheme by the
employer;
using assets of the scheme directly or as collateral for borrowing by the employer or
an associate of the employer;
misapplying the assets of a scheme to meet the obligations and expenses of another
scheme or of the sponsoring employer;
buying/selling of scheme assets by the investment manager without the required
mandate or authorisation;
lending of scheme assets by the custodian without authorisation;
exchange of assets without sufficient valuable consideration (for example, selling
assets such as property at below market value);
assets of the scheme used for the personal preferment of the trustees or used for the
personal preferment of an individual scheme member;
benefit claims by members or their beneficiaries to which they are not entitled – for
example, failure to notify a scheme of the death of a member or other beneficiary;
creation of fictitious scheme records by the administrator – for example, dummy
beneficiary records.
These examples are only illustrative and do not cover all situations which may arise.
Guidance on the internal control procedures which can be put in place by trustees, and
are designed to minimise the risk of fraud or error occurring, is included in the section on
ISA (UK and Ireland) 315 ‘‘Identifying and Assessing the Risks of Material Misstatement
14 ISA (UK and Ireland) 315, paragraph 25.
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Through Understanding the Entity and its Environment’’. Instances of actual or
suspected fraud are also likely to involve breaches of specific statutory or trust law
requirements relating to pension schemes.
76.
77.
Examples of conditions or events which may increase the risk of fraud are:
failure by the trustees to establish and operate adequate internal control
mechanisms, as required by legislation;
trustees or scheme management displaying a significant disregard for the various
regulatory authorities;
trustees or scheme management having little or no involvement in the day-to-day
administration of the scheme;
trustees or scheme management having ready access to the scheme’s assets and
an ability to override any internal controls;
trustees or scheme management failing to put in place arrangements to monitor
activities undertaken by third parties, including the employer;
trustees or scheme management displaying a lack of candour in dealings with
members, the scheme actuary or the scheme auditor on significant matters affecting
scheme assets;
the sponsoring employer operating in an industry with increasing business failures,
or itself having financial difficulties;
significant levels, or unusual types, of related party transactions (including employerrelated investments) involving unaudited entities or entities audited by other firms;
opaque investment arrangements where the flow of information to the trustees is
restricted and therefore it is more difficult to control the investment and to
understand the position.
The audit planning process includes an assessment of the risk of material misstatements
arising from fraud. Conditions or events which increase the risk of fraud include previous
experience or incidents which call into question the competence or integrity of persons
involved in the operation of the scheme, which include:
the trustees;
the sponsoring employer, its directors or staff (and in the case of groups, those of
the holding company or subsidiary undertakings);
third parties to whom the trustees have delegated the conduct of scheme activities,
for example:
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Practice Note 15
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–
the investment manager (including the insurance company) or investment
adviser;
–
the property manager;
–
the scheme administrator;
–
the investment custodian; and
–
payroll administrator (both employee and pensioner payroll);
professional advisers, principally:
–
the actuary; and
–
the lawyer.
78.
Section 249A of PA 2004 requires trustees or managers of an occupational pension
scheme to establish and operate internal controls which are adequate for the purpose of
securing that the scheme is administered and managed in accordance with the schemes
rules and in accordance with the requirements of the law. A Code of Practice – Internal
controls and supporting guidance have been issued by TPR setting out TPR’s
expectations of how occupational pension schemes should satisfy the legal requirement
to have adequate internal controls in place, including those controls TPR would expect
all trustees to operate.
79.
The auditor is not required to conclude on the adequacy of the approach taken by
trustees to assess and address risks faced by their scheme. However, where the
trustees have produced documentation that sets out their assessment of the various
risks facing the scheme, and how they believe those risks are controlled and mitigated,
the auditor has regard to that documentation when performing its own assessment of the
risk of material misstatements in financial reporting resulting from fraud.
80.
In assessing the risk of misstatement arising from fraud, the scheme auditor also
considers the extent of the trustees’ involvement in the day-to-day administration of the
scheme, their access to its resources and their ability, collectively or individually, to
override any internal controls. Additionally, the auditor considers the arrangements the
trustees have put in place to monitor work undertaken by third parties, for example,
custodianship of investments or the day-to-day administration of the scheme, including
those circumstances where the services are provided by the sponsoring employer.
The auditor shall evaluate whether unusual or unexpected relationships that have been
identified in performing analytical procedures, including those related to revenue accounts,
may indicate risks of material misstatement due to fraud. (paragraph 22)
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The auditor shall evaluate whether analytical procedures that are performed near the end
of the audit, when forming an overall conclusion as to whether the financial statements are
consistent with the auditor’s understanding of the entity, indicate a previously
unrecognised risk of material misstatement due to fraud. (paragraph 34)
81.
Detailed guidance on the analytical techniques that may be applied either to obtain an
understanding of a scheme or at or near the end of the audit is set out in the section of
this Practice Note dealing with ISA (UK and Ireland) 520.
82.
Determining which particular trends and relationships may indicate risks of material
misstatement due to fraud requires professional judgment. For example, unusual
fluctuations in benefits and other payments, particularly when not matched by matching
changes in the number and status of members, may indicate fraudulent activity.
If the auditor has identified a fraud or has obtained information that indicates that a fraud
may exist, the auditor shall communicate these matters on a timely basis to the appropriate
level of management in order to inform those with primary responsibility for the prevention
and detection of fraud of matters relevant to their responsibilities. (paragraph 40)
The auditor shall include in the audit documentation communications about fraud made to
management, those charged with governance, regulators and others. (paragraph 46)
Reporting to management
83. The scheme auditor communicates its findings to the appropriate level of management,
unless it is concluded that the suspected or actual instance of fraud ought to be reported
to TPR and/or the Serious Organised Crime Agency (SOCA) in the public interest and
that the auditor no longer has confidence in the integrity of the trustees or managers. In
this case, the scheme auditor makes a report direct to TPR/SOCA in the public interest,
without delay and without informing the trustees in advance. In the case of a report to
TPR, a written report can be preceded by a telephone call if appropriate.
84.
In the case of pension schemes where the trustees are not involved in the day-to-day
management of the scheme, having delegated this function to staff or a third party, and it
is the latter who are suspected of involvement in fraud, the scheme auditor may consider
that it is appropriate to communicate with the trustees in the first instance.
Reporting to addressees of the scheme auditor’s report on the financial statements
85. The scheme auditor’s report on financial statements is addressed to the trustees of the
scheme concerned, and to other parties if required by the trust deed or other applicable
rules. Even where an actual or suspected fraud has already been communicated fully to
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the trustees, the scheme auditor’s report on the financial statements includes details of
any fundamental uncertainty, or disagreement over disclosure of a suspected or actual
instance of fraud, having a material effect on the financial statements.
Reporting to third parties
86. Any suspected or actual fraud found at a pension scheme will normally give rise to a
statutory duty to report to TPR. Guidance on this area is contained in the section of this
Practice Note dealing with Section B of ISA (UK and Ireland) 250.
If the auditor has concluded that the presumption that there is a risk of material
misstatement due to fraud related to revenue recognition is not applicable in the
circumstances of the engagement, the auditor shall include in the audit documentation the
reasons for that conclusion. (paragraph 47)
87.
28
Revenue in a pension scheme generally comprises contributions and investment
income. Pension schemes are not profit-making entities and pension scheme accounts
are not publicly available. Additionally, unlike sales revenue of a commercial entity, there
is little scope to manipulate revenue of a pension scheme, for example, through false
invoicing or misuse of credit notes. Given these facts, there is likely to be little incentive
or opportunity for revenue to be fraudulently misstated and therefore limited risk of
material misstatement arising due to fraud. However, the scheme auditor gives
consideration to the risks arising in connection with the types of fraud that may occur in
the context of an occupational pension scheme as indicated in paragraph 74 and
documents its conclusion and the reasoning behind it.
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ISA (UK AND IRELAND) 250: SECTION A – CONSIDERATION OF LAWS
AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS
Objectives
The objectives of the auditor are:
(a) To obtain sufficient appropriate audit evidence regarding compliance with the
provisions of those laws and regulations generally recognized to have a direct effect on
the determination of material amounts and disclosures in the financial statements;
(b) To perform specified audit procedures to help identify instances of non-compliance
with other laws and regulations that may have a material effect on the financial
statements; and
(c) To respond appropriately to non-compliance or suspected non-compliance with laws
and regulations identified during the audit. (paragraph 10)
As part of obtaining an understanding of the entity and its environment in accordance with
ISA (UK and Ireland) 315,15 the auditor shall obtain a general understanding of:
(a) The legal and regulatory framework applicable to the entity and the industry or sector
in which the entity operates; and
(b) How the entity is complying with that framework. (paragraph 12)
The auditor shall obtain sufficient appropriate audit evidence regarding compliance with
the provisions of those laws and regulations generally recognized to have a direct effect on
the determination of material amounts and disclosures in the financial statements.
(paragraph 13)
The auditor shall perform the following audit procedures to help identify instances of noncompliance with other laws and regulations that may have a material effect on the financial
statements:
(a) Inquiring of management and, where appropriate, those charged with governance, as
to whether the entity is in compliance with such laws and regulations; and
(b) Inspecting correspondence, if any, with the relevant licensing or regulatory authorities.
(paragraph 14)
15 ISA (UK and Ireland) 315, ‘‘Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment,’’ paragraph 11.
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During the audit, the auditor shall remain alert to the possibility that other audit procedures
applied may bring instances of non-compliance or suspected non-compliance with laws
and regulations to the auditor’s attention. (paragraph 15)
The regulatory framework
88. In the case of pension schemes, the legal and regulatory framework includes trust law,
and hence the specific requirements of the scheme’s governing document (usually a
trust deed). The regulatory framework within which an occupational pension scheme
operates does not alter the nature of the scheme auditor’s responsibility to consider laws
and regulations in an audit of financial statements, as described by Section A of ISA (UK
and Ireland 250).
89.
The trustees of a pension scheme are responsible for ensuring that the necessary
controls are in place to ensure compliance with applicable laws and regulations, and to
detect and correct breaches that have occurred, even if they have delegated some of
their executive functions to professional staff or advisers.
Classification of laws and regulations
90. Appendix 1 provides a list of principal relevant legislation. Laws and regulations relevant
to the audit of a pension scheme can be regarded as falling into three main categories:
(a) those which are generally recognized to have a direct effect on the determination of
material amounts and disclosures in the financial statements;
(b) those which relate to the payment of contributions to the scheme;
(c) those where compliance may be fundamental to the operating aspects of the
business, to an entity’s ability to continue its business, or to avoid material penalties,
and hence non-compliance may have a material effect on the financial statements.
91.
Examples of items falling into each of these categories are discussed in the following
paragraphs. Laws and regulations which do not fall into any of these categories need not
be taken into account in planning audit work to be undertaken: however, the scheme
auditor is required to remain alert to the possibility of breaches of other requirements,
including trust law, and to investigate any which come to its attention.
Laws and regulations generally recognized to have a direct effect on the determination of
material amounts and disclosures in the financial statements
92. All staff involved in a scheme’s audit need a broad understanding of the requirements of
PSA 1993, PA 1995, PA 2004 and related Regulations, in particular of the principal
requirements of the Administration Regulations (SI No 1996/1715) and the Audited
Accounts Regulations (SI No 1996/1975), as amended by subsequent regulations, and
of the general principles of the Pensions SORP.
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93.
Further knowledge is required, commensurate with the individual’s role and
responsibilities in the audit process, of:
the trust deed and rules of a particular scheme;
the legal and regulatory framework applicable to occupational pension schemes
sufficient to meet the requirements of ISAs (UK and Ireland), including:
94.
January 2011
–
the responsibilities of pension scheme trustees under general trust law and PA
1995 and PA 2004;
–
responsibilities of pension scheme managers, the sponsoring and participating
employer(s), any professional adviser or any prescribed person acting in
connection with the scheme;
the detailed requirements concerning the preparation of the financial statements and
other matters on which scheme auditors are required routinely to report.
The scheme auditor also gains an understanding of the pension scheme’s trust deed
and rules, and plans and conducts the audit so as to ensure that the audit procedures
cover compliance with any special provisions as to the disclosure of information in the
financial statements or reporting requirements. Users of the financial statements of a
scheme reasonably expect that the transactions recorded within them are authorised by
the governing document(s): hence, in order to show a true and fair view, due regard
needs to be given to disclosure of any material non-compliance with the governing
document(s).
Laws relating to the payment of contributions to the scheme
95. Where statutory requirements require the auditor to report, as part of the audit of the
financial statements, whether the entity complies with certain provisions of laws or
regulations, the auditor needs to have a sufficient understanding of such laws and
regulations and to test for compliance with such provisions.
96.
The scheme auditor is required, in addition to its opinion on the financial statements, to
give a statement as to whether the scheme has received contributions in accordance
with legislative requirements. In the case of earmarked schemes, which are not required
to prepare audited financial statements, the auditor is required by statute only to report
about contributions. In addition to the statutory requirements, the trust deed and rules of
the scheme may require the auditor to report on whether contributions have been paid to
the scheme in accordance with the trust deed and rules of the scheme and with the
recommendations of the actuary, where one is appointed.
97.
Further considerations relating to reporting on contributions are set out in paragraphs
[329-364] below.
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Laws and regulations where instances of non-compliance may have a material effect on
the financial statements
98. In the context of pension schemes, instances of non-compliance with other laws and
regulations that may have a material effect on the financial statements for a particular
scheme would include those where breaches would have any of the following
consequences:
(a) action by the HMRC to rescind registered status (for example, as a result of a change
to the constitution or the nature and value of benefits provided which do not comply
with the legislation);
(b) the penalty regime for breaches of the Finance Act 2004; or
(c) action by TPR under sections 3–9 or 11 of PA 1995, as amended by PA 2004:
99.
–
to remove or replace the scheme’s trustees. Action to remove trustees can be
taken where, in TPR’s opinion, a trustee is not a fit and proper person. This
would include instances where there have been serious and/or persistent
breaches of their fiduciary duties. TPR has the power to appoint trustees, where
necessary, to secure that the trustees as a whole have the necessary skills,
knowledge and understanding, to secure proper use of assets, or to ensure that
there is a sufficient number of trustees for the proper administration of the
scheme;
–
to wind up the scheme. This action may be taken where TPR concludes that the
scheme ought to be replaced or is no longer required, or that the step is
necessary to protect the interests of the generality of members of the scheme.
The Pensions Ombudsman may also make recommendations concerning remedial
action necessary in particular cases, which may lead to investigation and action by TPR.
The scheme auditor therefore includes a review of correspondence with that body, as
well as correspondence with TPR and HMRC, as part of the procedures to assess the
risk of non-compliance with laws and regulations which may have a material effect on the
financial statements of a pension scheme.
100. In addition, each scheme is bound to comply with the terms of its governing
document(s). Failure to comply will constitute a breach of trust, which may form grounds
for intervention by TPR. Determination of laws and regulations where instances of noncompliance may have a material effect on the financial statements of a particular scheme
therefore requires consideration of its governing document(s), as well as applicable laws
and regulations and the requirements of trust law and statute.
Money laundering
101. Auditors in the United Kingdom have reporting obligations under the Proceeds of Crime
Act 2002 (as amended) and the Money Laundering Regulations 2007 to report
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knowledge or suspicion of money laundering offences, including those arising from
fraud and thefts, to the Serious Organised Crime Agency (SOCA).
102. Further guidance on the matters to be considered by auditors is set out in Practice Note
12 ‘‘Money laundering – Guidance for auditors in the United Kingdom’’ (Revised).
103. Any knowledge or suspicions of involvement of a pension scheme’s trustees in money
laundering would normally be regarded as being of material significance to TPR and so
give rise to a statutory duty to report to TPR in addition to making any necessary report
required by legislation relating to money laundering offences. When reporting to TPR,
partners and staff in audit firms need to be alert to the dangers of tipping-off under the
anti-Money Laundering legislation.
Reporting non-compliance with law or regulations
Unless all of those charged with governance are involved in management of the entity, and
therefore are aware of matters involving identified or suspected non-compliance already
communicated by the auditor,16 the auditor shall17 communicate with those charged with
governance matters involving non-compliance with laws and regulations that come to the
auditor’s attention during the course of the audit, other than when the matters are clearly
inconsequential. (paragraph 22)
Reporting to those charged with governance
104. Section A of ISA (UK and Ireland) 250 requires the auditor to communicate findings to
those charged with governance (in the case of a pension scheme, the trustees), unless
they conclude that the suspected or actual instance of non-compliance ought to be
reported to a ‘‘proper authority’’ in the public interest and that the auditor no longer has
confidence in the integrity of those charged with governance.
105. In this case, the scheme auditor makes a report direct to a proper authority in the public
interest, without delay and without informing the trustees in advance. In those cases
where the trustees are not involved in the day-to-day management, having delegated
this function to others, and it is the latter who are suspected of involvement in the breach
of law or regulations, the scheme auditor may consider that it is appropriate to discuss
the matter with the trustees in order to form an opinion as to whether to report to TPR.
Reporting in the auditor’s report on the financial statements
106. The scheme auditor’s report on financial statements is addressed to the scheme’s
trustees. Although an actual or suspected breach of law or regulations may already have
16 ISA (UK and Ireland) 260, ‘‘Communication with Those Charged with Governance,’’ paragraph 13.
17 Subject to compliance with legislation relating to ‘tipping off’.
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been reported to the trustees, the scheme auditor’s report on the financial statements is
nevertheless required to include details of any fundamental uncertainty, or disagreement
over disclosure of a suspected or actual instance of non-compliance, having a material
effect on the financial statements.
Reporting to third parties
107. Scheme auditors of occupational pension schemes whose trustees are required by
section 47(1) of PA 1995 to appoint a scheme auditor have a statutory duty to report to
TPR in certain circumstances, as set out in the section dealing with the application to
pension schemes of Section B of ISA (UK and Ireland) 250. It is likely that if the auditor of
such a pension scheme encounters matters of sufficient gravity to consider reporting to
an appropriate authority in the public interest, these matters will have already have been
reported to TPR in the first instance.
108. Where the trustees of an occupational pension scheme are not required by section 47(1)
of PA 1995 to appoint an auditor (but nevertheless do so under the trust deed or for other
reasons), the auditor also has a statutory duty to report to TPR.
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ISA (UK AND IRELAND) 250: SECTION B – THE AUDITOR’S RIGHT AND DUTY
TO REPORT TO REGULATORS IN THE FINANCIAL SECTOR
Objective
The objective of the auditor of a regulated entity is to bring information of which the auditor
has become aware in the ordinary course of performing work undertaken to fulfil the
auditor’s audit responsibilities to the attention of the appropriate regulator as soon as
practicable when:
(a) The auditor concludes that it is relevant to the regulator’s functions having regard to
such matters as may be specified in statute or any related regulations; and
(b) In the auditor’s opinion, there is reasonable cause to believe it is or may be of material
significance to the regulator. (paragraph 8)
Where an apparent breach of statutory or regulatory requirements comes to the auditor’s
attention, the auditor shall:
(a) Obtain such evidence as is available to assess its implications for the auditor’s
reporting responsibilities;
(b) Determine whether, in the auditor’s opinion, there is reasonable cause to believe that
the breach is of material significance to the regulator; and
(c) Consider whether the apparent breach is criminal conduct that gives rise to criminal
property and, as such, should be reported to the specified authorities. (paragraph 12)
The regulatory framework
109. PA 2004 established TPR as the regulator with specific responsibilities relating to the
activities of occupational pension schemes and their trustees in the United Kingdom,
and Section 70(1) of PA 2004 imposes a reporting requirement on the following persons
to report breaches of the law to TPR:
a trustee or manager of an occupational or personal pension scheme;
a person who ‘‘is otherwise involved in’’ the administration of such a scheme;
the employer in relation to an occupational pension scheme;
a professional adviser (including scheme auditor and actuary) in relation to such a
scheme;
a person who is ‘‘otherwise involved’’ in advising trustees or managers of an
occupational or personal pension scheme in relation to the scheme.
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110. Section 70(2) requires that a written report must be made to TPR as soon as is
practicable where a person has reasonable cause to believe that:
a duty which is relevant to the administration of the scheme in question, and is
imposed by or by virtue of an enactment or rule of law, has not been or is not being
complied with; and
the failure to comply is likely to be of material significance to the TPR in the exercise
of any of its functions.
111. Although the title of ISA (UK and Ireland) 250 Section B refers to reports to regulators in
the financial sector, the requirements included apply in respect of this statutory duty to
report to TPR.
112. The obligation to report under section 70 of PA 2004 does not require the scheme
auditor to undertake additional work directed at identifying matters to report over and
above that which is necessary to fulfil the auditor’s obligations under the Audited
Accounts Regulations to report on a scheme’s financial statements and on the payment
of contributions. The scheme auditor is therefore not required to put into place
arrangements to detect matters to be reported under section 70; the auditor’s obligation
is limited to reporting those which come to its attention. This applies even where, as in
the case of certain earmarked schemes, the scheme auditor is reporting only about
contributions so that the focus of the auditor’s work is very narrow. Although the scope
of the auditor’s work makes the discovery of reportable items less likely, the auditor of
such a scheme may nevertheless find the guidance in this section of the Practice Note
helpful in meeting the statutory duty under section 7018.
113. Occupational pension schemes operate within a complex legal framework determined
by general trust law and specific statutory provisions. PA 1995 and PA 2004 and related
regulations introduced specific statutory requirements concerning key areas of trustees’
responsibilities and scheme administration which supplement, but do not replace, the
requirements of trust law.
114. The purpose of the statutory duty to report under section 70 of PA 2004 is to strengthen
the system of regulation of occupational pension schemes in the United Kingdom by
requiring the parties listed earlier (including scheme auditors and actuaries) to
communicate in particular circumstances with TPR, so assisting the exercise of its
statutory objectives. PA 2004 provides TPR with a variety of powers (set out in Appendix
2 of this Practice Note) that it can use to ensure that trustees and others comply with the
legal requirements for the proper administration of occupational pension schemes.
18 TPR has published guidance supporting the ‘Reporting Breaches of the Law’ Code of Practice giving
examples of breaches that it considers to be of material significance.
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115. TPR has indicated that it does not consider isolated and inconsequential breaches which
relate to an otherwise well-run scheme materially significant, because experience has
shown that such breaches do not constitute a risk to members’ interests. This will
particularly be the case where the reaction by the trustees was such that prompt and
effective corrective action was taken. For the majority of breaches which occur, TPR will
seek to provide assistance and guidance to trustees and others, thus achieving
compliance without recourse to punitive action. In those instances where TPR considers
there has been, or could be, a materially significant risk to the security of scheme assets
or members’ benefits, TPR will consider using its regulatory powers to protect members’
interests where appropriate.
Criteria for reporting to TPR
Material significance
116. A scheme auditor conducting activities under PA 1995 needs to assess information of
which it becomes aware in the course of its work which indicates that a breach of law
may have taken place so as to determine whether, in the auditor’s opinion, that
information may be relevant to TPR in the context of its powers.
117. In circumstances where the scheme auditor identifies that a reportable matter may exist,
the auditor carries out such extra work, as considered necessary, to determine whether
the facts and circumstances give the auditor ‘‘reasonable cause to believe’’ that the
matter does in fact exist. This may require the scheme auditor to seek information from
the employer, its auditor or other third parties19. TPR has stated that ‘‘Having a
reasonable cause to believe that a breach has occurred means more than merely having
a suspicion that cannot be substantiated.’’ It should be noted that the scheme auditor’s
work does not need to prove that the reportable matter exists, merely that the auditor has
reasonable cause to believe that there was a breach of the law.
118. In the context of pension schemes, the scheme auditor is required to assess all breaches
which come to the auditor’s attention of any duty relevant to the administration of the
scheme imposed by any enactment or rule of law on not only the trustees or manager of
the scheme concerned, but also on the employer, any professional adviser or any
prescribed person acting in connection with the scheme. This includes breaches of
statute, regulation and trust law.
119. ‘‘Material significance’’ is defined in paragraph 9(d) of ISA (UK and Ireland) 250: Section
B as follows:
19 In circumstances where the scheme auditor is uncertain whether an action or an in-action constitutes a
breach of the law, it clarifies the legal requirements to the extent necessary to decide whether it has a
reasonable cause to believe that the law has been broken.
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‘‘A matter or group of matters is normally of material significance to a regulator’s
functions when, due either to its nature or its potential financial impact, it is likely of itself
to require investigation by the regulator.’’
120. ‘‘Material significance’’ does not have the same meaning as materiality in the context of
the audit of financial statements. Whilst a particular event may be trivial in terms of its
possible effect on the financial statements of an entity, it may be of a nature or type
which is likely to change the perception of the regulator. For example, dishonesty by a
trustee may not be significant in financial terms in comparison with the income of the
scheme but could have a significant effect on TPR’s consideration of whether to prohibit
an individual from being a trustee.
121. In interpreting the term ‘‘of material significance’’ in the context of pension schemes, the
scheme auditor needs to be aware of the specific requirements of relevant legislation,
including the role of TPR. TPR’s powers enable it to react to information reported to it
which indicates a need to intervene to protect the rights of members of a scheme or to
safeguard its assets. This includes situations where trustees may be in breach of trust
arising from their poor stewardship of the scheme. TPR’s approach to regulation is risk
based and proportionate; its objectives are clearly set out in statute. TPR will proactively
supervise the activities of occupational pension schemes gathering information from a
number of sources, including the Scheme Return and Notifiable Events.
122. As already noted, TPR has issued ‘‘Code of Practice 01 – Reporting breaches of the
law’’, together with guidance. The supporting guidance gives possible examples of
breaches TPR may consider to be of material significance. The examples are designed
to aid the reporter by illustrating situations against which the actual breach can be
compared, thus aiding the reporter in reaching an appropriate decision. Additional
guidance is also provided in other TPR Codes of Practice, in particular Code of Practice
05, Reporting Late Payment of Contributions to Occupational Money Purchase
Schemes.
123. TPR’s focus is on the areas it considers critical to protecting members’ benefits and
security of scheme assets. These are:
dishonesty;
poor governance, inadequate controls resulting in deficient administration (including
poor record keeping) or slow or inappropriate decision-making practices;
incomplete or inaccurate advice; or
acting (or failing to act) in deliberate contravention of the law.
124. Where the breach is caused by one of the above, it is likely to be of material significance
to TPR. TPR has indicated that all such breaches would give rise to thorough
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investigation and that it expects the scheme auditor to report any instances of such
breaches which come to the auditor’s attention.
125. The examples of breaches provided in TPR Guidance have been categorised according
to the nature and severity of the breach: i.e. as either ‘‘red, amber or green’’ breach
situations (known as ‘‘the traffic light framework’’) and include:
breaches which a scheme auditor may become aware of in carrying out the auditor’s
professional duties that the auditor believes TPR consider to be of material
significance; and
circumstances which render the breach to be of material significance.
126. The determination of whether a matter is, or is likely to be, of material significance to TPR
inevitably requires the scheme auditor to exercise judgment. In forming such judgments,
the scheme auditor needs to consider not simply the facts of the matter but also the
reaction by trustees to the breach and the wider implications of the breach. In addition, it
is possible that a matter, which is not of material significance in isolation, may become
so when other possible breaches are considered, together with other reported and
unreported breaches of which the auditor is aware.
127. In forming an opinion as to whether a matter that has been identified is likely to be of
material significance, the scheme auditor of a defined benefit scheme may wish to liaise
with the scheme actuary. This procedure helps to ensure that the cumulative effect of all
breaches is considered and not only those identified by one professional adviser. It is
important to ensure that the auditor’s terms of engagement allow discussions with the
scheme actuary in this context.
128. On completion of its investigations, the scheme auditor ensures that the facts and
circumstances and the basis for the auditor’s conclusion as to whether to report to TPR
are adequately documented such that the reasons for the decision (particularly for a
decision not to report) may be clearly demonstrated should the need to do so arise in
future.
129. Whilst confidentiality is an implied term of scheme auditors’ and actuaries’ contracts in
respect of pension schemes or other entities, section 70 (3) of PA 2004 states:
‘‘No duty to which a person is subject is to be regarded as contravened merely
because of any information or opinion contained in a written report under this section’’.
130. Hence reporting to TPR under section 70 of PA 2004 does not contravene the duty of
confidentiality, provided that the scheme auditor communicates in good faith matters
which it has reasonable cause to believe amount to a relevant breach, and which in the
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auditor’s view are likely to be of material significance to TPR in the exercise of its
functions.
Other considerations
131. In assessing the effect of an apparent breach of duty which has come to its attention, the
scheme auditor takes into account the quantity and type of evidence concerning such a
matter which may reasonably be expected to be available. If the scheme auditor
concludes that it has been prevented from obtaining all such evidence concerning a
matter which may give rise to a duty to report, the auditor considers making a report
direct to TPR without further delay. A written report can be preceded by a telephone call
if appropriate.
132. Not every actual or suspected breach of a legal duty relevant to the administration of a
scheme which comes to the scheme auditor’s attention will give rise to a duty to report to
TPR. The scheme auditor needs to assess whether a duty to report arises by considering
the type of requirement which has been breached and the implications of the breach in
relation to the specific circumstances of the scheme.
133. Certain events that would attract sanctions do not constitute breaches of PA 1995 or PA
2004 if there is a ‘‘reasonable excuse’’ for them. In the APB’s view, whether an excuse is
‘‘reasonable’’ (and therefore would not give rise to sanctions) is not a matter on which an
auditor should form a judgment with a view to deciding whether to report a particular
matter to TPR. However TPR would expect the auditor to exercise professional discretion
in deciding what is of material significance to TPR. The auditor therefore reports to TPR
all breaches attracting criminal sanctions which come to its attention, without attempting
to evaluate whether excuses are ‘‘reasonable’’. The auditor may wish to precede the
written report by way of a telephone call to TPR in respect of breaches requiring urgent
attention.
134. Breaches of other legal duties require careful consideration in the light of both:
(a) the gravity of the matter taken alone; and
(b) its implications when considered with other information known to the scheme
auditor.
The potential gravity of some breaches of legal duty may be such that an individual
breach is likely of itself to warrant the consideration by TPR of the use of its powers to
debar an individual from acting as trustee, to appoint a new trustee or otherwise to
intervene in the running of a scheme, to issue an Improvement or Third Party Notice or to
impose financial penalties.
135. TPR’s powers also cover other important elements of the relationship between the
trustees and members. Persistent breaches of these requirements such as
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communications (or disclosure) with scheme members may also be regarded as of
material significance to TPR.
136. All breaches of law therefore require careful assessment, irrespective of their apparent
individual significance. Breaches which, of themselves, may not be of the gravity
described in paragraph 134, may be indicative of a general lack of compliance with legal
requirements or of a more significant breach of duty which is likely to be of material
significance to TPR. Where the scheme auditor concludes (after further enquiries, if
appropriate) that this is the case, a duty to report arises. In addition the auditor carries
forward a note of unreported and reported breaches from year to year in order to gauge
the cumulative effect which might suggest a need to report to TPR.
137. Other individual breaches do not give rise to a duty to report if the scheme auditor
concludes after its enquiries that they do not immediately or potentially constitute a
significant risk to the security of scheme assets or immediately or potentially have any
detrimental impact on members’ benefits, for example, if:
the matter is an isolated occurrence;
its occurrence is inconsequential;
appropriate corrective action was taken immediately on discovery, both in relation to
the individual matter (for example, incorrect information provided to a member was
followed immediately on discovery by accurate information and an appropriate
letter) and in relation to the scheme’s systems of controls; and
the trustees had given proper consideration to bringing the matter to TPR’s attention.
TPR has indicated that in these circumstances and where the appropriate course of
action has been taken by the trustees, TPR will not regard the breach as of material
significance.
Reporting of late scheme financial statements
138. One of the civil breaches of PA 1995 is the failure by trustees or managers to obtain
audited financial statements within seven months of the end of the scheme year.
Although the obtaining of scheme financial statements is the responsibility of the
trustees (who may decide to appoint an administrator or other appropriate person to
assist them), an auditor who is aware of persistent failures by trustees or managers to
obtain audited financial statements within seven months of the end of the scheme year
(for example, where the failures are as a result of poorly maintained records or
inadequate administration systems), considers reporting this to TPR.
139. The auditor therefore puts in place procedures to establish whether trustees have
obtained audited financial statements within the seven-month period established by the
Regulations. Where the auditor acts for a large number of pension schemes, the auditor
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may find it helpful to establish a database or other system to monitor the dates on which
the financial statements are obtained. As soon as the auditor concludes that the trustees
have failed to obtain audited financial statements within the required timeframe, the
auditor considers whether to report the matter to TPR.
140. There are a number of different circumstances in which the auditor determines whether a
scheme’s audited financial statements have been obtained by the trustees within seven
months after the scheme’s year-end date:
Where the audit is recurring: in these circumstances, the auditor will be aware of the
date of the year-end of the pension schemes for which it has responsibility.
Occasionally, the trustees may change the year-end date (before the year-end date
has passed), in which case the auditor amends the records on a timely basis once
the auditor has been informed.
Where the auditor is newly appointed: in these circumstances and as part of the
acceptance procedures prior to appointment, the auditor establishes the date of the
scheme year-end and considers whether there are late financial statements in
respect of the year(s) for which it is to be appointed. If there are late financial
statements in respect of any such period, the auditor considers reporting such
matters to TPR as soon as the appointment is effective.
Where the trustees have not determined the date of the scheme year-end at the time
the auditor is appointed (for example, in the case of a newly constituted scheme): in
these circumstances, the auditor will assume, unless and until they are otherwise
informed by the trustees, that the scheme year-end will be 31 March following the
date of commencement of the scheme or, if this would cause the initial period to be
less than six months, then 31 March in the year following20.
20 The maximum duration of a scheme year is specified in the Occupational Pension Schemes
(Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996 SI 1996
No. 1975:
‘‘Scheme year means :
(a) a year specified for the purposes of the scheme in any document comprising the scheme or, if
none, a period of 12 months commencing on 1st April or on such date as the trustees or managers
select; or
(b) such other period (if any) exceeding 6 months but not exceeding 18 months as is selected by the
trustees or managers in connection with –
the commencement or termination of the scheme, or
a variation of the date on which the year or period referred to in paragraph (a) is to commence’’.
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Conduct of the audit
The auditor shall ensure that all staff involved in the audit of a regulated entity have an
understanding of:
(a) The provisions of applicable legislation;
(b) The regulator’s rules and any guidance issued by the regulator; and
(c) Any specific requirements which apply to the particular regulated entity,
appropriate to their role in the audit and sufficient (in the context of that role) to enable
them to identify situations which may give reasonable cause to believe that a matter should
be reported to the regulator. (paragraph 11)
141. As noted above, PA 2004 does not require the scheme auditor to perform any additional
work as a result of the statutory duty to report to TPR nor is the auditor required
specifically to seek out breaches of the requirements applicable to a particular pension
scheme. However, the duty to report is not restricted to rules of law directly relevant to
the scheme auditor’s routine reporting responsibilities, but extends to non-compliance
with any duty relevant to the administration of a scheme imposed by any enactment or
rule of law on the trustees or managers, the employer, any professional adviser or any
prescribed person, should the scheme auditor become aware of breaches. The scheme
auditor therefore includes procedures within the audit planning process to ensure that
members of the audit team have sufficient understanding (in the context of their role) to
enable them to recognise breaches and that such matters are reported to the audit
engagement partner without delay so that a decision may be made as to whether a duty
to report arises.
142. The numbers of staff involved in the audit of a pension scheme will vary, depending on
its size and complexity. While specific expertise will also vary, all staff will be aware of the
main features of a pension scheme audit. In addition, at least the staff who are involved
in a scheme’s audit team in a supervisory or review role should have an understanding
of the following:
the principles of the Pensions SORP;
the principal requirements of the Scheme Administration Regulations (SI 1996/1715,
as amended) and the Audited Accounts Regulations (SI 1996/1975, as amended);
TPR’s Codes of Practice and the supporting Guidance;
the trust deed and rules of the particular scheme;
the standards and guidance in Section B of ISA (UK and Ireland) 250.
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143. Further knowledge is required, commensurate with the individual’s role and
responsibilities in the audit process, of:
the legal and regulatory framework applicable to occupational pension schemes
sufficient to meet the requirements of ISAs (UK and Ireland), including:
–
the responsibilities of pension scheme trustees under general trust law and PA
1995 and PA 2004;
–
responsibilities of the pension scheme manager(s), the sponsoring employer
and any other participating employer(s), any professional adviser, third-party
administrators or any prescribed person acting in connection with the scheme;
and
the detailed requirements concerning the preparation of the financial statements and
other matters on which the scheme auditor is required routinely to report.
An overview, which provides a general introduction to the major features of the legal and
regulatory framework, is set out in Appendix 2.
Reporting matters of material significance
144. Section 70(2) of PA 2004 imposes a duty for reports to be made ‘‘as soon as reasonably
practicable’’. The duty to report only arises once the scheme auditor has concluded that
there is reasonable cause to believe that a breach of duty exists and that the breach is
likely to be of material significance to TPR in the exercise of its functions. In reaching a
conclusion, the scheme auditor may wish to take appropriate advice and consult with
colleagues or lawyers. The obligation to report as soon as reasonably practicable does
not prevent such consultation taking place as part of the process of forming an opinion
that a duty to report arises. However, the more serious the nature of the breach, e.g.
dishonesty, the more urgently consultation needs to take place.
145. The trustees are the persons principally responsible for the management of the scheme.
In forming an opinion, the scheme auditor will therefore normally seek to reach
agreement with the trustees on the circumstances giving rise to a report to TPR and to
understand whether they intend to make a report. However, Section B of ISA (UK and
Ireland) 250 requires the auditor to bring the matter to the regulator’s attention as soon
as practicable. Paragraph 14 of ISA (UK and Ireland) 250: Section B also states that:
‘‘When the matter giving rise to a statutory duty to make a report direct to a regulator
casts doubt on the integrity of those charged with governance or their competence to
conduct the business of the regulated entity, the auditor shall make the report to the
regulator as soon as practicable and without informing those charged with governance
in advance.’’
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The scheme auditor ensures that it complies with legislation relating to ‘‘tipping off’’.
Therefore, the scheme auditor cannot undertake to inform trustees in advance of every
matter which it brings to TPR’s attention.
146. In certain circumstances, joint reporting (i.e. a shared report between the trustees and
auditor) of breaches to TPR may be appropriate. A number of difficulties, however, arise
in practice, including:
delays occurring due to the time taken to agree wording with all the signatories of the
joint report; and
the scheme auditor finding it difficult to associate itself with trustees’ descriptions of
action plans to avoid further breaches.
In the light of these practical difficulties, the APB recommends that the scheme auditor
does not delay reporting to TPR in order to participate in a joint report; rather the auditor
reports to TPR directly once it has concluded that a breach of material significance has
occurred.
Contents of a report to TPR
147. When making a report concerning a matter of material significance directly to a regulator,
in accordance with Section B of ISA (UK and Ireland) 250, an auditor is required to:
(a) state the name of the regulated entity concerned;
(b) state the statutory power under which the report is made;
(c) state that the report has been prepared in accordance with ISA (UK and Ireland) 250,
Section B ‘‘The Auditor’s Right and Duty to Report to Regulators in the Financial
Sector’’;
(d) describe the context in which the report is given;
(e) describe the matter giving rise to the report;
(f) request the regulator to confirm that the report has been received; and
(g) state the name of the auditor, the date of the written report and, where appropriate,
the date on which an oral report was made to the regulator and the name and title of
the individual to whom the oral report was made (paragraph 16 of Section B).
The statutory power under which such reports are made to TPR is section 70(2) of PA
2004. TPR Code of Practice 01, Reporting Breaches of the Law, mirrors the above and
also requires the name of the relevant employer to be stated.
148. The requirement under section 70(2) of PA 2004 for reports to be in writing does not
preclude oral reporting to TPR in circumstances where speed of reporting is essential.
However, the duty to report is not satisfied until any such report is confirmed in writing.
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Describing the context of a report
149. The description of the context in which the report is made sets out information relevant to
a proper understanding of its subject matter, primarily concerning the way in which the
matter was identified, and the extent to which it has been investigated and discussed
with those responsible for stewardship of the scheme. Matters to which the pension
scheme auditor may wish to refer include:
The nature of the engagement from which the report derives. For example, it may be
appropriate to distinguish between a report made by the auditor of a defined benefit
scheme or defined contribution scheme, who is required to express an opinion on
the scheme’s financial statements as well as to report on its contributions, and one
which arises from the more limited engagement as the auditor of an earmarked
scheme who is required to report only about the scheme’s contributions;
The applicable provisions of PA 1995 or PA 2004 and related Regulations and any
interpretations of those provisions which have informed the scheme auditor’s
judgment;
The extent (if any) to which the scheme auditor has investigated the circumstances
giving rise to the matter reported, including (in the case of defined benefit schemes)
whether the matter has been discussed with the scheme actuary or other third
parties. TPR has also indicated that under normal circumstances, it would expect
reports to state (to the extent that this information is available) the name, address,
email, telephone and fax numbers of the scheme actuary and the scheme’s TPR
reference number and Pension Scheme Tax Reference number, to assist TPR in
identifying the scheme. If the matter has already been considered by TPR and the
TPR case number is known, this may also usefully be included, together with
information on:
whether or not the matter reported has been discussed with the trustees;
why the breach is thought to be of material significance; and
whether or not the trustees have taken steps to rectify the matter.
It may be difficult for the auditor to confirm whether or not the trustees have taken steps
to rectify a reported matter. In such circumstances, the auditor may decide to encourage
the trustees to report the matter and describe their rectification process.
150. Where trustees wish to make a submission to TPR as to the circumstances and steps
being taken to address a reportable matter, the auditor may attach such a memorandum
or report prepared by the trustees to the auditor’s report. Where such additional
information is provided, the auditor refers to the additional information in the auditor’s
report, and indicates whether or not the auditor has undertaken additional procedures to
determine whether any remedial actions described have been taken.
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Matters already reported to TPR
151. The requirement to report applies to all parties who are subject to the reporting duty who
become aware of a breach that is likely to be of material significance to TPR and it is not
automatically discharged by another party reporting the breach. Where a breach of
legislation has occurred and the matter has already been reported to TPR, the scheme
auditor’s statutory duty to report should be considered in the light of the nature of the
breach, any response by TPR and whether the report fully reflects the auditor’s own
concerns.
152. In order to document the background to a decision whether to make a report, a scheme
auditor should obtain a copy of the report already made to TPR and of TPR’s response.
Unreported breaches of legal duty
153. If the scheme auditor concludes that a breach of a duty imposed by law is not likely to be
of material significance, the auditor has no specific statutory duty to report to TPR. The
scheme auditor nevertheless takes steps to ensure that such breaches are taken into
account for future consideration.
154. Paragraph A42 of Section B of ISA (UK and Ireland) 250 provides guidance for the
auditor of a regulated entity, when reporting on its financial statements, not only to
assess the significance of individual transactions or events but also to consider whether
a combination of such items over the course of the work undertaken for the auditor’s
primary reporting responsibilities may give the auditor reasonable grounds to believe
that they constitute a matter of material significance, so giving rise to a duty to report to
TPR.
155. In circumstances where the auditor is uncertain whether the auditor may be required to
make a report or not, the auditor considers taking legal advice.
156. Information about unreported instances of breaches of PA 1995 and PA 2004 and related
Regulations and breaches of other legal duties relevant to scheme administration is
therefore assessed by a scheme’s auditor whenever the auditor becomes aware of a
new breach and when issuing the auditor’s report on its financial statements, in order to
determine whether the cumulative effect is or is likely to be of material significance to
TPR. Where there is evidence of persistent breaches, a duty to report normally arises.
157. The scheme auditor also takes steps to ensure that the scheme’s trustees are made
aware of breaches which have come to the auditor’s attention in the course of its work,
whether or not they have led to a duty to report to TPR, for example, by requesting that
copies of any management letters dealing with such breaches are circulated to all the
trustees.
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Information received in a capacity other than as scheme auditor
158. There may be circumstances where it is not clear whether information about an
occupational pension scheme coming to the attention of the auditor is received in the
capacity of auditor or in some other capacity, for example, as general adviser to the
scheme. Appendix 2 to ISA (UK and Ireland) 250 section B provides guidance as to how
information obtained may be relevant to the auditor in the planning and conduct of the
audit and the steps which need to be taken to ensure the communication of information
that is relevant to the audit. The auditor considers matters that are potentially of material
significance to TPR, and which arise in this context and, if appropriate, reports these in
accordance with ISA (UK and Ireland) 250 Section B.
159. Where an audit firm is appointed as scheme auditor and is also engaged to provide
services to the scheme’s employer, for example, as auditor to the employer, so long as
the two engagements are separate (including the staff involved), then the audit firm in its
capacity as employer auditor has no duty to consider reporting to TPR. However, if the
employer is alerted to a breach by the employer audit engagement team, the employer
has a duty to consider reporting it.
160. Similarly, if the audit firm provides services to other entities that provide services to the
pension scheme, for example, investment managers, custodians and pensions
administrators, then so long as the pension scheme audit engagement is separate from
these other engagements, the audit firm in its capacity as provider of these other
services has no duty to consider reporting to TPR.
Failure to fulfil the statutory duty to report matters of material significance
161. A scheme auditor who is aware of a breach of law and fails to report it to TPR whilst
having reasonable grounds to believe that a breach of law had occurred and that breach
was, or was likely to be, of material significance to TPR in the exercise of its functions, is
in breach of both the statutory requirement to report and of ISAs (UK and Ireland) with
which registered auditors are required to comply.
162. Section 70 (4) of PA 2004 makes provision for TPR, under section 10 of PA 1995, to
impose civil penalties for failure to comply with section 70 of PA 2004, as well as to refer
the scheme auditor to its professional body. Within any legal restrictions which may
operate, TPR makes available to those bodies all the information in its possession,
including copies of correspondence between TPR and the scheme auditor concerned,
relevant to such a case.
Non-statutory audit appointments
163. Certain occupational pension schemes (for example, certain small schemes) may be
exempted from the statutory duty to appoint a scheme auditor but may nevertheless
appoint an auditor to report on non-statutory financial statements. This may be required
by their constitution or be considered prudent or otherwise appropriate by the trustees.
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In such cases, the auditor would normally still fall to be treated as a ‘‘professional
adviser’’ under Section 70 (1) of PA 2004 and would have a duty under section 70 to
report to TPR.
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ISA (UK AND IRELAND) 260: COMMUNICATION WITH THOSE CHARGED WITH
GOVERNANCE
Objectives
The objectives of the auditor are:
(a) To communicate clearly with those charged with governance the responsibilities of the
auditor in relation to the financial statement audit, and an overview of the planned
scope and timing of the audit;
(b) To obtain from those charged with governance information relevant to the audit;
(c) To provide those charged with governance with timely observations arising from the
audit that are significant and relevant to their responsibility to oversee the financial
reporting process; and
(d) To promote effective two-way communication between the auditor and those charged
with governance. (paragraph 9)
The auditor shall communicate in writing with those charged with governance regarding
the significant findings from the audit if, in the auditor’s professional judgment, oral
communication would not be adequate. Written communications need not include all
matters that arose during the course of the audit. (paragraph 19)
164. ISA (UK and Ireland) 260 stresses that communication should be active, two-way
communication between the auditor and those charged with governance. This is unlikely
to be achieved if communication is only by way of written reports. 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.
165. The scheme auditor notifies trustees of all breaches, discovered in the course of its
work,21 of duties relevant to the administration of the scheme imposed by any enactment
or rule of law on the trustees or managers, the employer, any professional adviser or any
prescribed person acting in connection with the scheme, regardless of whether the
matter gave rise to a statutory duty to report to TPR. Such notification normally takes
21 Subject to compliance with legislation relating to ‘tipping off’.
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place in the course of assessing the consequences of each particular breach: however,
the scheme auditor may also summarise such breaches in the auditor’s report of audit
matters to those charged with governance.
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ISA (UK AND IRELAND) 265: COMMUNICATING DEFICIENCIES IN INTERNAL
CONTROL TO THOSE CHARGED WITH GOVERNANCE AND MANAGEMENT
Objective
The objective of the auditor is to communicate appropriately to those charged with
governance and management deficiencies in internal control that the auditor has identified
during the audit and that, in the auditor’s professional judgment, are of sufficient
importance to merit their respective attentions. (paragraph 5)
The auditor shall communicate in writing significant deficiencies in internal control
identified during the audit to those charged with governance on a timely basis
(paragraph 9).
The auditor shall also communicate to management at an appropriate level of
responsibility on a timely basis:
(a) In writing, significant deficiencies in internal control that the audit has communicated or
intends to communicate to those charged with governance, unless it would be
inappropriate to communicate directly to management in the circumstances; and
(b) Other deficiencies in internal control identified during the audit that have not been
communicated to management by other parties and that, in the auditor’s professional
judgment, are of sufficient importance to merit management’s attention
(paragraph 10).
166. Section 249A of PA 2004 states that schemes should have adequate internal control
mechanisms in place. Therefore, trustees of an occupational pension scheme have a
statutory obligation to establish and operate adequate internal controls. TPR’s Code of
Practice 09 on Internal Controls and supporting guidance provides guidelines on the
standards of conduct and practice expected in this regard and sets out the processes
and controls that TPR considers to be adequate for the purposes of satisfying the legal
requirement.
167. When determining whether individual deficiencies in internal control that are identified
during the audit merit the attention of the trustees, the auditor has regard to factors such
as the following:
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the significance and nature of the risk(s) to the scheme’s activities which are not
addressed (adequately or at all) as a result of the deficiency;
the possible impact of the deficiency on the security of scheme assets;
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the possible impact of the deficiency on the payment of members’ benefits;
the extent to which the operation of controls is informal and undocumented, rather
than formal and documented;
whether detective controls are in operation, to compensate for deficiencies in
preventative controls;
whether aspects of the role of parties such as third-party service providers
compensate for deficiencies in controls operated by the trustees.
168. The auditor considers the aggregate impact of identified control deficiencies (including
controls operated by third-party service providers) when deciding whether to report
them to the trustees. Where the effect and wider implications of a scheme not having in
place adequate internal controls, either individually or in aggregate, are likely to be of
material significance to TPR, the auditor considers making a report to TPR. TPR’s Code
of Practice 01 on Reporting Breaches of the Law and supporting guidance provides
guidelines for auditors in their consideration of whether to make a report to TPR.
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ISA (UK AND IRELAND) 300: PLANNING AN AUDIT OF FINANCIAL STATEMENTS
Objective
The objective of the auditor is to plan the audit so that it will be performed in an effective
manner. (paragraph 4)
169. In developing the audit plan, the auditor considers the responsibilities as set out in
statute and the letter of engagement to ensure that the scope of the audit plan is
sufficient and includes, where appropriate, reports required by statute.
170. The auditor obtains an understanding of the accounting framework under which the
financial statements are prepared and their impact on the audit. Accounting principles for
pension schemes include those set out in:
specific legislation;
accounting and other recommendations issued by TPR and the PPF;
accounting standards; and
the Pensions SORP.
The auditor shall develop an audit plan that shall include a description of:
(a) The nature, timing and extent of planned risk assessment procedures, as determined
under ISA (UK and Ireland) 315.22
(b) The nature, timing and extent of planned further audit procedures at the assertion level,
as determined under ISA (UK and Ireland) 330.23
(c) Other planned audit procedures that are required to be carried out so that the
engagement complies with ISAs (UK and Ireland). (paragraph 9)
171. When planning the work to be undertaken in respect of a pension scheme audit, it is
important to identify those areas which are key to its operations as reflected in its
financial statements. The risks arising from different benefit structures are explained in
Appendix 8. The key areas of most schemes’ financial statements include the following:
contributions receivable;
22 ISA (UK and Ireland) 315, ‘‘Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment.’’
23 ISA (UK and Ireland) 330, ‘‘The Auditor’s Responses to Assessed Risks.’’
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benefits payable;
investment return;
investment assets.
January 2011
172. In addition to assessing the work to be undertaken to form an opinion on the financial
statements, the scheme auditor’s plan also takes account of the steps necessary to
obtain sufficient appropriate evidence in order to discharge the auditor’s statutory
obligation to report on the payment of contributions.
173. When planning the work to be undertaken, the scheme auditor considers the other
information available to the scheme auditor, including:
discussions with trustees;
minutes of trustee meetings;
information in the public domain regarding relevant developments at the sponsoring
employer;
membership records; and
actuarial valuation.
174. Other areas which may have significant impact are those where there have been
significant changes in the year. This will include significant transfer values paid and
received, new investment types and buy-outs, administration expenses and debtors and
creditors.
175. When planning the audit of a pension scheme’s financial statements, the scheme auditor
also takes into account the importance of the work of third parties in the administration
and accounting on behalf of the trustees. Such third parties include the:
administrator;
investment manager;
investment custodian;
property manager;
sponsoring and participating employer(s).
176. At an early stage in planning the audit, the scheme auditor seeks agreement with the
trustees for necessary access to third parties, when appropriate, and the timing and
extent of the information required from them. The principal requirements are normally set
out in the scheme auditor’s engagement letter. More detailed arrangements for
obtaining access and information are likely to be one of the main subjects of discussion
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with the trustees, whether at a planning meeting or more informally, before the scheme
auditor completes its audit plan.
177. In delegating particular matters to third parties, such as investment managers, trustees
are legally obliged to do so in a manner which is consistent with their duty to act
prudently. Hence, in addition to exercising care in the selection of advisers and other
third parties to whom scheme activities are delegated, trustees need to lay down
adequate guidelines for the way the third parties undertake those activities and for
monitoring their performance. This is frequently achieved by using service level
agreements. Where significant functions have been delegated to third parties, the
scheme auditor reviews any such agreements with third parties as part of the planning
process where they are relevant to the audit.
178. How such delegation actually works in practice also has an impact on the control
environment and the audit plan. Effective segregation of duties between third parties and
regular supervision and direction by the trustees can greatly strengthen the control
environment while, in contrast, the blurring of responsibilities and poor communication
and co-ordination can weaken the control environment.
179. The sections on ISA (UK and Ireland) 315 ‘‘Identifying and Assessing the Risks of
Material Misstatement Through Understanding the Entity and Its Environment‘‘ and ISA
(UK and Ireland) 402 ‘‘Audit Considerations Relating to an Entity Using a Service
Organisation’’ give guidance on the factors to be considered by the scheme auditor
when determining the evidence about outsourced functions which is necessary to
support the auditor’s report on the scheme’s financial statements.
180. The scheme auditor may wish to discuss the audit plan with the trustees so as to enable
the trustees to consider whether they require any specific additional procedures to be
performed beyond those necessary to support the audit opinion. For example, the
trustees may request the scheme auditor to carry out additional tests on the detailed
membership records, or on the calculation of individual benefits, to provide the trustees
with added assurance that reliable records are being maintained and that the individual
payments being made are in accordance with the rules of the scheme.
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ISA (UK AND IRELAND) 315: IDENTIFYING AND ASSESSING THE RISKS OF
MATERIAL MISSTATEMENT THROUGH UNDERSTANDING THE ENTITY AND ITS
ENVIRONMENT
Objective
The objective of the auditor is to identify and assess the risks of material misstatement,
whether due to fraud or error, at the financial statement and assertion levels, through
understanding the entity and its environment, including the entity’s internal control, thereby
providing a basis for designing and implementing responses to the assessed risks of
material misstatement. (paragraph 3)
181. The principles of obtaining and using knowledge of the scheme to be audited are the
same as those applying to the audit of any entity.
182. However, ISA (UK and Ireland) 315 takes little account of the possible use of service
organisations by a reporting entity. When planning an audit of a pension scheme, the
ISA (UK and Ireland) should be read in conjunction with ISA (UK and Ireland) 402 ‘‘Audit
Considerations Relating to an Entity Using a Service Organisation’’, which is discussed
later in this Practice Note. The discussion in this section focuses on the control
environment and controls of the entity (i.e. the pension scheme) itself, rather than those
service organisations which may be relevant to the audit.
A. Understanding the Entity and Its Environment, Including Its Internal Controls
The auditor shall obtain an understanding of the following:
(a) Relevant industry, regulatory, and other external factors including the applicable
financial reporting framework. (paragraph 11(a))
Legislative and Regulatory Requirements
183. Pension schemes operate within a framework of law and regulation which is complex
and differs in a number of respects from that applicable to commercial enterprises. This
framework involves both trust law and specific statutory provisions, set out primarily in
PSA 1993, PA 1995 and PA 2004, and Regulations made under those Acts. Funded
schemes are usually established under trust law or (generally in the case of public sector
schemes) under specific statute, and for a non-statutory scheme to register with HMRC,
it is essential that it is established under ‘‘irrevocable trusts’’. It is essential for auditors of
occupational pension schemes to have a good understanding of relevant pensions
legislation and associated regulations. In the case of public sector schemes, this
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extends to the specific requirements applicable to each scheme, which may differ in a
number of respects from the requirements of the Pensions Acts.
Financial Reporting: Legal Requirements and Accounting Standards
184. The form and content of a pension scheme’s financial statements are specified in the
Occupational Pension Schemes (Requirement to obtain Audited Accounts and a
Statement from the Auditor) Regulations 1996 (SI 1996 No 1975) (‘‘the Audited Accounts
Regulations’’). These require scheme trustees to obtain financial statements which:
(a) contain specified information, set out in the Schedule to the Audited Accounts
Regulations; and
(b) show a true and fair view of the financial transactions of the scheme during the
scheme year and of the amount and disposition as at the end of the scheme year of
its assets and of its liabilities, other than liabilities to pay pensions and benefits after
the end of the scheme year.
185. The Audited Accounts Regulations require the trustees to state whether the financial
statements have been prepared in accordance with the Statement of Recommended
Practice ‘‘Financial Reports of Pension Schemes’’ (the Pensions SORP)24 and to indicate
any material departures from its guidance. The Pensions SORP supplements general
accounting principles set out in Financial Reporting Standards, indicating best practice
in accounting and financial reporting by pension schemes. Consequently, it is normally
necessary to follow the guidance in the Pensions SORP in order for pension scheme
financial statements to show the true and fair view required by legislation.
The auditor shall obtain an understanding of the following:
(b) The nature of the entity, including:
(i) its operations;
(ii) its ownership and governance structures;
(iii) the types of investments that the entity is making and plans to make, ncluding
investments in special-purpose entities; and
(iv) the way that the entity is structured and how it is financed
to enable the auditor to understand the classes of transactions, account balances, and
disclosures to be expected in the financial statements. (paragraph 11b)
24 The SORP, which was revised in May 2007, was issued by the Pensions Research Accountants Group
(PRAG) in accordance with the Accounting Standards Board’s code of practice for the development
and issue of SORPs.
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186. The scheme auditor’s understanding of the nature of the entity usually includes:
(a) scheme nature and documentation:
— trust deed and rules;
–
the definition of pensionable earnings/pay, where not covered by the above;
–
membership numbers;
–
nature of the scheme and type of benefits provided;
–
scheme booklet;
–
documentation of the scheme’s registered pension scheme status and related
correspondence with HMRC;
–
contracting-out documentation;
(b) scheme governance:
–
membership of the trustee body and division of responsibilities;
–
outsourcing arrangements and principal terms of contractual agreements with
third-party service providers;
–
availability and use of relevant reports on the internal controls of service
organisations including investment managers, custodians and administrators;
–
correspondence with TPR/Pensions Ombudsman/the Pensions Advisory Service
(TPAS);
–
minutes of meetings of the trustee body and key sub-committees;
–
internal dispute resolution procedure and any disputes in progress;
–
arrangements for agreeing schedule of contributions or payment schedule with
the sponsoring employer and taking actuarial advice where necessary;
(c) sponsoring and participating employers:
–
identity of the sponsoring and other participating employer(s);
–
agreements with employer(s) and related parties, including any relevant
covenants or guarantees supporting the scheme;
–
details of employer auditor;
–
arrangements for payments in accordance with the agreed schedule of
contributions or payment schedule and rules of the scheme;
–
arrangements for payment of additional voluntary contributions;
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(d) scheme actuary (where appropriate):
–
letter of appointment;
–
areas of responsibility;
–
valuation reports and details of funding requirements;
–
statement of funding principles;
–
schedule of contributions;
–
recovery plan;
–
latest certificates;
–
annual report provided under PA 2004;
(e) scheme administration:
–
responsibilities of pension scheme managers, the sponsoring and participating
employers, any prescribed professional adviser or any prescribed person acting
in connection with the scheme;
–
service agreements;
–
division of administrative responsibilities;
–
documentation of accounting systems and controls;
–
accounting and membership records;
–
stewardship reports;
–
systems and controls documentation;
(f) investments:
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–
statement of investment principles;
–
custody arrangements;
–
investment management agreements and service agreements with custodians;
–
investment managers’ reports;
–
nature of investments and extent of employer-related investment, use of complex
financial instruments, stock lending, unquoted investments;
–
borrowings;
–
common investment fund arrangements;
–
subsidiaries;
–
AVC arrangements;
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(g) other advisers:
–
relationships/contracts with other advisers.
The auditor shall obtain an understanding of the following:
(c) The entity’s selection and application of accounting policies, including the reasons for
changes thereto. The auditor shall evaluate whether the entity’s accounting policies
are appropriate for its business and consistent with the applicable financial reporting
framework and accounting policies used in the relevant industry. (paragraph 11(c))
187. The Pensions SORP provides detailed guidance on appropriate accounting policies.
Material departures from the Pensions SORP must be disclosed in the financial
statements.
188. As trustees are left with little discretion as to the choice of accounting policies, the
auditor’s primary concern will be to understand the manner in which these policies have
been applied in the particular context of the individual scheme and to ensure that where
the trustees have adopted a policy that is not in accordance with the Pensions SORP,
such as where some income and expenditure items have been dealt with on the cash
basis rather than the accruals basis, either the impact is not material to the financial
statements or, where the impact is material, the alternative policy can be justified by the
circumstances and is disclosed as a deviation from the Pensions SORP.
The auditor shall obtain an understanding of the following:
(d) The entity’s objectives and strategies, and those related business risks that may result
in risks of material misstatement. (paragraph 11(d))
189. The scheme auditor needs to be aware of the principal terms of the trust instrument
governing the particular scheme. This is usually contained in the Trust Deed and Rules
which set out the objectives of the scheme and determine the powers of the trustees,
along with the more detailed rules in respect of how the scheme affairs should be
conducted. Failure to comply with the Trust Deed and Rules may constitute a breach of
trust, and may result in a report to TPR.
Defined contribution schemes
190. The benefits payable by defined contribution schemes will be directly related to and
determined by the assets attributable to an individual member at the date that their
pension benefits become payable. The risk that the pension that can be secured with the
assets available is inadequate is borne by the member, not the scheme. Therefore in the
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absence of a loss of the assets due to theft or mismanagement, such a scheme does not
face ‘‘business risks’’ that threaten the achievement of the scheme’s objective.
Defined benefit schemes
191. Due to the nature of the commitment of defined benefit schemes to pay benefits related
to members’ pensionable pay at or close to retirement, such schemes face a risk of
being under-funded, and therefore being unable to meet all benefits in full as they fall
due for payment. This situation may arise from a number of factors, including:
inadequate contributions;
inadequate investment returns;
adverse changes in experience affecting the amount and/or duration of benefit
payments (e.g. improvements in longevity assumptions);
default by the sponsoring employer;
change of sponsoring employer;
change in the strength of the sponsoring employer’s covenant.
192. Financial statements of pension schemes record the historical levels of contributions,
investment return and benefit payments but are not designed to provide measures of the
current or future levels of funding: these measures are provided by the outcomes of the
work of the actuary, whose statements sit alongside the audited financial statements
within the annual report.
The auditor shall obtain an understanding of the following:
(e) The measurement and review of the entity’s financial performance. (paragraph 11(e))
Conventional measures of financial performance, such as profit, return on capital or
cash flow are typically not relevant to pension scheme financial statements.
However, the trustees should have procedures in place to monitor investment
performance and the receipt of contributions, and the auditor considers these as
part of the audit work.
The auditor shall obtain an understanding of internal control relevant to the audit. Although
most controls relevant to the audit are likely to relate to financial reporting, not all controls
that relate to financial reporting are relevant to the audit. It is a matter of the auditor’s
professional judgment whether a control, individually or in combination with others, is
relevant to the audit. (paragraph 12)
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193. There is a wide variation between different schemes in terms of size, activity and
organisation. Smaller schemes may be administered by the staff of the sponsoring
employer or by third-party administrators or a combination of both. Larger schemes may
employ their own professionally qualified, staff. However, the legal requirement to
operate internal controls25 and the responsibilities of trustees for ensuring that the
scheme has adequate internal controls and therefore is properly administered and its
assets properly safeguarded apply irrespective of a scheme’s size or administrative
arrangements. The attitude, role and involvement of each scheme’s trustees are likely to
be fundamental in determining the effectiveness of its control environment. TPR’s code
of practice on internal controls and supporting Guidance provides trustees with
guidelines on their duty to establish and operate adequate internal controls.
194. In addition to reviewing accounting systems and the control environment in order to
assess the risk of material misstatement in a pension scheme’s financial statements, the
scheme auditor also undertakes a review of the arrangements made by the trustees to
implement the contribution rates set out in the payment schedule (for defined
contribution schemes) or schedule of contributions certified by the actuary (for defined
benefit, hybrid and mixed benefit schemes). The scheme auditor may also undertake
work to test the adequacy of internal controls instituted by the trustees for this purpose.
195. Paragraph A61 of ISA (UK and Ireland) 315 makes it clear that a scheme’s use of service
organisations is relevant to the auditor’s consideration of the controls that are relevant to
the audit. For the purpose of compliance with this ISA (UK and Ireland), it is not
necessary for the auditor to document and assess the control environment or controls of
service organisations so long as its work at entity level has provided the auditor with a
sufficient understanding of risk on which to base its planning of audit procedures (see
later discussion of ISA (UK and Ireland) 402).
The auditor shall obtain an understanding of the control environment. As part of obtaining
this understanding, the auditor shall evaluate whether:
(a) Management, with the oversight of those charged with governance, has created and
maintained a culture of honesty and ethical behavior; and
(paragraph 14)
196. Trustees of a pension scheme are responsible for determining and implementing
systems of control appropriate to their particular scheme and sufficient to allow them
properly to discharge their legal duties.
25 Section 249a Pensions Act 2004.
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197. Where trustees delegate the operation of the detailed controls, the trustees focus on the
selection, appointment and monitoring of appropriate third-party delegates. In the case
of outsourced activities, the responsibility for these functions remains that of the trustees,
who should have appropriate controls in place over these arrangements. These may
include:
risk assessment prior to contracting with the service provider, which includes a
proper due diligence and periodic review of the appropriateness of the arrangement;
appropriate contractual agreements or service level agreements;
contingency plans, should the provider fail in delivery of services;
appropriate management information and reporting from the outsourced provider;
and
appropriate controls over scheme members’ information.
198. The maintenance of an effective control environment is as important for pension
schemes as it is for other entities, since it is a fundamental duty of pension scheme
trustees to protect the assets of the scheme. Failure to do so can render the trustees
personally liable for any related loss occasioned to the scheme. The scheme auditor’s
statutory responsibilities do not include any requirement to report to the trustees on the
design or operation of a scheme’s systems of controls. However, ISA (UK and Ireland)
265 requires the auditor to report any significant deficiencies in internal control identified
during the audit to those charged with governance on a timely basis. For pension
schemes, this would therefore require any such report to be made to the trustees.
The auditor shall obtain an understanding of the control environment. As part of obtaining
this understanding, the auditor shall evaluate whether:
(b) The strengths in the control environment elements collectively provide an appropriate
foundation for the other components of internal control, and whether those other
components are not undermined by deficiencies in the control environment.
(paragraph 14)
199. An effective control environment is likely to include the following features:
(a) appropriate trustee competence, commitment and involvement;
(b) properly trained and qualified staff, in relation to the tasks they have to perform;
(c) adequate segregation of duties. Where the size of the pension scheme does not
allow for segregation of duties between administrative staff, supervision by the
trustees is especially important;
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(d) the trustees have adequate arrangements to obtain independent professional
advice; and
(e) in the case of larger schemes, budgetary controls in the form of estimates for each
financial year of income, expenditure and (where expenses and benefit payments
are significant) cash flows, including regular comparisons of actual figures to the
estimates. For smaller schemes and in areas where future income and expenditure
are difficult to predict (for example, special contributions, death benefits, lump sum
withdrawals which arise incidentally), trustees or managers may rely on specific
procedures to approve items of expenditure and monitor the nature and levels of
income and expenditure.
200. Factors taken into account when considering the attitude, role and involvement of a
scheme’s trustees include:
the skills and qualifications of individual trustees;
training undertaken by trustees;
the regularity and effectiveness of trustee meetings;
adequacy of minutes of trustee meetings;
arrangements to monitor adherence to the scheme’s statements of investment and
funding principles;
compliance with industry guidelines (for example, TPR’s Codes of Practice);
the policy on dealing with trustee and other conflicts;
the division of duties between trustees;
the involvement of trustees in supervision and control procedures, including matters
such as banking arrangements;
the trustees’ attitude towards third parties to whom they delegate the conduct of
scheme activities;
arrangements for trustees to monitor scheme income and expenditure;
the attitude of trustees to previously identified breaches or control deficiencies.
The auditor shall obtain an understanding of whether the entity has a process for:
(a) Identifying business risks relevant to financial reporting objectives;
(b) Estimating the significance of the risks;
(c) Assessing the likelihood of their occurrence; and
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(d) Deciding about actions to address those risks. (paragraph 15)
201. Where a scheme has a formal process for identifying business risks, (such as
maintaining a risk register), the auditor reviews the process and considers its outcomes.
For schemes without such a process, the auditor refers to paragraph 17 of ISA (UK and
Ireland) 315 and discusses with management whether business risks relevant to
financial reporting objectives have been identified and how they have been addressed..
202. The key operational risk of a pension scheme is that it will become under-funded and, as
a result, be unable to meet its obligations to pay pensions as they fall due for payment in
the future. Pension scheme annual financial statements are not designed to provide a
view of the adequacy of a scheme’s state of funding and, as a result, this risk is not
relevant to annual financial reporting by pension schemes.
The auditor shall obtain an understanding of control activities relevant to the audit, being
those the auditor judges it necessary to understand in order to assess the risks of material
misstatement at the assertion level and design further audit procedures responsive to
assessed risks. An audit does not require an understanding of all the control activities
related to each significant class of transactions, account balance, and disclosure in the
financial statements or to every assertion relevant to them. (paragraph 20)
203. Aspects of the control activities which are pensions-related are described below. Control
activities which are not specific to pension schemes (such as segregation of duties) are
not included in the examples, but are relevant to the auditor’s assessment of the
components of audit risk.
Control activities
204. In any scheme, key activities include receiving contributions, and investing scheme
funds to generate capital growth and income. Where members have retired, the scheme
will be also be involved in securing or paying pension benefits. Examples of controls
which trustees may implement in each of these areas where they are material to the
financial affairs of the scheme, both to reduce the risk of material misstatements and to
minimise the risk of loss of the scheme’s assets through fraud, are set out in the table
below.
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January 2011
controls to monitor and check the accurate and timely receipt of
contributions from the employer in accordance with the Schedule of
Contributions or Payment Schedule, such as monitoring date
received, comparing contributions received to the prior month or
carrying out full reconciliations of contributions received to
expected amounts using source data
agreeing special contributions to actuarial advice and employer
communications
agreement of receipts to current membership records
agreement of receipts to actuary’s recommendations
reviewing reports from administrators on the results of checks that
membership records are up to date
Benefits
agreement of benefits payable to list of current pensioners or
beneficiaries
agreement of benefits payable to scheme rules, actuarial advice,
relevant legislation and trust law
reconciling DC and AVC benefits to provider statements and
member records
scrutiny of claims made on the scheme to determine their validity
monitoring of queries arising from benefit statements and
monitoring of disputes resolution procedures
Protection of
scheme assets and
investment return
physical security, where appropriate, over cash, cheques, share
certificates, title deeds, etc.
monitoring of compliance with the statement of funding principles
monitoring of compliance with the statement of investment
principles
monitoring of investment manager’s performance against agreed
investment objectives and service levels (including property
management where significant)
use of independent benchmarking services to monitor investment
return
obtaining indemnities from third parties providing services
Monitoring of
custody
arrangements
monitoring of purchases and sales and other investment cash flows
(including use of budgets and forecasts)
custodian reconciliation procedures
comparison of performance against service level agreement
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205. Guidance such as ICAEW Technical Release ‘‘AAF 01/06 – Assurance reports on internal
controls of service organisations made available to third parties’’ or ‘‘Statement on
Auditing Standards No. 70: Service Organizations’’ from the AICPA is applicable to the
full range of services that trustees may obtain from third-party providers. Trustees may
therefore seek to obtain (where available) copies of reports issued under AAF 01/06 or
SAS 70 from investment and/or property managers, custodians, providers of scheme
administration and/or fund accounting where these activities are carried out by third
parties on behalf of the trustees.
206. Where trustees obtain copies of reports produced under AAF 01/06 or SAS 70, these are
likely to provide useful information for a scheme auditor in obtaining an understanding of
risk and the impact of outsourced activities (see paragraph 232).
Accounting records
207. Section 49 of PA 1995 requires the trustees to maintain books and records of the
transactions of the scheme. The nature of the accounting books and records to be
maintained are set out in the Scheme Administration Regulations and consist of
particular items specified in the Regulations26. Further requirements relating to records
of contributions for defined benefit schemes are set out in the Occupational Pension
Schemes (Scheme Funding) Regulations 2005 (SI 2005 No 3377). In addition, there are
further rules relating to the retention of member records set out in the Employers Duties
(Registration and Compliance) Regulations 2010, SI 2010/05, which become effective in
2012.
208. The reporting responsibilities of a pension scheme auditor do not include a requirement
to report a breach of these requirements in the auditor’s report on financial statements,
as is the case for companies and various other entities. However, the auditor considers
whether failure by the trustees to ensure that the requirements of section 49 of PA 1995
are met is likely to be of material significance to TPR and so give rise to a statutory duty
to report.
209. Additionally, HMRC has specified requirements regarding accounting records. Failure to
comply may jeopardise a scheme’s tax status, with consequential impact on the
scheme’s assets and liabilities.
B. Assessing the Risks of Material Misstatement
The auditor shall identify and assess the risks of material misstatement at:
(a) the financial statement level; and
26 These requirements are the minimum. Trustees are likely to require more detailed and historic records
for the effective management of their scheme than the minimum set down in legislation.
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(b) at the assertion level for classes of transactions, account balances, and disclosures
to provide a basis for designing and performing further audit procedures. (paragraph 25)
210. There is a wide variation between different schemes in terms of size, activity and
organisation, so that there can be no standard approach to internal controls and risk.
The scheme auditor assesses risk and the adequacy of controls in relation to the
circumstances of each scheme.
211. Factors considered by the auditor in assessing whether there may be an increased level
of risk of material misstatement at the financial statement level include:
complex scheme structure;
major changes in the operation of the scheme or participating/sponsoring
employers;
outdated trust deed and rules, which have numerous amendments;
inadequacy of administrative resources;
informal arrangements for delegation of discretionary decisions;
employer is the sole trustee;
cash flow difficulties of the sponsoring or participating employer(s);
the involvement of the sponsoring employer(s) in corporate acquisitions or
disposals;
previous enquiries by regulatory bodies;
experience from previous years’ audits.
212. Factors considered by the auditor in assessing whether there may be an increased level
of risk of material misstatement at the assertion level especially in a year where changes
are made include:
complex contribution arrangements, for example:
–
age-related rates;
–
a complex definition of pensionable earnings;
–
rates which are related to benefit accrual rates (DB arrangements) or which are
subject to member choice, possibly with employer matching;
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–
rates which are different for different participating employers or groups of
employees;
–
salary sacrifice arrangements;
complex benefit structure, for example:
–
continuous service granted in respect of membership of previous pension
arrangements;
–
elements of benefits that are subject to trustees’ discretion;
–
‘‘added years’’ purchased with AVCs;
membership profile:
–
–
–
difficulties in establishing pensioner existence;
numbers of members leaving the scheme, giving rise to transfer payments;
the death rate among scheme members, and extent of consequential
adjustments to benefits payable to surviving spouses and dependants.
non compliance with schedule of contributions or payment schedule;
investment arrangements:
–
investment in volatile markets or in assets that are difficult to value;
–
use of complex financial instruments;
–
insurance policies, including those linked with life-styling arrangements;
–
significant new investment types;
–
remote location of assets and unregulated custodial arrangements;
–
non-standard investment classes – works of art, loans;
–
significant levels of employer-related investment;
–
investment in opaque investment arrangements, e.g. fund of funds.
As part of the risk assessment, the auditor shall determine whether any of the risks
identified are, in the auditor’s judgment, a significant risk. In exercising this judgment, the
auditor shall exclude the effects of identified controls related to the risk. (paragraph 27)
If the auditor has determined that a significant risk exists, the auditor shall obtain an
understanding of the entity’s controls, including control activities, relevant to that risk.
(paragraph 29)
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213. Significant risks may arise from significant changes to the scheme. For example:
changes in third-party service providers (such as a change in the scheme
administrator or investment manager);
a scheme reconstruction;
changes in sponsoring or participating employers; or
changes in funding arrangements by the employer.
214. Significant risks may also be presented by the following:
investment types that are illiquid and difficult to value;
benefits whose calculation are particularly complex and/or involve significant
exercise of discretion in individual cases;
contributions whose rates depend on the identity of the employing company within a
group, member age and/or members’ employment status or are variable at the
discretion of the member and/or the employer.
215. Where the use of service organisations is relevant to material aspects of the scheme’s
financial statements, the scheme auditor needs to have a sufficient understanding of the
possible impact of the involvement of the service organisation(s) on financial information
in order to assess the risks of material misstatement in the financial statements that
might be controlled by the trustees.
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ISA (UK AND IRELAND) 320: MATERIALITY IN PLANNING AND PERFORMING
AN AUDIT
Objective
The objective of the auditor is to apply the concept of materiality appropriately in planning
and performing the audit. (paragraph 8)
When establishing the overall audit strategy, the auditor shall determine materiality for the
financial statements as a whole. If, in the specific circumstances of the entity, there is one
or more particular classes of transactions, account balances or disclosures for which
misstatements of lesser amounts than materiality for the financial statements as a whole
could reasonably be expected to influence the economic decisions of users taken on the
basis of the financial statements, the auditor shall also determine the materiality level or
levels to be applied to those particular classes of transactions, account balances or
disclosures. (paragraph 10)
The auditor shall determine performance materiality for purposes of assessing the risks of
material misstatement and determining the nature, timing and extent of further audit
procedures. (paragraph 11)
216. The principles of assessing materiality of a pension scheme to be audited are the same
as those applying to the audit of any entity. However, the focus of attention in a set of
financial statements of a pension scheme does not correspond to that of a commercial
trading entity: net earnings or level of working capital are not among the prime indicators
for a pension scheme and therefore, when considering materiality, the focus is directed
at contributions receivable, benefits payable, returns on investment, the levels of other
items of income and expenditure and the disposition of the scheme assets.
217. In the context of pension schemes, the approach to setting materiality is a matter of
judgment. It is usually based on:
a percentage of the total value of the assets in the scheme; or
a percentage of the inflows or outflows from dealings with members.
218. Materiality for pension schemes may vary with the nature of the scheme and needs to be
assessed for each individual scheme rather than applying any general guidelines. It is
also important to distinguish, especially for the benefit of the trustees, that materiality in
relation to the audit of the pension scheme’s financial statements will not necessarily
coincide with the expectations of materiality of an individual member of the scheme in
relation to his or her expected benefits. Even in the case of defined contribution
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arrangements, the scheme auditor’s judgments about materiality are made in the
context of the financial statements as a whole and the account balances and classes of
transactions reported in those statements, rather than in the context of an individual
member’s designated assets, contributions or benefits.
219. The scheme auditor’s statement about contributions requires assessment of whether
specific conditions have been met. This narrower and more factual focus of the report
entails close consideration of payment dates and amounts, and hence a different level of
materiality to that used in relation to the scheme’s financial statements may be
appropriate. The auditor documents the approach and factors considered in the
determination of the level of materiality for the statement of contributions separately even
if it is the same as that used for the audit of the financial statements.
220. The scheme auditor has a duty under PA 1995, if the auditor becomes aware of
breaches of law which it has reasonable grounds to believe are ‘‘of material significance’’
to the exercise of the functions of TPR, to report such matters to TPR. The meaning of the
term ‘‘of material significance’’ differs from ‘‘materiality’’ in the context of forming an
opinion as to whether financial statements show a true and fair view, and is considered in
more detail in the section commenting on the application of ISA (UK and Ireland) 250
Section B ‘‘The Auditor’s Right and Duty to Report to Regulators in the Financial Sector’’.
221. Neither the scope of the audit, nor the scheme auditor’s assessment of materiality for
planning purposes, is affected by the duty to report matters that are likely to be of
material significance to TPR.
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ISA (UK AND IRELAND) 330: THE AUDITOR’S RESPONSES TO ASSESSED RISKS
Objective
The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the
assessed risks of material misstatement, through designing and implementing appropriate
responses to those risks. (paragraph 3)
The auditor shall design and perform tests of controls to obtain sufficient appropriate audit
evidence as to the operating effectiveness of relevant controls if:
(a) The auditor’s assessment of risks of material misstatement at the assertion level
includes an expectation that the controls are operating effectively (i.e. the auditor
intends to rely on the operating effectiveness of controls in determining the nature,
timing and extent of substantive procedures); or
(b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at
the assertion level. (paragraph 8)
If the auditor has determined that an assessed risk of material misstatement at the
assertion level is a significant risk, the auditor shall perform substantive procedures that are
specifically responsive to that risk. When the approach to a significant risk consists only of
substantive procedures, those procedures shall include tests of details. (paragraph 21)
222. There are a limited number of circumstances where it may not be possible or practicable
to reduce the risks of material misstatement in a pension scheme’s financial statements
to an appropriate level with only substantive procedures. Some possible examples are:
complex contribution structures or a large number of payroll sites;
complex benefit structures.
223. Where the auditor deems such a situation to exist, the operating effectiveness of the
controls in place will need to be tested.
224. Possible significant risks in the context of pension schemes are listed in the section on
ISA (UK and Ireland) 315. The related substantive procedures that an auditor might
apply are as follows:
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Where significant investments are illiquid and difficult to value, the auditor pays
particular attention to the basis adopted by the trustees for obtaining a market
valuation. Where the trustees have sought the assistance of specialist valuers, the
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auditor has regard to the requirements of ISA (UK and Ireland) 500 ‘‘Audit evidence’’
when deciding how much direct testing to apply to the values reflected in the
scheme’s financial statements.
Where calculations of significant benefits are particularly complex and/or involve
significant exercise of discretion in individual cases, the trustees are likely to have
engaged specialists (possibly the scheme actuary) to perform calculations on their
behalf. Once again, the auditor has regard to ISA (UK and Ireland) 500 ‘‘Audit
Evidence’’ when deciding how much direct testing to apply to benefits reflected in
the scheme’s financial statements.
225. Where the auditor carries out controls testing or substantive testing (for example, to reperform benefit or contribution calculations), and errors arise, the auditor considers
whether this gives rise to a risk of a material misstatement in the financial statements.
Where such a risk arises as a result of poor record keeping, the auditor revisits its
assessment of control activities relevant to the audit and considers whether a report on
deficiencies in internal control to those charged with governance is required under ISA
(UK and Ireland) 265 or a report to TPR is required under ISA (UK and Ireland) 250
Section B.
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ISA (UK AND IRELAND) 402: AUDIT CONSIDERATIONS RELATING TO AN
ENTITY USING A SERVICE ORGANISATION
Objectives
The objectives of the user auditor, when the user entity uses the services of a service
organization, are:
(a) To obtain an understanding of the nature and significance of the services provided by
the service organization and their effect on the user entity’s internal control relevant to
the audit, sufficient to identify and assess the risks of material misstatement; and
(b) To design and perform audit procedures responsive to those risks. (paragraph 7)
When obtaining an understanding of the user entity in accordance with ISA (UK and
Ireland) 315,27 the user auditor shall obtain an understanding of how a user entity uses the
services of a service organisation in the user entity’s operations, including:
(a) The nature of the services provided by the service organization and the significance of
those services to the user entity, including the effect thereof on the user entity’s internal
control;
(b) The nature and materiality of the transactions processed or accounts or financial
reporting processes affected by the service organization;
(c) The degree of interaction between the activities of the service organization and those of
the user entity; and
(d) The nature of the relationship between the user entity and the service organization,
including the relevant contractual terms for the activities undertaken by the service
organization;
(e) If the service organisation maintains all or part of a user entity’s accounting records,
whether those arrangements impact the work the auditor performs to fulfil reporting
responsibilities in relation to accounting records that are established in law or
regulation. (paragraph 9)
226. The auditor identifies whether the pension scheme uses service organisations and
assesses the effect of any such use on the procedures necessary to obtain sufficient and
appropriate audit evidence to determine with reasonable assurance whether the
financial statements are free of material misstatement.
27 ISA (UK and Ireland) 315, paragraph 11.
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227. Use of a service organisation does not diminish the ultimate responsibility of the trustees
for conducting the affairs of the scheme in a manner which meets their legal
responsibilities, including those of safeguarding the assets, maintaining proper
accounting records and preparing financial statements.
228. Similarly, an entity’s use of a service organisation does not alter the auditor’s
responsibilities when reporting on its financial statements, but may have a significant
effect on the nature of procedures undertaken to obtain sufficient appropriate audit
evidence to determine whether a user entity’s financial statements are free from material
misstatement.
229. Service organisations undertake a wide range of activities within the pensions sector.
Many of these are capable of having a significant effect on the financial statements.
Consequently, the auditor of a pension scheme needs to consider the nature and extent
of activity undertaken by service organisations to determine whether those activities are
relevant to the audit, and what their effect is on audit risk.
230. Examples of activities that may be undertaken by service organisations include:
maintenance of the scheme’s accounting and/or membership records;
processing of the pension payroll;
collection and investment of contributions paid over by the employer;
custody and management of the scheme’s investment assets, including the
collection of income and (where possible) the recovery of withholding tax suffered;
calculation and payment of benefits and transfers.
231. In determining the nature of work and sources of evidence, there are some issues that
apply to all service organisations:
(a) The trustees’ own procedures on appointment of a third-party service organisation;
(b) The nature and extent of records maintained by the trustees or scheme
administrators, and the level of supervision that the trustees exercise over any third
parties;
(c) The reputation of the third party for providing accurate and timely information. The
reputation of the entity may be enhanced in circumstances where the service
provided is subject to regulatory oversight (as is the case in relation to investment
management) and there is no evidence of regulatory action against the service
organisation having been initiated by the regulator concerned; and
(d) The availability of internal control reports produced under either AAF 01/06
‘‘Assurance reports on internal controls of service organisations made available to
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third parties’’ (a Technical Release issued by the Audit Faculty of the ICAEW) or
other equivalent guidance.
232. The Pensions Research Accountants Group (PRAG) has issued guidance for scheme
trustees entitled ‘‘Outsourcing for trustees’’28, which provides practical guidance on the
management of the risks that can arise when functions are carried out by a service
provider. As one of the risks concerns access to accounting records, it may be beneficial
for the scheme auditor to enquire whether the trustees have obtained the PRAG
guidance and considered its implications. TPR’s Code of Practice 09 ‘‘Internal Controls’’
also provides guidance on the monitoring of third parties.
233. As noted above, some outsourced activities are the subject of regulation, notably
investment management. However, regulation does not by itself eliminate the need for
the pension scheme auditor to obtain independent evidence because controls required
by regulators, and inspection work undertaken by them in service organisations, may
not be relevant to or sufficiently focused on aspects of importance to pension schemes.
Furthermore, reports from the service organisation’s auditor required by its regulator are
not ordinarily available to a pension scheme or its auditor.
The user auditor shall determine whether a sufficient understanding of the nature and
significance of the services provided by the service organization and their effect on the user
entity’s internal control relevant to the audit has been obtained to provide a basis for the
identification and assessment of risks of material misstatement. (paragraph 11)
If the user auditor is unable to obtain a sufficient understanding from the user entity, the
user auditor shall obtain that understanding from one or more of the following procedures:
(a) Obtaining a type 1 or type 2 report29, if available;
(b) Contacting the service organization, through the user entity, to obtain specific
information;
(c) Visiting the service organization and performing procedures that will provide the
necessary information about the relevant controls at the service organization; or
(d) Using another auditor to perform procedures that will provide the necessary
information about the relevant controls at the service organization. (paragraph 12)
28 Available from the PRAG Administrator, whose contact details may be obtained from PRAG’s website –
www.prag.org.uk.
29 Type 1 reports on the description and design of controls at a service organisation, while type 2 reports
report on the description, design and operating effectiveness of controls at a service organisation. In
the UK, these will typically be reports prepared under AAF01/06 or SAS 70.
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Using a Type 1 or Type 2 Report to Support the User Auditor’s Understanding of the Service
Organization
In determining the sufficiency and appropriateness of the audit evidence provided by a
type 1 or type 2 report, the user auditor shall be satisfied as to:
(a) The service auditor’s professional competence and independence from the service
organization; and
(b) The adequacy of the standards under which the type 1 or type 2 report was issued.
(paragraph 13)
If the user auditor plans to use a type 1 or type 2 report as audit evidence to support the
user auditor’s understanding about the design and implementation of controls at the
service organization, the user auditor shall:
(a) Evaluate whether the description and design of controls at the service organization is
at a date or for a period that is appropriate for the user auditor’s purposes;
(b) Evaluate the sufficiency and appropriateness of the evidence provided by the report for
the understanding of the user entity’s internal control relevant to the audit; and
(c) Determine whether complementary user entity controls identified by the service
organization are relevant to the user entity and, if so, obtain an understanding of
whether the user entity has designed and implemented such controls. (paragraph 14)
In responding to assessed risks in accordance with ISA (UK and Ireland) 330, the user
auditor shall:
(a) Determine whether sufficient appropriate audit evidence concerning the relevant
financial statement assertions is available from records held at the user entity; and, if
not;
(b) Perform further audit procedures to obtain sufficient appropriate audit evidence or use
another auditor to perform those procedures at the service organization on the user
auditor’s behalf. (paragraph 15)
234. If the auditor is able to obtain a sufficient understanding of risk on which to base its
planning of audit procedures by considering the pension fund’s controls and information
available to the pension fund, for example, by reviewing a report produced in
accordance with AAF 01/06, the auditor will not need to supplement that understanding
and assessment by making further enquiries about the control arrangements of relevant
service providers.
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235. At the time when the auditor is planning the audit and performing assessments of risk,
the latest available AAF 01/06 may not cover all or even any of the period whose financial
statements are to be audited. Rather than disregard the AAF 01/06, an auditor considers
whether it is likely that the subsequent AAF 01/06, which will cover some or all of the
period to be audited, will contain conclusions that are significantly different. For this
purpose, the auditor has regard to whether:
the conclusions reported in AAF 01/06 reports in recent years have presented
fundamentally the same conclusions as the latest available report;
the service provider has changed its systems since the period/date covered by the
latest available AAF 01/06;
the trustees are aware of any errors affecting the client scheme during the period to
be audited that have arisen from the activities of the service provider, either reported
by the service provider itself or detected by the trustees’ own control procedures.
236. If, before the approval of the audit report, the auditor obtains an AAF 01/06 that covers a
later period than the one that was available when the audit was planned, the auditor
assesses whether the reports differ in any important respects If the later report identifies
weaknesses or breakdowns in controls that are relevant to significant aspects of the
financial statements of the client, the auditor revisits the assessment of risk and
considers the impact on the nature and extent of the audit procedures that have been
planned or performed. Where necessary, additional and/or alternative procedures are
planned and performed to address the new or heightened risks, where these are
significant. The auditor also considers whether the additional weaknesses or
breakdowns in controls are required to be reported to those charged with governance.
237. Information prepared on behalf of the trustees of a pension scheme by outsourced
service providers (e.g. actuaries, investment managers and custodians, and scheme
administrators) should be considered as being ‘‘produced by the entity’’ and therefore
the auditor is required to obtain audit evidence about the accuracy and completeness of
that information (see also ISA (UK and Ireland) 500).
238. In particular, many pension schemes outsource the maintenance of their accounting
records to third parties. The scheme auditor obtains and documents an understanding
as to the way the accounting records are maintained, including the way in which trustees
ensure that their records meet PA 1995 and trust deed requirements for such records.
239. If the scheme auditor concludes that evidence from records held by a service provider is
necessary in order to form an opinion on the financial statements of the pension scheme
and it is unable to obtain such evidence, the auditor considers how this will affect its
audit opinion. If the scheme auditor decides to qualify its opinion due to insufficient audit
evidence relating to outsourced activities, this situation may need to be reported to TPR
under section 70 of PA 2004.
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240. Where controls operated by the trustees are poor or absent, the auditor also considers
whether the status of the scheme’s internal control arrangements should be the subject
of a report to TPR.
Administration of contributions and benefits
241. When a pension scheme uses another organisation or the sponsoring employer to deal
with the administration of contributions and benefits and to maintain membership and
financial records, the trustees arrange for the scheme auditor to have direct access to
the records and personnel of the relevant organisation acting as scheme administrator.
242. Where particular administrative functions such as the collection of contributions and the
payment of benefits are delegated to sponsoring employers, the scheme auditor may,
with the agreement of the trustees and the employers, request the employer’s auditor or
internal auditors to carry out specified procedures and to report their findings to the
scheme auditor. Where such auditors are used, the requirements set out in ISA (UK and
Ireland) 610 ‘‘Using the Work of Internal Auditors’’ or ISA (UK and Ireland) 600 ‘‘Special
Considerations – Audits of Group Financial Statements (Including the Work of
Component Auditors)’’, as applicable, should be followed.
243. It is the statutory duty of the employer and the employer’s auditor to disclose on request
to the trustees such information as is reasonably required for the performance of the
duties of the trustees or scheme auditor. The trustees in turn have a statutory duty to
disclose such information to the scheme auditor as the auditor reasonably requires to
perform the auditor’s duties. If the scheme auditor requires the assistance of the
employer’s auditor in providing information or in carrying out certain audit procedures, it
is appropriate for the initial request to be made to the employer through the trustees.
244. If the foregoing methods of obtaining audit evidence are not available the scheme
auditor may need to consider whether this will result in a limitation to the scope of the
audit which will affect the audit opinion on the financial statements and the auditor’s
statement about the payment of contributions.
Investment management and custody
245. The relationship between the pension scheme and third-party investment managers and
custodians will often have a significant impact on the source, nature and timing of
financial information available to the pension scheme and the accounting records
maintained by it.
246. The principal factors affecting the scheme auditor’s judgment as to the extent and nature
of audit evidence required in relation to investments managed by a third party are:
(a) The nature and extent of the investment services provided by the third party;
(b) The materiality and inherent risk of the financial statement assertions relating to
activities delegated to the third party;
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(c) The contract terms between the pension scheme and the various service
organisations concerned, and the ways in which the trustees of the pension scheme
monitor compliance with the contract terms, including any arrangements for crosscheck on the actions of one service organisation by another (for example, where
duties are segregated between a custodian and investment manager who operate
independently of each other).
247. A contract clause whereby the investment manager or custodian indemnifies the
scheme in the event of loss caused by maladministration is unlikely to provide
information directly relevant to the scheme auditor’s judgment concerning the extent of
evidence to be obtained in relation to investments and investment income. However,
such a clause may, together with information concerning the financial resources
available to the service organisation, be relevant to the auditor’s understanding of the
effect on the scheme’s financial statements of performance failure by the investment
manager or custodian.
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ISA (UK AND IRELAND) 500: AUDIT EVIDENCE
Objectives
The objective of the auditor is to design and perform audit procedures in such a way as to
enable the auditor to obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the auditor’s opinion. (paragraph 4)
If information to be used as audit evidence has been prepared using the work of a
management’s expert, the auditor shall, to the extent necessary, having regard to the
significance of that expert’s work for the auditor’s purposes:
(a) Evaluate the competence, capabilities and objectivity of that expert;
(b) Obtain an understanding of the work of that expert; and
(c) Evaluate the appropriateness of that expert’s work as audit evidence for the relevant
assertion. (paragraph 8)
248. In preparing its financial statements, the scheme may use estimates which have been
provided by a number of experts engaged by the trustees or by the employer, e.g.
actuaries, property valuers. Where the scheme auditor uses information provided by
these experts as audit evidence as to the appropriate valuation of these assets held by
the scheme, the reliability of such information is assessed with reference to the
competence, capabilities and objectivity of the expert.
249. As well as being used in providing estimates for the valuation of assets, the scheme
actuary will provide an actuarial valuation of the liability to pay pensions after the yearend. However, as this is not within the scope of the financial statements, this valuation
will not be used in providing audit evidence in relation to scheme liabilities. Guidance on
liaison with the actuary is provided in paragraphs 368 to 376 of this Practice Note.
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ISA (UK AND IRELAND) 520: ANALYTICAL PROCEDURES
Objectives
The objectives of the auditor are:
(a) To obtain relevant and reliable audit evidence when using substantive analytical
procedures; and
(b) To design and perform analytical procedures near the end of the audit that assist the
auditor when forming an overall conclusion as to whether the financial statements are
consistent with the auditor’s understanding of the entity. (paragraph 3)
The auditor shall perform risk assessment procedures to provide a basis for the
identification and assessment of risks of material misstatement at the financial statement
and assertion levels. Risk assessment procedures by themselves, however, do not provide
sufficient appropriate audit evidence on which to base the audit opinion. (paragraph 5 of
ISA 315)
The risk assessment procedures shall include the following:
(a) Inquiries of management and of others within the entity who in the auditor’s judgment
may have information that is likely to assist in identifying risks of material misstatement
due to fraud or error.
(b) Analytical procedures.
(c) Observation and inspection. (paragraph 6 of ISA 315)
250. Analytical review techniques are likely to be particularly useful in the audit of pension
schemes, not only at the planning and overall review stages of the audit but also as
substantive procedures to supplement other evidence concerning the operation of
controls or accuracy of individual balances and transactions.
251. Although a pension scheme’s income, resources and expenditure may fluctuate from
year to year, for most transactions there are still ways in which the scheme auditor can
establish whether the figures are internally consistent and reflect the pension scheme’s
operations during the year. Key techniques include comparison of information shown in
the financial statements, for example:
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investment income and investment return can be compared with relevant published
information;
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monthly and annual patterns of contribution income can be compared to expected
amounts using rates set out in the schedule of contributions or payment schedule.
However, difficulties may be encountered when differing rates of contribution are
used for different categories of members;
monthly and annual patterns of pensions payments can be compared to movements
in membership statistics and increases to benefits in payment;
membership statistics can be reconciled with information from the employer’s
payroll, and information about active pensioners and deferred members;
bench-marking reports on investment performance, can be compared to financial
information shown in the financial statements to check for correlation;
non-financial information contained in documents issued by the scheme, such as
summary reports, pensions newsletters, or in management information reports
concerning scheme membership can be compared to financial information shown in
the financial statements;
minutes of trustees’ meetings, including committees and sub-committees of the
trustees, can be expected to reflect major issues and events arising during the
period under review;
actual income and expenditure can be compared to budgets, prior years’ figures
and trends; and
actual expenditure can be compared to the scheme auditor’s own expectation of
expenditure that would be reasonable for the particular transaction under review, for
example, average pension payment per pensioner.
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ISA (UK AND IRELAND) 540: AUDITING ACCOUNTING ESTIMATES, INCLUDING
FAIR VALUE ACCOUNTING ESTIMATES, AND RELATED DISCLOSURES
Objective
The objective of the auditor is to obtain sufficient appropriate audit evidence about
whether:
(a) accounting estimates, including fair value accounting estimates, in the financial
statements, whether recognized or disclosed, are reasonable; and
(b) related disclosures in the financial statements are adequate
in the context of the applicable financial reporting framework. (paragraph 6)
The auditor shall review the outcome of the accounting estimates included in the prior
period financial statements, or, where applicable, their subsequent re-estimation for the
purpose of the current period. The nature and extent of the auditor’s review takes account
of the nature of the accounting estimates, and whether the information obtained from the
review would be relevant to identifying and assessing risks of material misstatement of
accounting estimates made in the current period financial statements. However, the review
is not intended to call into question the judgments made in the prior periods that were
based on information available at the time. (paragraph 9)
In identifying and assessing the risks of material misstatement, as required by ISA (UK and
Ireland) 315, the auditor shall evaluate the degree of estimation uncertainty associated with
an accounting estimate. (paragraph 10)
The auditor shall determine whether, in the auditor’s judgment, any of those accounting
estimates that have been identified as having high estimation uncertainty give rise to
significant risks. (paragraph 11)
For accounting estimates that give rise to significant risks, in addition to other substantive
procedures to meet the requirements of ISA (UK and Ireland) 330, the auditor shall
evaluate the following:
(a) How management has considered alternative assumptions or outcomes, and why it
has rejected them, or how management has otherwise addressed estimation
uncertainty in making the accounting estimate.
(b) Whether the significant assumptions used by management are reasonable.
(c) Where relevant to the reasonableness of the significant assumptions used by
management or the appropriate application of the applicable financial reporting
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framework, management’s intent to carry out specific courses of action and its ability to
do so. (paragraph 15)
252. Increasingly, pension schemes invest in complex financial instruments or illiquid
investments such as private equity, property or hedge funds for which there may not be
an exchange traded price and therefore fair value accounting estimates are made for
inclusion in the financial statements where permitted by accounting standards. Further
illiquidity in some sectors can cause difficulties (e.g. where there are no accepted
valuation techniques) and uncertainties in establishing fair value accounting estimates.
253. More pension schemes are purchasing insurance policies to cover benefits for a
selection of pensioners, called ‘‘buy-ins’’. These policies are in the scheme name and
therefore held as an asset of the scheme. Other arrangements include ‘‘buy-outs’’ which
involve the transfer of scheme assets and liabilities to insurers and the insurer writes
policies in the name of individual members.
254. Recently, pension schemes have begun putting in place special arrangements with
employers. These may, for example, involve the transfer of title of assets, rights to future
income streams or a share of an entity to pension schemes. The process of transfer can
take some time and the underlying contracts may be complex meaning that the timing of
the initial recognition and the valuation of these assets, where financial statements are
produced before the completion of this process, can be problematic.
SORP
255. The SORP (paragraph 2.95) states that ‘‘investments should be valued at market value
or the trustees’ or manager’s estimate thereof and where market value is not readily
ascertainable, this should be the fair value. Fair value is the amount for which an asset
could be exchanged, or a liability settled, between unrelated willing knowledgeable
parties in an arms length transaction.’’ It goes on to say ‘‘if the market for an investment
is not active, an estimated market value can be established using valuation techniques.
The objective of a valuation technique is to establish what the price would have been at
the year-end date in an arm’s length transaction, in normal circumstances. The
estimated market value is not the amount the scheme would receive or pay in a forced
transaction or distressed sale’’. The SORP also gives guidance on the valuation basis of
the principal categories of investment (paragraphs 2.95 to 2.147).
256. The Pensions Research Accountants Group (PRAG) has published a document entitled
‘‘Guidance on Investment Valuations’’. The guidance looks at areas that trustees should
consider and questions that they should ask their investment managers to ensure that
there is an appropriate framework in place for determining fair values. This guidance is
also useful to pension scheme auditors when considering fair value accounting
estimates.
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Estimation uncertainty
257. Fair value accounting estimates may involve varying degrees of estimation uncertainty.
Some fair value accounting estimates involve low estimation uncertainty and may give
rise to lower risks of material misstatement, for example, where the data used is readily
available and is observable such as published interest rate data or exchange traded
prices of securities. For other fair value estimates there may be relatively high estimation
uncertainty, particularly where fair values are based on significant assumptions such as
for derivative financial instruments not publically traded or where highly specialised
entity developed models are used for which assumptions or inputs are not observable in
the market place, such as complex over-the-counter derivatives or private equity
investments. Where there is a greater degree of uncertainty, there will be an increased
risk of valuation misstatement and this will require a greater amount of auditor attention.
Sensitivity analysis may be used to demonstrate how estimation uncertainty may affect
the fair value accounting estimate.
258. In order to help the auditor better understand the approach taken to valuing investments
and the degree of estimation uncertainty, a valuation hierarchy which splits the portfolio
may assist in identifying areas of greater risk. The hierarchy could recognise investments
that are:
easy to price;
moderately difficult to price; and
difficult to price, and therefore have the greatest degree of estimation uncertainty.
Significant risks
259. Paragraph 21 of ISA (UK and Ireland) 330 ‘‘The Auditor’s Responses to Assessed Risks’’
requires that if the auditor has determined that an assessed risk of material misstatement
at the assertion level is a significant risk, the auditor shall perform substantive
procedures that are specifically responsive to that risk. When the approach to a
significant risk consists only of substantive procedures, those procedures shall include
tests of details. This may apply where significant investments are illiquid and difficult to
value and the auditor pays particular attention to the basis adopted by the trustees for
obtaining a market valuation. Where the trustees have sought the assistance of specialist
valuers, the auditor has regard to the requirements of ISA (UK and Ireland) 500 ‘‘Audit
Evidence’’ when deciding how much direct testing to apply to the values reflected in the
scheme’s financial statements.
260. Assumptions are deemed to be significant if a reasonable variation in the assumption
would materially affect the value of the fair value accounting estimate and in these
circumstances the auditor considers the reasonableness of these assumptions and why
alternative assumptions have been rejected or how estimation uncertainty has been
addressed.
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261. Some long-term investments may be valued on the basis that they will not need to be
realised in the short term. This valuation will need to be reviewed and possibly modified if
the trustees or the employer start winding-up procedures or other scheme
discontinuance procedures. The primary considerations will be the intended time scale
and processes for winding up or discontinuance. The Pension SORP gives guidance that
as a general rule, the values placed on assets will be consistent with those which may
reasonably be expected to be achieved in an orderly winding up with appropriate
allowance for the costs of realisation.
262. The scheme auditor also assesses the degree to which assumptions may be biased by
managers of the pension scheme. This bias may arise from a desire to meet trustee
expectations on the results for the year or to demonstrate growth in the value of assets.
Complex financial instruments
263. Practice Note 23 (Revised) ‘‘Auditing Complex Financial Instruments – Interim
Guidance’’ provides guidance to the auditor when planning and performing audit
procedures for financial statement assertions related to complex financial instruments30.
264. It is the trustees’ responsibility to ensure that complex financial instruments recorded in
the financial statements are properly valued and presented. The auditor obtains an
understanding of the risks to which the use of complex financial instruments exposes the
pension scheme and the requirements of the accounting framework and the approach
adopted by the trustees when considering the audit planning.
265. Paragraph 75 of Practice Note 23 (Revised) gives guidance on how investments are
valued, for example, via direct comparison to an external source or by valuation through
a model. It explains that the scheme, investment manager or custodian to which the
valuation is outsourced, should, as far as possible, obtain evidence from an external
source that confirms the price at which an investment could be sold or closed out.
266. Paragraphs 110 to 129 of Practice Note 23 (Revised) set out the substantive procedures
related to the valuation assertion. Tests of valuation mainly fall into three categories:
Verifying the external prices that are used to value complex financial instruments.
Confirming the validity of valuation models.
Evaluating the overall result and adjusting for residual uncertainties in the valuation.
30 For the purpose of Practice Note 23 (Revised), complex financial instruments include, but are not
limited to:
Derivatives (including option contracts, futures and swaps); and
Structured products. Some of these products may include embedded derivatives and can combine a
number of financial instruments to achieve a desired overall effect (e.g. collaterised debt obligations
and mortgage backed securities).
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267. The scheme auditor considers the following issues that arise in valuing investments and
complex financial instruments when carrying out its audit work. More detail is provided in
paragraphs 76 to 79 of Practice Note 23 (Revised):
Prices used need to be as current as possible. Where markets are illiquid, prices
quoted may be stale (i.e. out of date) or not represent prices at which market
participants may trade. Controls should be in place to identify such prices and to
obtain alternative valuation sources to support their valuations.
Sometimes price quotations are provided by only one source, which may be the
scheme itself or its broker. The pricing source would ideally be genuinely
independent and, where possible, there should be more than one provider of a
quote.
It may be necessary to adjust for factors not present in any market quotations, for
example, credit spreads of counterparties.
Models used in valuation need to be properly reviewed and checked and comfort
gained that they are not amended without authorisation.
Valuations cannot always be precise and accurate particularly where markets are
illiquid and such markets present particular challenges.
A change in markets may require a change in valuation approaches.
Pooled investment vehicles
268. In many circumstances, pension schemes hold complex financial instruments or illiquid
investments such as private equity or property investments as well as other simpler
investments, such as equities and bonds, through investing in pooled investment
vehicles. This will also include holdings of hedge funds and limited liability partnerships.
In these circumstances, the evidence that the auditor may consider when auditing fair
value accounting estimates includes:
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Internal controls reports such as SAS 70 or AAF 01/06 reports, where available,
which cover controls over the determination of fair values. The auditor reviews the
scope and findings of these reports, in accordance with ISA (UK and Ireland) 402
Audit Considerations Relating to an Entity Using a Service Organisation.
Audited accounts for the pooled investment vehicle. The auditor confirms that
audited accounts show that the investments held by the fund are valued at market
value or using fair value accounting estimates. It may also be useful to compare the
initial unaudited and subsequent audited valuation to assess the robustness of the
fair valuation framework. Where the financial year-end of the fund is not coterminous
with the scheme year-end, the auditor considers further additional audit work to gain
assurance over the movement in valuation from the date of the latest audited
accounts to the scheme year-end date, if this movement could potentially be
materially misstated. This additional work may include for example:
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(a) analytical review of the fund return compared with published or benchmark
indices for the fund strategy; or
(b) obtaining additional more up-to-date supporting substantive evidence for the
valuation. This may include reviewing the valuation of the underlying investments
where the procedures above are not sufficient to reduce the audit risk to an
acceptable level or where other sources of evidence are limited (for example, if
the vehicle is unaudited).
If the scheme is the sole or a significant participant in the pooled investment vehicle,
the auditor would also need to consider the liquidity of the investment as this may
have an impact on the fair value of the fund units.
Buy-ins and buy-outs
269. More pension schemes are purchasing insurance policies to cover benefits for either all
members or a selected group of members. These policies may be either a ‘‘buy-in’’ or a
‘‘buy-out’’. A ‘‘buy-in’’ insurance policy is in the scheme name and therefore held as an
asset of the scheme. They aim to secure the benefits for selected members. ‘‘Buy-outs’’
involve the transfer of scheme assets and liabilities to insurers and the insurer writes
policies in the name of individual members. Consequently, the scheme no longer has
legal title to the assets and has fully discharged their liabilities to the members.
270. In accordance with the SORP (paragraph 2.112), ‘‘buy-in’’ insurance policies which are
in the name of the scheme will need to be valued by an actuary in accordance with the
methodologies outlined in the SORP. Where such policies provide all of the benefits
under a scheme for particular members and the trustees are satisfied that an effective
discharge of their liabilities is, and continues to be, in place, the policies can be valued at
nil in accordance with the SORP (paragraphs 2.108 to 2.110). The auditor obtains an
understanding of the trustees’ approach to recognition of the insurance policy and
considers the reasonableness of the conclusion.
271. However, ‘‘buy-in’’ and ‘‘buy-out’’ insurance policies may be written on a number of
different bases and the auditor obtains an understanding of the contractual terms of
policies to ensure that they are valued in the accounts on the correct basis. For example,
if any balancing payments have yet to be made, it may mean the scheme liabilities are
not either fully or effectively discharged until the balancing payment is made.
272. Where assumptions in an insurance valuation are deemed to be significant,
consideration needs to be given to the reasonableness of these assumptions and why
alternative assumptions have been rejected or how estimation uncertainty has been
addressed.
Special purpose vehicles and transfers of interests in employer assets
273. The funding arrangements between some defined benefit schemes and their employers
are becoming increasingly complex. There has been an increase in the use of
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mechanisms that do not involve only direct and unconditional cash payments from
scheme employers to fund schemes but instead/also involve the transfer of some or all
of the benefits of specified employer assets or their transfer on a contingent basis. These
mechanisms can strengthen the employer covenant, or support to the scheme, by
providing the scheme with an enforceable legal arrangement which reduces risks to
members. The details of these mechanisms can vary significantly from one to other.
274. Where the title of assets, rights to a future income stream or a share of an entity is
transferred to the pension scheme, the value will be recognised in the Net Assets
Statement. This is different to a contingent asset which would only be recognised in the
Net Assets Statement on the occurrence of a future event and until then should be
disclosed in the Trustees’ Report in accordance with the SORP (paragraphs 2.202 to
2.206).
275. Where an asset is to be recognised, a fair value accounting estimate will need to be
calculated each year for inclusion in the financial statements. The auditor considers the
estimation uncertainty in such a value and whether the assumptions are deemed to be
significant. This will include a consideration of a comparison with the prior year estimate.
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ISA (UK AND IRELAND) 550: RELATED PARTIES
Objectives
The objectives of the auditor are:
(a) Irrespective of whether the applicable financial reporting framework establishes related
party requirements, to obtain an understanding of related party relationships and
transactions sufficient to be able:
(i) To recognize fraud risk factors, if any, arising from related party relationships and
transactions that are relevant to the identification and assessment of the risks of
material misstatement due to fraud; and
(ii) To conclude, based on the audit evidence obtained, whether the financial
statements, insofar as they are affected by those relationships and transactions:
a. Achieve fair presentation (for fair presentation frameworks); or
b. Are not misleading (for compliance frameworks); and
(b) In addition, where the applicable financial reporting framework establishes related
party requirements, to obtain sufficient appropriate audit evidence about whether
related party relationships and transactions have been appropriately identified,
accounted for and disclosed in the financial statements in accordance with the
framework. (paragraph 9)
In meeting the ISA (UK and Ireland) 315 requirement to identify and assess the risks of
material misstatement,31 the auditor shall identify and assess the risks of material
misstatement associated with related party relationships and transactions and determine
whether any of those risks are significant risks. In making this determination, the auditor
shall treat identified significant related party transactions outside the entity’s normal course
of business as giving rise to significant risks. (paragraph 18)
276. The related parties of pension schemes fall into three broad categories:
employer-related;
trustee-related; or
officers and managers.
31 ISA (UK and Ireland) 315, paragraph 25.
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277. The Pensions SORP recommends that for financial reporting purposes related parties
should be deemed also to include other pension schemes for the benefit of employees
of companies and businesses related to the employers, or for the benefit of the
employees of any entity that is itself a related party of the reporting pension scheme.
278. The same requirements set out in ISA (UK and Ireland) 550 apply to the audit of pension
schemes as to the audits of other entities. The scheme auditor considers the possibility
of related party transactions, for example, where a pension scheme contracts with the
employer or related third parties for the use of a property or for the supply of goods or
services to the scheme, even if these result in more favourable terms for the pension
scheme than would otherwise be available.
279. The scheme auditor enquires as to the procedures that the trustees have in place to
identify related parties and to authorise and record any related party transactions,
including transactions with or loans to the sponsoring employer. Paragraphs 2.167 to
2.175 of the Pensions SORP provide guidance on the types of transaction that fall into
the categories shown above and the form of disclosure recommended. The scheme
auditor considers whether the trustees have made appropriate arrangements for
identifying, authorising and recording such transactions in the circumstances of the
particular scheme. Such arrangements might include a declaration of interest file and
opportunities at trustee meetings for trustees to declare interests. The scheme auditor
also obtains written representations from the trustees concerning the completeness of
information provided regarding the related party disclosures in the financial statements.
280. It is a general principle of trust law that trustees do not benefit from their trust. However,
some individual trustees may be paid for their services and professional trustee
organisations may be employed by a pension scheme. This apart, pension scheme
trustees are prohibited from transacting directly with the pension scheme, although
transactions between pension schemes and businesses in which any of the trustees
have an indirect interest (for example, as a shareholder or a director) are not necessarily
prohibited. The pension scheme trustee who is also a scheme member may, however,
benefit as a scheme member from decisions taken as a trustee.
281. In addition, certain forms of employer-related investments are also prohibited or
restricted by the legislation.
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ISA (UK AND IRELAND) 570: GOING CONCERN
Objectives
The objectives of the auditor are:
(a) To obtain sufficient appropriate audit evidence regarding the appropriateness of
management’s use of the going concern assumption in the preparation of the financial
statements;
(b) To conclude, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern; and
(c) To determine the implications for the auditor’s report. (paragraph 9)
The auditor shall evaluate management’s assessment of the entity’s ability to continue as a
going concern (paragraph 12).
282. The scheme auditor’s legal obligation in reporting on financial statements of an
occupational pension scheme is to express an opinion as to whether those statements
show a true and fair view of the scheme’s financial transactions and its assets and
liabilities (excluding liabilities to pay pensions and benefits falling due after the scheme
year-end) rather than a true and fair view of the broader concept of an entity’s state of
affairs. This form of opinion reflects the nature of occupational pension schemes’
financial statements, which exclude long-term obligations to meet pension
commitments.
283. The Pensions SORP explains that the going concern concept does not play the same
fundamental role in the measurement and classification of assets and liabilities in the
financial statements of occupational pension schemes as it does in the financial
statements of commercial entities. As such, the basis of preparation of financial
statements does not change unless a decision has been made to wind up the scheme,
an event triggering wind up has occurred, e.g. insolvency of the employer, or the
scheme has entered the PPF assessment period (the Pensions SORP, paragraphs 2.77
to 2.82). Even in these circumstances, there may not be any impact on the valuation of
scheme investments if the timescale of the wind up allows investments to be realised
without incurring significant redemption penalties.
284. Trustees preparing financial statements of a defined benefit scheme do not necessarily
need to prepare and review forecast financial information in order to confirm that their
scheme will be able to meet benefits in full as they fall due. However, in exceptional
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circumstances, for example, where a scheme is subject to an unexpectedly high number
of early retirements, they may need to prepare information (including cash flows) to
provide an assessment of whether there are sufficient liquid assets held by the scheme
in order to meet pension payments in the near future. They may also do this as part of
the scheme’s reliance on the continuation of financial support due under the employer
covenant. Trustees also remain alert for circumstances that indicate that the wind up of
the scheme is likely (for example, because the scheme has entered the PPF assessment
period) or certain (because an event triggering wind up has occurred).
285. Similarly, the scheme auditor’s assessment of a scheme’s status as a going concern
differs from that undertaken in the audit of the financial statements of a commercial
entity. The requirement of paragraph 16 of the ISA (UK and Ireland) for the auditor to
obtain sufficient appropriate audit evidence to determine whether or not a material
uncertainty exists which could cast significant doubt about a scheme’s ability to continue
as a going concern is not applied in the same way in an audit of a pension scheme as in
the case of an audit of a company. This is principally because a pension scheme has a
limited set of liabilities and the expectation of an inability to meet its obligations is not
necessarily a trigger for a curtailment of its operations.
286. In the case of a pension scheme, the primary area for the attention of the scheme auditor
will be whether circumstances have arisen that have triggered the wind up of the scheme
or that provide evidence that wind up of the scheme (either outside the PPF or on
transfer of assets into the PPF) is likely. The pension scheme auditor therefore makes
enquiries of the trustees as to whether circumstances have arisen that mean that the
scheme must be wound up or that it may be appropriate to wind up the scheme and will
review the steps that the trustees have taken to confirm the current status of the scheme.
As TPR has the power to order a scheme to be wound up, the scheme auditor also
considers the impact of correspondence between the trustees and TPR in this context.
287. The scheme auditor is alert to current circumstances that might lead to the scheme
needing to be wound up in the future. Where circumstances, which indicate that it is
likely that the scheme will be wound up at a future date or that it may be appropriate to
do so, come to the auditor’s attention during the course of the audit work, the auditor
discusses the matter with the trustees and considers whether the trustees have properly
assessed the risk and made appropriate disclosures in the annual report, as
recommended by the SORP.
288. Information about the continued ability of a defined benefit scheme to meet future
benefits is provided in the actuarial statements and actuarial valuation, neither of which
form a basis of the audited financial statements but are included or referred to in the
trustees’ annual report alongside the financial statements.
289. The scheme auditor has no statutory responsibility to report on information contained in
the annual report. However, the scheme auditor is required by ISA (UK and Ireland) 720
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– Section A to read other information included in documents containing audited financial
statements and, if the auditor becomes aware of apparent misstatements or
inconsistencies with the audited financial statements, to seek to resolve them. In
addition, the Auditors’ Code indicates that auditors do not allow their reports to be
included in documents containing other information which they consider to be
misleading.
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ISA (UK AND IRELAND) 580: WRITTEN REPRESENTATIONS
Objectives
The objectives of the auditor are:
(a) To obtain written representations from management and, where appropriate, those
charged with governance that they believe that they have fulfilled their responsibility for
the preparation of the financial statements and for the completeness of the information
provided to the auditor;
(b) To support other audit evidence relevant to the financial statements or specific
assertions in the financial statements by means of written representations if determined
necessary by the auditor or required by other ISAs (UK and Ireland); and
(c) To respond appropriately to written representations provided by management and,
where appropriate, those charged with governance, or if management or, where
appropriate, those charged with governance do not provide the written representations
requested by the auditor. (paragraph 6)
The auditor shall request written representations from management with appropriate
responsibilities for the financial statements and knowledge of the matters concerned.
(paragraph 9)
290. An important principle is that the scheme auditor does not accept the unsupported
representations of trustees or senior management of the pension scheme where these
relate to matters which are material to the financial statements. Moreover,
representations cannot substitute for evidence that the scheme auditor reasonably
expects to be available.
291. Relevant information for the written representation normally includes the completeness
of minutes of trustee meetings and correspondence with the Pensions Ombudsman,
TPAS and TPR. Appendix 1 of ISA (UK and Ireland) 580 gives a list of requirements for
written representations that are included in other ISAs (UK and Ireland). This includes
ISA (UK and Ireland) 250 and ISA (UK and Ireland) 550 which require the auditor to
obtain written confirmation in respect of the completeness of disclosure to the auditor of:
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known events which involve possible non-compliance with laws and regulations,
together with the actual or contingent consequences which may arise therefrom;
and
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information provided regarding the identification of related parties and the adequacy
of related party disclosures.
The auditor shall request management to provide a written representation that it has
fulfilled its responsibility for the preparation of the financial statements in accordance with
the applicable financial reporting framework, including where relevant their fair
presentation, as set out in the terms of the audit engagement.32 (paragraph 10)
292. The trustees as a body are responsible for the contents and presentation of the financial
statements in accordance with the applicable financial reporting framework.
Consequently, discussion of the content of any written representation by the trustee
body as a whole may be appropriate before it is signed on behalf of the trustees, often by
two of their members. The body of trustees as a whole is responsible for the contents
and presentation of the financial statements and the representation letter should include
confirmation that it has fulfilled this responsibility.
293. For larger pension schemes where there is a non-trustee chief executive or pensions
manager, it is also likely that in practice there are some representations that necessitate
discussion with that person. The scheme auditor often finds it useful to attend the
meeting at which trustees consider the financial statements and representation letter, to
encourage discussion of significant items or matters, including unadjusted errors, arising
in the course of the audit.
294. Appendix 5 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.
295. In many pension schemes, day-to-day management may be delegated to a scheme
management team, possibly provided by a service organisation. In these circumstances,
the trustees may wish scheme management or the third-party service organisation to
provide a representation to them in relation to some or all aspects of the preparation of
the financial statements. This is a relationship matter for the trustees and should not
impact on the nature or strength of the representations made by the trustees to the
auditor.
296. Timely communication by the auditor with the trustees on significant issues on which
representations will be required is important in this sector, which relies primarily on
unpaid (voluntary) trustees who are usually not involved in the day-to-day running of the
affairs of the scheme.
32 ISA (UK and Ireland) 210, ‘‘Agreeing the Terms of Audit Engagements,’’ paragraph 6(b)(i).
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297. If there is a delay between the approval of the financial statements by the trustees and
their receipt by the auditor for the approval of the audit report and the statement about
contributions, the auditor considers whether to obtain an update of the trustees’
representations, either by enquiry of the secretary to the trustees about any changes to
the scheme’s circumstances or by requesting the trustees to provide an updated
representation letter.
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ISA (UK AND IRELAND) 600: SPECIAL CONSIDERATIONS – AUDITS OF GROUP
FINANCIAL STATEMENTS (INCLUDING THE WORK OF COMPONENT
AUDITORS)
Objectives
The objectives of the auditor are:
(a) To determine whether to act as the auditor of the group financial statements; and
(b) If acting as the auditor of the group financial statements:
(i) To communicate clearly with component auditors about the scope and timing of
their work on financial information related to components and their findings; and
(ii) To obtain sufficient appropriate audit evidence regarding the financial information
of the components and the consolidation process to express an opinion on
whether the group financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework. (paragraph 8)
The group engagement partner is responsible for the direction, supervision and
performance of the group audit engagement in compliance with professional standards
and applicable legal and regulatory requirements, and whether the auditor’s report that is
issued is appropriate in the circumstances.33 As a result, the auditor’s report on the group
financial statements shall not refer to a component auditor, unless required by law or
regulation to include such reference. If such reference is required by law or regulation, the
auditor’s report shall indicate that the reference does not diminish the group engagement
partner’s or the group engagement partner’s firm’s responsibility for the group audit
opinion. (paragraph 11)
298. Where the scheme auditor uses the services of other auditors in the audit of statutory
financial statements, then the scheme auditor advises the other auditors of the use that is
to be made of their work and make the necessary arrangements for the co-ordination of
their efforts at the initial planning stage of the audit.
299. The Scheme Administration Regulations 6(1)(a) and 6(3)(a) require the sponsoring
employer and their auditor to provide trustees with ‘‘such information as is reasonably
required’’ for the scheme auditor to carry out its duties (Appendix 2, paragraph 54). The
scheme auditor may therefore request scheme trustees to ask the auditor of the
employer to carry out certain work on contributions paid to the scheme by the employer,
33 ISA (UK and Ireland) 220, paragraph 15.
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rather than undertaking such work itself. Typically, this arises in multi-employer
schemes, such as industry-wide arrangements.
300. The scheme auditor specifies the procedures to be undertaken and provides these to
the trustees. The trustees then pass these to the employer and the employer’s auditor,
who is engaged by the employer to undertake the work on the understanding that the
results will be passed to the scheme trustees purely for the purposes of the scheme
audit. If the trustees wish to contract directly with the employer’s auditor to undertake
work on their behalf, the employer’s auditor will need to be appointed as a professional
adviser to the scheme under the Scheme Administration Regulations in the same way as
the scheme auditor.
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ISA (UK AND IRELAND) 620: USING THE WORK OF AN AUDITOR’S EXPERT
Objectives
The objectives of the auditor are:
(a) To determine whether to use the work of an auditor’s expert; and
(b) If using the work of an auditor’s expert, to determine whether that work is adequate for
the auditor’s purposes. (paragraph 5)
If expertise in a field other than accounting or auditing is necessary to obtain sufficient
appropriate audit evidence, the auditor shall determine whether to use the work of an
auditor’s expert. (paragraph 7)
301. Areas in which the scheme auditor may use the work of its own expert to provide audit
evidence include:
fair valuations of certain investments, for example, unquoted investments, insurance
policies, properties, works of art, certain derivatives and alternative investment
categories; and
legal opinions concerning the interpretation of the trust deed and rules.
302. The nature of the scheme auditor’s statutory opinion excludes consideration of liabilities
to pay pension and benefits after the end of the scheme year. As a result, the scheme
auditor does not ordinarily rely on the work of the scheme actuary to provide audit
evidence to support the auditor’s report on a scheme’s financial statements.
303. Nevertheless, for a defined benefit scheme, the summary funding statement and the
actuary’s certificate and statement and the contribution schedule are important elements
in the information accompanying the audited financial statements as part of the trustees’
annual report. ISA (UK and Ireland) 720A requires the scheme auditor to read such
accompanying information and, if the auditor becomes aware of any apparent material
misstatements of fact or material inconsistencies with the audited financial statements, to
seek to resolve them. Steps to be taken to facilitate necessary liaison with the scheme
actuary are discussed in the section of this Practice Note headed Liaison with the
scheme actuary.
304. ISA (UK and Ireland) 500 ‘‘Audit Evidence’’ covers how the auditor uses information
prepared using the work of a management’s expert.
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ISA (UK AND IRELAND) 700: THE AUDITOR’S REPORT ON FINANCIAL
STATEMENTS
Objectives
The objectives of the auditor are to:
(a) Form an opinion on the financial statements based on an evaluation of the conclusions
drawn from the audit evidence obtained; and
(b) Express clearly that opinion through a written report that also describes the basis for
the opinion. (paragraph 7)
The auditor’s report on the financial statements shall contain a clear written expression of
opinion on the financial statements taken as a whole, based on the auditor evaluating the
conclusions drawn from the audit evidence obtained, including evaluating whether:
(a) Sufficient appropriate audit evidence as to whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error has been obtained;
(b) Uncorrected misstatements are material, individually or in aggregate. This evaluation
shall include consideration of the qualitative aspects of the entity’s accounting
practices, including indicators of possible bias in management’s judgments;
(c) In respect of a true and fair framework, the financial statements, including the related
notes, give a true and fair view; and
(d) In respect of all frameworks the financial statements have been prepared in all material
respects in accordance with the framework, including the requirements of applicable
law. (paragraph 8)
305. The form and content of auditor’s reports on the financial statements of occupational
pension schemes follow the requirements established by ISA (UK and Ireland) 700,
supplemented by the particular detailed requirements of the Audited Accounts
Regulations which are explained in the following paragraphs.
Addressee of the report
306. The Audited Accounts Regulations require trustees to obtain audited financial
statements: hence the scheme auditor addresses its report on a scheme’s financial
statements to the trustees of the scheme and to other parties if required by the trust deed
or other applicable rules.
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Statement of trustees’ responsibilities
307. ISA (UK and Ireland) 700 requires the auditor to include a statement distinguishing
between the auditor’s responsibilities and the responsibilities of those charged with
governance (in the case of a pension scheme, its trustees).
308. The responsibilities of the trustees may vary according to the constitution of the
particular pension scheme. Example Trustees’ Responsibilities Statements are set out in
Appendix 7, which may be adapted to the circumstances of individual schemes.
Compliance with relevant accounting requirements
309. The scheme auditor’s opinion on a pension scheme’s financial statements is expressed
in the context of the particular accounting requirements applicable to the pension
scheme concerned. ISA (UK and Ireland) 700 includes commentary on compliance with
the requirements of law and accounting standards (see paragraphs 17 and 18). In
general terms, unless exceptional circumstances apply, compliance with accounting
standards is necessary to show a true and fair view.
Requirements of the Pensions Act 1995
310. The Audited Accounts Regulations made under PA 1995 require trustees or managers of
certain types of scheme to obtain accounts which contain the information specified in the
Schedule to the Regulations and show a true and fair view of the financial transactions of
the scheme during the scheme year, the amount and disposition of the assets at the end
of the scheme year and the liabilities of the scheme, other than the liabilities to pay
pensions and benefits after the end of the scheme year. The Regulations require the
scheme auditor to state whether or not in the auditor’s opinion the financial statements
contain the information specified in the Schedule to the Regulations.
311. The Pensions SORP has been developed and issued by PRAG in accordance with the
Accounting Standards Board’s code of practice for the production and issue of SORPs.
The Pensions SORP was last revised in May 2007 and sets out guidance intended to
represent best practice on the form and content of the financial statements of pension
schemes prepared in accordance with accounting standards current at the time of its
issue.
312. The Audited Accounts Regulations require trustees of a scheme to disclose in its
financial statements whether those statements have been prepared following the
Pensions SORP’s guidance, and, if not, to give details of any material departures.
Although the Pensions SORP’s guidance is not mandatory, this provision, taken with the
general status of a Pensions SORP issued in accordance with the ASB’s code, has the
effect of establishing a strong presumption that financial statements which meet PA
1995’s requirement to show a true and fair view will normally follow the guidance
contained in the Pensions SORP, taking into account any amendment judged to be
necessary as a result of changes in financial reporting standards since its issue.
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Other considerations
313. The trust deed establishing a scheme may establish additional requirements concerning
the contents of its financial statements (but may not derogate from the statutory
requirements). The scheme auditor therefore assesses whether any such requirements
are met. In addition, where the scheme auditor becomes aware of information which
indicates that a transaction or transactions undertaken by the scheme may have
breached any terms of its trust deed, the auditor considers the implications for its
reporting responsibilities following the guidance in the sections dealing with ISA (UK and
Ireland) 250.
Examples of scheme auditor’s reports
314. ISA (UK and Ireland) 700 sets out requirements for the content of auditor’s reports on
financial statements, including the circumstances in which additional explanatory
material is necessary or the auditor’s opinion is to be qualified. Examples of auditor’s
reports showing different legislative requirements and forms of opinion are set out in
APB’s Compendium of Illustrative Auditor’s Reports on UK Private Sector Financial
Statements.
315. ISAs (UK and Ireland) 705 ‘‘Modifications to Opinion in the Independent Auditor’s
Report’’ and 706 ‘‘Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report’’, explain and give examples of modified reports.
Appendix 6 gives an example of a modified statement about contributions.
Relationship with duty to report to TPR
316. When determining the nature of the auditor’s report, the scheme auditor also assesses
whether the evidence obtained over the audit as a whole indicates that a statutory duty
to report direct to TPR exists in addition to any report already made in respect of
particular matters encountered in the course of their work. In making this assessment,
the scheme auditor takes into account the accumulated knowledge of the scheme and
the attitude of the trustees towards regulatory requirements.
317. In addition, a decision by the scheme auditor either to issue a modified or qualified
opinion on the financial statements of the scheme or to qualify the auditor’s statement
about contributions may be of material significance to TPR and, if so, is reported to TPR
by the scheme auditor without waiting for the issue of the annual report. The report
should take account of the normal reporting guidelines referred to earlier in this Practice
Note.
Electronic publication of annual reports
318. An increasing number of pension schemes have made arrangements for members to
obtain information about their schemes (including the scheme annual report)
electronically: this may be via publicly accessible websites or on corporate intranet sites.
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319. The auditor determines through discussion with the trustees whether the annual report,
and therefore the auditor’s report and statement about contributions, is to be
‘‘published’’ electronically. If electronic publication is proposed, the auditor follows the
guidance in the appendix of ISA (UK and Ireland) 720 Section A titled ‘‘Electronic
Publication of the Auditor’s Report’’. The main aim of the guidance is to ensure that the
auditor’s duty of care is not extended solely as a result of the auditor’s report being
published in electronic rather than hard copy form. In addition, as information published
on websites is available in many countries with different legal requirements, it must be
clear which legislation governs the preparation and dissemination of the financial
statements.
Summary financial information
320. Some pension schemes include statements which summarise financial information
based on the full financial statements in their publications. They do this to communicate
key financial information without providing the greater detail required in the full financial
statements with the intention of making this information more accessible to the lay
readership of these publications, particularly pension scheme members.
321. There is no requirement for trustees to attach to these summary financial statements a
statement from the auditor giving an opinion as to whether the summary financial
information is consistent with the full audited accounts. However, the Pensions SORP
recommends that as a matter of good practice trustees include the auditor in the
distribution of any publications containing summary financial information.
322. Where trustees request the auditor to be associated formally with summary financial
information, the auditor ensures that the nature and presentation of any report that is to
be provided for inclusion with the summary financial information is appropriate. In
particular, information that is in summarised form or that lacks the analysis contained in
full financial statements is unlikely to show a true and fair view; in practice the greatest
assurance that the scheme auditor is likely to be able to provide is confirmation that the
summarised or selected information has been properly extracted from the full financial
statements.
323. Any report by the auditor on summary financial information includes the following
elements:
Statement of the respective responsibilities of the trustees and the auditor: the
summary financial information is the responsibility of the trustees; the auditor is only
responsible for forming and reporting its opinion on that information.
Opinion: a statement that in the opinion of the auditor the summary financial
information has been properly extracted from the audited financial statements for the
relevant financial period.
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ISA (UK AND IRELAND) 720: SECTION A – THE AUDITOR’S RESPONSIBILITIES
RELATING TO OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED
FINANCIAL STATEMENTS
Objective
The objective of the auditor is to respond appropriately when documents containing
audited financial statements and the auditor’s report thereon include other information that
could undermine the credibility of those financial statements and the auditor’s report.
(paragraph 4)
The auditor shall read the other information to identify material inconsistencies, if any, with
the audited financial statements. (paragraph 6)
324. One of the fundamental principles set out in The Auditors’ Code is that auditors do not
allow their reports to be included in documents containing other information if they
consider that the additional information is in conflict with the matters covered by their
report or they have cause to believe it to be misleading.
325. The scheme auditor reads the other information contained in the annual report in the
light of the knowledge the auditor has acquired during the audit. The scheme auditor is
not expected to verify any of the other information. The auditor reads the other
information with a view to identifying whether there are any apparent misstatements
therein or matters which are inconsistent with the financial statements. It is important to
ensure that the trustees are aware of the scheme auditor’s responsibilities in respect of
the other information, as set out in ISA (UK and Ireland) 720 Section A and the extent of
those responsibilities is specifically outlined in the engagement letter.
326. The ‘‘other information’’ which may accompany the financial statements of a pension
scheme and examples of the areas of potential concern are as follows:
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Trustees’ report – membership reconciliation: are the changes in membership
numbers consistent with the financial information – number of deaths, new
pensioners, new contributors, etc.
Trustees’ report – pension increases: is the rate of increase reflected in the benefit
payments?
Trustees’ report: are details of the basis of calculation of transfer payments
consistent with the actual basis of the amounts paid?
Actuary’s certificate as to the adequacy of contributions and the Summary Funding
Statement: are the recommended rates of contribution the same as those received
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by the scheme? There will be occasions when the opinion will be on the schedule in
force in the year, rather than that included in the annual report.
Investment report: is the asset total and investment income/return reported by the
investment manager consistent with the amounts shown in the financial statements?
327. The trustees may also distribute other documents together with the financial statements
such as personal benefit statements, scheme funding statements, new rules booklets or
newsletters. The scheme auditor has no statutory responsibility to consider these
documents.
328. Practical considerations concerning the timing of work undertaken by the scheme
auditor and actuary are discussed in a subsequent section of this Practice Note, ‘‘Liaison
with the scheme actuary’’.
If, on reading the other information, the auditor identifies a material inconsistency, the
auditor shall determine whether the audited financial statements or the other information
needs to be revised. (paragraph 8)
329. If revision of the audited financial statements is necessary and the trustees or managers
refuse to make the revision, the auditor follows the requirements of ISA (UK and Ireland)
705 and modifies the opinion in the auditor’s report.
330. If revision of the other information is necessary and management refuses to make the
revision, the auditor communicates this matter to the trustees, unless all of the trustees
are involved in managing the scheme, and:
(a) include in the auditor’s report an Other Matter(s) paragraph describing the material
inconsistency in accordance with ISA (UK and Ireland) 706; or
(b) withhold the auditor’s report; or
(c) withdraw from the engagement, where withdrawal is possible under applicable law
and regulation.
331. If the situation is not resolved and involves information which the scheme auditor
considers to be of material significance to TPR, the auditor reports to TPR.
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THE AUDITOR’S STATEMENT ABOUT CONTRIBUTIONS (THE
STATEMENT)
Requirement to provide the Statement
332. Under Regulation 2 of the Audited Accounts Regulations the trustees of an occupational
pension scheme are required to obtain, not more than seven months after the end of the
scheme year, an auditor’s statement about contributions under the scheme. Regulation
4 (as amended) sets out the form and content of the auditor’s statement as follows:
–
a statement as to whether or not in its opinion contributions have in all material
respects been paid at least in accordance with the schedule of contributions (for a
defined benefit, hybrid or mixed benefit scheme) or payment schedule (for a defined
contribution scheme); and
–
if the above statement is negative or qualified, a statement of the reasons.
333. If the trustees have not put in place a schedule of contributions or a payment schedule
the scheme auditor is required to make a Statement as to whether or not contributions
have been paid in accordance with the scheme rules or the contracts under which they
were payable and, if applicable, the recommendations of the scheme actuary. If this
Statement is negative or qualified, a statement of the reasons must be given.
334. The Statement is not an audit opinion. However, it is similar in that it expresses an
opinion intended to convey reasonable assurance. It is normal practice for the scheme
auditor to provide it at the same time as providing the audit opinion on the financial
statements. The work to support the Statement will draw on the auditor’s work
performed in relation to contributions as part of the audit of the scheme’s financial
statements. Accordingly guidance to auditors on providing the Statement is set out in
this Practice Note. For consistency between the various types of scheme (as, for
example, in the case of earmarked schemes there are no statutory financial statements),
it is recommended that the auditor’s statement about contributions is presented
separately from the opinion on the financial statements.
Schedules of Contributions
335. Under section 227 of PA 2004 the trustees or managers of pension schemes subject to
the Act’s Scheme Specific Funding requirements must prepare and from time to time
review and if necessary revise a schedule of contributions. The required contents of the
schedule of contributions are set out in Regulation 10 of the Occupational Pension
Schemes (Scheme Funding) Regulations 2005 as follows:
–
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the rates and due dates of all contributions (other than voluntary contributions)
payable by or on behalf of active members of the scheme and the employer;
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–
if separate contributions to cover expenses which are likely to fall due for payment by
the trustees in the schedule period are made to the scheme, the rates and due dates
of those contributions;
–
where additional contributions are required in order to give effect to a recovery plan,
the rates and dates of those contributions must be shown separately from the rates
and dates of contributions otherwise payable;
–
a note to explain the treatment of the Pension Protection Fund levy.
336. The schedule of contributions must be prepared by the trustees within 15 months of the
effective date of the actuarial valuation. The schedule is generally required to cover a
period of five years from the date of certification by the scheme actuary, or the period of
the recovery plan if the plan covers a longer period. The schedule must be signed by the
trustees and make provision for signature by the employer in order to signify the
employer’s agreement to the matters included within it.
337. A schedule of contributions is required for any scheme subject to PA 2004’s funding
requirements and it needs to cover all sections of the scheme. For example, a mixed
benefit or hybrid scheme with separate sections providing defined benefit and defined
contribution benefits would need to include both rates and the due dates on the
schedule of contributions. A schedule of contributions is only legally effective from the
date of certification by the scheme actuary.
338. The content of the schedule of contributions is amongst the matters to which trustees
are required to obtain the agreement of the employer under section 229 of PA 2004.
There may be instances when TPR imposes a schedule of contributions on the parties.
Payment Schedules
339. Under section 87 of PA 1995 the trustees of most defined contribution pension schemes
must prepare, maintain and from time to time revise a payment schedule the required
contents of which are:
–
separate entries for the rates and due dates of contributions (other than voluntary
contributions) payable towards the scheme by or on behalf of the employer, and in
the case of a scheme in relation to which there is more than one employer, each
employer, and the active members of the scheme (Regulation 19 of the Scheme
Administration Regulations);
–
amounts payable towards the scheme by the employer in respect of expenses likely
to be incurred in the scheme year (Regulation 18 of the Scheme Administration
Regulations).
340. In the case where an insurance premium is payable, the payment schedule need not
contain separate entries identifying the contributions payable by or on behalf of the
employer and the active members of the scheme in respect of that premium.
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341. The content of the payment schedule should be as specified in the scheme
documentation or, in the absence of this, as agreed between the trustees and the
employer and if agreement cannot be reached with the employer the payment schedule
should be prepared and put in place by the trustees without the employer’s agreement.
Trustee regulatory responsibilities
342. Schedules of contributions and payment schedules are part of a regulatory mechanism
to make sure that the employer pays the right contributions on time. If the employer fails
to pay contributions in accordance with the schedule of contributions or payment
schedule the trustees need to consider whether to report the matter to TPR. Guidance
on reporting late contributions is set out in Code of Practice [number]: Funding Defined
Benefits (for schedules of contributions) and Code of Practice 05: Reporting Late
Payment of Contributions to Occupational Money Purchase Schemes (for payment
schedules). Generally, the codes only require the reporting of late contributions by the
trustees if the late contributions are likely to be of material significance to TPR: for
example, if contributions due are more than 90 days late or if the late payment involves
dishonesty or a misuse of assets or contributions. The trustees must report late
contributions to TPR and members within a ‘‘reasonable period’’.
343. The Schedule of Contributions and Payment Schedule are disclosable documents under
PA 1995 and the trustees are therefore required to make them available or provide them
to members and others on request.
Scope of contribution schedules
344. In relation to Schedules of Contributions, TPR’s Code of Practice: Funding defined
benefits comments that the Schedule of Contributions should not refer to the
contributions covering individual augmentations or general benefit improvements,
unless these were planned and due to be paid when the Schedule of Contributions was
certified. However, trustees do sometimes include the requirement for the employer to
meet the cost of augmentations in their Schedule of Contributions even when amounts
and timing are not certain at the time of preparing the Schedule of Contributions, in
which case contributions arising from such matters do fall within the scope of the
Schedule of Contributions and the auditor’s statement about contributions.
345. In relation to Payment Schedules, Regulation 19 of the Scheme Administration
Regulations states that a Payment Schedule should contain ‘‘separate entries for the
rates and due dates of contributions (other than voluntary contributions) payable
towards the scheme by or on behalf of the employer, and the active members of the
scheme’’. The law does not state that all employee and employer contributions should
be included, and the reference to ‘‘voluntary contributions’’ does not distinguish
between employee and employer. This lack of clarity is particularly troublesome for
defined contribution schemes because contribution arrangements can be complex and
flexible. For example, some defined contribution schemes offer members the
opportunity to pay additional employee contributions which are matched to some extent
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by additional employer contributions. These are treated as ‘‘normal contributions’’ in the
scheme records but are sometimes regarded as ‘‘voluntary’’ for Payment Schedule
purposes. Similarly, special employer contributions, such as salary/bonus sacrifice, are
sometimes not included since they are made by the employee/employer on a
‘‘voluntary’’ basis.
346. The auditor is not required to interpret the law in this area. Instead the auditor takes
account of the analysis in the trustees’ summary of contributions between contributions
payable under the schedule and contributions not payable under the schedule and
considers whether the former have been paid in accordance with the requirements of the
schedule. Although AVCs are not required by law to be included in schedules some
trustees do include them. In these cases the auditor’s statement about contributions will
also cover AVCs.
Effective date for schedules
347. A schedule of contributions is legally effective from the date of certification by the
scheme actuary. Contributions received prior to the certification date need to be
considered in relation to the schedule of contributions applicable at that time or, if no
schedule of contributions was in place, against the rules of the scheme and, where
appropriate, the recommendations of the scheme actuary.
348. Revised schedules of contributions are sometimes drafted so that they are effectively
backdated, e.g. to the beginning of the scheme year. As the revised schedule is only
effective from the date of certification by the scheme actuary, the auditor reports on the
schedule of contributions that is legally in force until the revised schedule is certified.
349. Where contributions are increased, this will result in additional contributions being
classified as ‘‘other contributions’’ in addition to those required by the schedule of
contributions. Where contributions are decreased, the auditor will need to consider
qualifying the statement about contributions.
350. The question may arise as to whether it is permissible to backdate an entry on the
schedule of contributions, for example, to correct the omission of certain contributions
due to a drafting error. It is not possible for a schedule of contributions to be backdated
to include such contributions since this would constitute a change in the rates on the
schedule of contributions which would require a revision by the scheme actuary. As
explained above, the schedule of contributions is only effective from the certification
date. However, it is permissible for a new schedule of contributions to require ‘‘catch-up’’
contributions from the employer that are expressed as being in respect of a past period
but payable once the schedule of contributions has been certified and has come in to
force. An example of this is where the certification of a schedule of contributions has
been delayed but the parties to it had already reached agreement that a new rate of
employer contributions would accrue from an earlier date.
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351. In relation to payment schedules, there is no equivalent certification requirement to act
as a legal trigger to make a payment schedule effective so the picture is not as clear as it
is for a schedule of contributions. The law does not require a payment schedule to be
physically signed by the trustees or employer, merely agreed between them, or failing
agreement, put in place by the trustees. The auditor therefore satisfies itself about the
date from which the payment schedule was ‘‘in place’’. In the absence of legal or other
guidance the auditor should regard a payment schedule as being effective from the date
it is used by the trustees to monitor the receipt of contributions to the scheme from the
employer. It therefore follows that a payment schedule is not effective for periods prior to
its preparation and use. A payment schedule can be amended by the trustees and the
employer to refer to contribution arrangements that were omitted but the omitted
arrangements will only be effective from the date they are included in the payment
schedule. They cannot have retrospective effect.
Materiality
352. The scheme auditor provides statements in relation to contributions due under the
schedule and therefore plans and carries out its work with a reasonable expectation of
detecting errors which are material to contributions due under the schedule as a whole
rather than, for example, at an individual member level. Therefore, the scheme auditor
does need to consider materiality in relation to the Statement when planning and
performing its work.
353. The Statement requires assessment of whether specific conditions have been met. This
narrower, more factual, focus entails close consideration of payment dates and amounts
and hence a different level of materiality to that used for the audit of the scheme’s
financial statements may be appropriate.
354. The auditor provides Statements as to whether contributions have in all material respects
been paid at least in accordance with the schedule. As a result, the auditor considers
whether any breaches of the schedule in relation to the timing and/or amount of
contributions that the auditor has detected from its work require the auditor to qualify its
Statement. This is a matter of professional judgment and it is important that the auditor
documents the considerations and conclusions on the identification of breaches of the
schedule.
355. In circumstances where a schedule is not in place or a schedule has ceased to have
effect (for example, in the case of a schedule of contributions, because the scheme has
commenced winding up, or been the subject of a scheme failure notice, which causes it
to lapse), the Audited Accounts Regulations require the auditor to provide a Statement
as to whether or not contributions have been paid in accordance with the scheme rules
and, if applicable, the recommendations of the scheme actuary. In such circumstances
the auditor is not able to have regard to materiality when framing his statement.
However, scheme rules do not normally specify the dates on or before which
contributions are required to be paid to a scheme. As a result, where a payment of
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contributions was made during a scheme year at an incorrect amount, and the auditor is
reporting by reference to the scheme rules, the requirements of the scheme rules are still
likely to be satisfied if a correction to the payment is made before the auditor approves
the Statement. Where a correction is not made before the auditor approves the
Statement, the auditor will need to qualify its statement appropriately.
356. There can be cases where late contributions do not require to be reported to TPR or
members by the trustees or the auditor but do represent a material breach of the
schedule of contributions or payment schedule. Therefore late contributions which are
not required to be reported to TPR may nonetheless result in a qualified auditor’s
Statement about contributions.
Work to be performed
357. In order to report on contributions, the scheme auditor obtains either the schedule of
contributions or the payment schedule, and undertakes procedures, normally on a test
basis, in order to obtain sufficient appropriate evidence to conclude on whether or not
contributions payable to the scheme have been paid for the amounts, and at the times,
set out in the applicable schedule. In doing this the scheme auditor has regard to both
the amount of contributions received and the timing of those contributions.
358. Some issues that may require consideration in assessing whether contributions payable
to the scheme have been paid for the amounts, and at the times, set out in the applicable
schedule include:
–
changes in the rates of contributions payable and the timing of the implementation of
the change in the employer payroll and the amendment to the schedules;
–
changes in the definition of pensionable pay;
–
where calculations of contributions include rates that depend on the identity of the
employing company within a group, member age and/or members’ employment
status. The auditor considers the procedures adopted by the trustees for ensuring
the correct allocation of members to age bands, employer groups or senior
management/staff membership categories. In the case of contribution rates that are
variable or discretionary, the auditor pays particular attention to the manner in which
the trustees exercise their discretion or monitor the discretion of members to change
rates as a basis for ensuring that contributions are received in accordance with the
requirements of the Schedule of Contributions or Payment Schedule (as applicable);
–
whether the schedule is sufficiently clear in its drafting to allow the auditor to properly
assess whether contributions have been paid in accordance with its requirements;
–
whether the schedule complies with legal requirements, the requirements of the
scheme’s trust deed and rules and the relevant TPR Code of Practice and related
guidance;
–
the scheme’s systems of recording and monitoring contributions;
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–
any reports to TPR by the trustees of late or inaccurate contributions;
–
whether there have been any member complaints about incorrect contributions, for
example, in response to annual benefit statements issued to members.
Reporting
359. The Statement is not the audit opinion on the financial statements and the work
performed by the scheme auditor to provide the Statement is different to that of the audit.
It is therefore important that the reader of the Statement does not confuse it with the
audit opinion on the financial statements. Therefore, it is recommended that the
Statement is given separately from the audit opinion.
360. It is important for the readers of the Statement to understand which contributions are
covered by it and which are not. As discussed above, some trustees include special
contributions and AVCs on their schedules and some do not. It is also important for the
scheme auditor to be able to clearly identify which contributions are covered by the
Statement. To assist in this the trustees prepare a Summary of Contributions paid to the
scheme under the schedule of contributions/payment schedule and the scheme auditor
refers to this in the auditor’s Statement. Trustees are required by the Disclosure
Regulations (SI 1996 No 1655) to give reasons in the annual report where contributions
have not been paid in accordance with the schedule.
An example auditor’s Statement about contributions is set out in Appendix 6.
Non-compliance with a schedule
361. The legislation requires the scheme auditor to state whether or not contributions have
been paid in all material respects at least in accordance with the relevant schedule.
Therefore in providing its Statement the scheme auditor considers whether or not
contributions have been materially under-paid against the schedule and qualifies the
auditor’s Statement accordingly. Similarly, where contributions were paid late at any time
during the period covered by the Statement, the auditor judges whether the late
payment(s) were material and qualifies the auditor’s Statement accordingly.
362. Whether underpayments or late payments of contributions are material to the auditor’s
Statement is a matter of professional judgment. Typically the auditor will have regard to
the nature and frequency of the breaches and the cumulative, as well as the individual,
impact of the breaches in the context of the materiality set.
363. The auditor may encounter circumstances where the schedule omits contributions paid
to the scheme which the auditor would expect to be included on the schedule, for
example, normal contributions from a new participating employer. The auditor
determines whether the omission is an error in the schedule through discussion with the
trustees, employer and in the case of defined benefit schemes, the scheme actuary. If it
is an error then the scheme auditor considers how it should report:
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if the omission is significant such that the schedule is ineffective, then the auditor
reports against the scheme rules and, where appropriate, recommendations of the
actuary; or
if the omission is not significant but all parties agree that the contribution should
have been included on the schedule, then the contribution should be included in the
reconciliation of the contributions payable under the schedule and the total
contributions reported in the financial statements with an explanatory note
explaining the reason why this contribution had to be included in the reconciliation.
As a result of the above it will be possible for the contributions paid under the schedules
as set out in the Summary of Contributions to be different from the contributions reported
in the financial statements. In these circumstances a reconciliation of contributions paid
under the schedules and contributions reported in the financial statements should be
included in the Summary of Contributions. In this connection, the auditor considers
whether any circumstances of non-compliance may require the auditor to make a report
to TPR, by reference to the relevant TPR Code of Practice and related Guidance.
Non-compliance with the scheme rules and advice of the actuary
364. In circumstances where the auditor is providing a Statement as to whether or not
contributions have been paid in accordance with the scheme rules (and, if applicable,
the recommendations of the scheme actuary) apparent breaches in relation to amounts
(and possibly timing) need to be considered carefully.
365. If the scheme rules and/or advice of the actuary (where relevant) include requirements in
relation to the timing as well as the amount of payments of contributions, the auditor
considers whether the payments made to the scheme during the period complied with
those requirements and, if they did not, the auditor will normally qualify its Statement.
366. If neither the scheme rules nor the advice of the actuary (relevant for final salary
schemes) include requirements in relation to the timing of payments of contributions,
and underpayments of contributions appear to have occurred during the financial
period, the auditor establishes whether those unpaid contributions were paid before the
date when the auditor approved the Statement. If they were, the auditor will normally be
able to conclude that the requirements of the scheme rules and the advice of the actuary
have been met. Where some or all of the shortfall remains outstanding on the date of the
auditor’s Statement, the auditor will normally qualify its Statement.
Reporting on contributions as part of a non-statutory audit engagement
367. When a scheme is exempt from the statutory requirement for audited financial
statements and/or an auditor’s Statement about contributions, the trust deed may
nonetheless require the trustees to engage an auditor to report on contributions. In
these cases, the auditor’s responsibilities will be as defined by the trust deed, including
the benchmark for reporting (i.e. either the requirements of a schedule or of the trust
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deed and rules). The wording of the trust deed will also determine whether
overpayments or immaterial late payments or underpayments impact on the wording of
the auditor’s statement.
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LIAISON WITH THE SCHEME ACTUARY34
368. The liability to pay pensions after the scheme year-end, and the actuarial valuation of that
liability, is not within the scope of the financial statements or of the audit, so the scheme
auditor has no responsibility for confirming the accuracy and appropriateness of
underlying data used by the actuary.
369. As noted in the discussion of ISA (UK and Ireland) 720, the auditor reads the other
information contained in the annual report (which includes the actuarial statements) with
a view to identifying whether there are any apparent material misstatements of fact
therein or matters which are materially inconsistent with the financial statements.
However, this does not require the scheme auditor to carry out any checking of the basis
of the actuary’s statements.
370. Nonetheless, the scheme auditor may agree (if requested) to undertake additional work
to provide assurance to the trustees that information supplied to the scheme actuary is
consistent with that used in the preparation of the financial statements. In these
circumstances, the additional work will normally be the subject of a separate letter of
engagement and will be reported on separately from the financial statements.
371. The auditor and scheme actuary will ordinarily look to the scheme trustees (rather than
each other) as the primary source of information in relation to their professional roles.
However, reference to arrangements for direct communication between the scheme
auditor and the scheme actuary is normally included in the engagement letters of both
the scheme auditor and the actuary. Such access is relevant to a number of areas of the
scheme auditor’s responsibility:
(a) in planning the timing of audit procedures in the context of the trustees’ timetable for
the annual report, the scheme auditor may wish to liaise with the scheme actuary to
understand the nature and timing of any planned actuarial statements or certificates;
(b) in relation to the Statement about contributions, the scheme auditor may require
evidence to confirm that the correct schedule of contributions was being used by the
scheme during its financial year, for example, where there is doubt about the
effective date of a schedule;
(c) in relation to benefit payments during the scheme year, the scheme auditor may
seek to understand the nature and extent of the scheme actuary’s involvement in the
determination of benefits payable;
(d) in relation to any actuarial statement or certificate included in the annual report, the
scheme auditor reads the actuarial statement or certificate which accompanies its
34 The ICAEW has issued more general guidance on this subject entitled: TECH 02/08: Actuaries’ and
Auditors’ Inter-professional Communication – Pensions and Other Post-Retirement Benefits.
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report on the scheme’s financial statements and, if it becomes aware of any apparent
material misstatements of fact therein, or identifies any material inconsistencies with
the audited financial statements, it seeks to resolve the situation;
(e) when assessing whether a breach of legal duty discovered by the scheme auditor is
likely to be of material significance to TPR, the scheme auditor may wish to consult
with the scheme actuary in order to assist in forming its opinion.
Completion of the trustees’ annual report
372. A practical consideration in completing the audit is the timing of the issue of the scheme
auditor’s report and the scheme actuary’s certificate both of which are required to be
included in the trustees’ annual report. ISA (UK and Ireland) 720 Section A requires the
scheme auditor to read other information included in the annual report and to seek to
resolve any inconsistencies with the financial statements or possible misstatements
which the auditor identifies, as set out above. ISA (UK and Ireland) 700 requires the
financial statements and all other financial information in the annual report to have been
approved by the trustees before the auditor’s report is signed.
373. The trustees’ annual report must be available within seven months of the end of the
scheme year. It should include the latest actuarial certificate of the adequacy of the
schedule of contributions.
374. The SORP recommends also including a copy of the latest Summary Funding Statement
prepared by the trustees and the actuary’s certificates of the calculation of technical
provisions.
375. Close liaison and a good working relationship between the scheme auditor and the
scheme actuary will enable both to carry out the work needed to arrive at their respective
professional conclusions within the trustees’ overall timetable for the preparation of the
annual report.
376. Further guidance relevant to liaison with the scheme actuary is set out in the sections
dealing with ISA (UK and Ireland) 210 ‘‘Agreeing the Terms of Engagement’’ and Section
B of ISA (UK and Ireland) 250 ‘‘The Auditor’s Right and Duty to Report to Regulators in
the Financial Sector’’. Professional guidance issued or adopted by the Board for
Actuarial Standards (‘‘BAS’’) also includes matters on which the actuary will wish to
communicate with the auditor.
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APPENDIX 1
LIST OF PRINCIPAL RELEVANT LEGISLATION
Set out below are Statutes and Regulations affecting Occupational Pension Schemes in
the UK. This is not intended to be a comprehensive list of all relevant legislation, but a
reference to the more important ones.
(Note that some of the statutes and regulations may have been amended subsequently)
Statutes
Trustee Investments Act 1961
Pension Schemes Act 1993
Pensions Act 1995
Trustee Act 2000
Pensions Act 2004
Finance Acts 2004 and 2006
Pensions Act 2008*
Regulations
The Occupational Pension Schemes (Disclosure of Information) Regulations 1996 (SI 1996/
1655)
The Occupational Pension Schemes (Scheme Administration) Regulations 1996 (SI 1996/
1715)
The Occupational Pension Schemes (Transfer Values) Regulations 1996 (SI 1996/1847)
The Occupational Pension Schemes (Requirement to obtain Audited Accounts and a
Statement from the Auditor) Regulations 1996 (SI 1996/1975)
The Occupational Pension Schemes (Winding up) Regulations 1996 (SI 1996/3126)
The Occupational Pension Schemes (Administration and Audited Accounts) (Amendment)
Regulations 2005 (SI 1996/2426)
The Occupational Pension Schemes (Internal Control) Regulations 2005 (SI 2005/3379)
The Occupational Pension Schemes (Investment) Regulations 2005 (SI 2005/3378)
The Occupational Pension Schemes (Scheme Funding) Regulations 2005 (SI 2005/3377)
The Occupational Pension Schemes (Trustees’ Knowledge and Understanding) Regulations
2006 (SI 2006/686)
The Occupational Pension Schemes (Member Nominated Trustees and Directors)
Regulations 2006 (SI 2006/714)
The Occupational Pension Schemes (Payments to Employers) Regulations 2006 (SI 2006/
802)
The Occupational and Personal Pension Schemes (Miscellaneous Amendments) Regulations
2007 (SI 2007/814)
The Registered Pension Schemes (Authorised Member Payments) Regulations 2007 (SI 2007/
3532)
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The Registered Pension Schemes (Modifications of the Rules of Existing Schemes)
Regulations 2009 (SI 2009/3055)
The Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments)
Regulations 2010 (SI 2010/725)
* Most of the legislation is not effective for the purposes of this Practice Note until 2012.
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APPENDIX 2
THE LEGAL AND REGULATORY FRAMEWORK
This Appendix sets out a description of the major features of the legal and regulatory
framework based on law as at [January 2011]. It is intended to provide a general introduction
for those unfamiliar with these major features and does not deal with any particular aspect in
any depth. It is not intended to provide an interpretation of any aspect of the law nor to
substitute for direct reference to the legislation.
Types of pension scheme
1.
Pension schemes may be divided into two main types: occupational schemes and
personal schemes. Occupational schemes are those run by employers for the benefit of
their employees and, from an employee viewpoint, are linked with employment. On
leaving the service of the employer, active membership ceases, though the employee
may leave the benefits accrued to date in the scheme.
2.
Personal pension schemes are individual arrangements made by individuals. These
arrangements are open to all individuals whether or not they also contribute to an
occupational pension scheme. They may accept contributions from the employer as well
as the employee. Some employers set up group personal pension plans, which are an
arrangement for the employees of a particular employer to participate in a personal
pension scheme on a grouped basis. These arrangements are subject to different
legislation from occupational pension schemes and, with the exception of a stakeholder
pension scheme registered as an occupational trust-based scheme, are not subject to
the pension scheme audit regime.
Occupational pension schemes
3.
Pension schemes are very varied in their benefit structure. The main types are as follows:
defined benefit (or earnings related) – a pension scheme where the benefit is
calculated by reference to the member’s pensionable earnings usually for a period
ending at or before normal pension date or leaving service (hence the common
description of such schemes as ‘‘final salary’’ schemes), usually also based on
pensionable service. Because of the uncertainties in determining the extent of future
liabilities of such schemes, the trustees of such schemes are required to obtain
regular actuarial assessments of the schemes’ liabilities and estimated future costs;
defined contribution (or money purchase) – a pension scheme where the individual
member’s benefit is determined by reference to contributions paid into the scheme
in respect of that member, increased or decreased by an amount reflecting the
investment return on those contributions. Because the scheme’s commitment to pay
future pensions is determined by the extent of funds available, no actuarial valuation
is normally required;
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hybrid – a pension scheme in which the benefit is usually calculated as the better of
two alternatives, for example, on a defined contribution and a defined benefit basis;
such a term may also be applied to a multiple benefit or mixed benefit scheme – a
pension scheme in which there is both a defined benefit and defined contribution
section; membership of the different sections need not necessarily be compulsory or
complementary.
4.
It is not compulsory for employers to offer members a facility to pay additional voluntary
contributions (AVCs) as members can contribute to as many schemes (whether
occupational or personal) as they wish. Where AVCs are available, these may be on a
defined benefit or defined contribution basis. Contributions providing defined benefits
are generally paid into the scheme itself and can provide ‘‘added years’’ at retirement.
Defined contribution AVCs may be invested in the main fund or, more usually, invested
with a third party such as an insurance company or building society. These investments
remain under the control of and are the responsibility of the trustees of the scheme.
5.
Members may choose to pay ‘‘free standing AVCs’’ (FSAVCs) to an independent thirdparty provider. FSAVCs are outside the control of the trustees and do not form part of the
assets of the occupational scheme.
Tax status
6.
All tax legislation in force at 5 April 2006 was superseded on 6 April 2006 (known as
Authorisation Day or ‘‘A’’ Day) by a new regime. Details of this new regime were set out
in the Finance Act 2004 and Finance Act 2005.
7.
Where pension schemes had obtained HMRC approval by 5 April 2006, they
automatically became Registered Pension Schemes under the tax rules. All new
schemes need to register with HMRC to become Registered Pension Schemes.
Registered Pension Schemes receive a number of valuable tax reliefs so it is usual for
pension schemes in the United Kingdom to seek such status.
Insured schemes
8.
Insured schemes are those where the long-term investment is an insurance policy. The
trustees enter into a contract with a life assurance company under which premiums are
paid to secure the benefits for the members and meet the costs of administering the
scheme. Such schemes are generally used by small employers for ease of
administration. The contract with the insurance company may be deposit administration
or a with-profits policy or the underlying investments may be pooled funds. An insured
scheme may provide defined benefits or it may be a defined contribution scheme, in
which case there may be a series of policies earmarked for individual members, so that
the policy provides all the benefits payable under the scheme for the particular member
or their dependants.
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9.
January 2011
A fully insured scheme is one under which insurance policies provide benefits
corresponding at all times to those promised under the scheme. On retirement, the
trustees of insured schemes arrange for an annuity to be purchased to settle the liability
for the pension and, in most cases, the responsibility for paying the pension is passed to
the insurer.
Earmarked schemes
10. An ‘‘earmarked scheme’’ is a particular type of insured scheme under which all the
benefits other than death benefits are money purchase benefits and all are secured by
one or more policies of insurance or annuity contracts, and such policies or contracts
are specifically allocated to the provision of benefits for individual members or any other
person who has a right to benefits under the scheme. An earmarked scheme is required
to appoint an auditor to issue a report about contributions but is exempt from having to
obtain audited financial statements, unless the deed and rules require them, in which
case the financial statements are non-statutory.
11.
The Occupational Pension Schemes (Administration and Audited Accounts)
(Amendment) Regulations 2005 require that the trustees and managers of an earmarked
scheme shall, upon receiving a written request from a relevant person (broadly speaking
this includes members, their spouses/partners and relevant trade unions):
make available a copy of the most recent accounts published in relation to the
insurance companies with which they hold earmarked policies of insurance or
annuity contracts in relation to that person;
make that information available to the person who requested it within a reasonable
time.
Managed funds
12. Some pension schemes use insurance company pooled funds as their investment
vehicle. The arrangement consists essentially of an investment contract by means of
which an insurance company offers participation in one or more pooled funds. Such
schemes are not insured schemes; however, insured schemes may be invested in
internally managed funds of the insurance company.
Small Schemes
13. A Small Self-Administered Scheme is a scheme generally with fewer than 12 members.
Such schemes are almost invariably defined contribution and the level of self-investment
in the employer is allowed to be higher than that permitted for other Registered Pension
Schemes. Small Schemes are less regulated than other schemes, particularly where all
the members are trustees and decisions require unanimity.
14.
Schemes which meet the following criteria are exempt from appointing a scheme auditor
under PA 1995:
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fewer than 12 members where all the members are trustees of the scheme; and
either:
the provisions of the scheme provide that all decisions which fall to be made by
the trustees are made by unanimous agreement by the trustees who are
members of the scheme; or
the scheme has a trustee who is independent in relation to the scheme for the
purposes of section 23 of the 1995 Act (power to appoint independent trustees),
and is registered in the register maintained by TPR in accordance with
regulations made under subsection (4) of that section.
This exemption therefore does not apply if, for example, there are deferred members
who are not trustees. Even if the exemption applies, the scheme’s trust deed and rules
may still require an audit and HMRC and the scheme actuary may require scheme
financial statements. Schemes which are exempt from the requirement to appoint an
auditor are also exempt from the requirement to prepare a payment schedule.
Self-administered schemes
15. In self-administered schemes the composition of the portfolio may be related to the age
profile of scheme members and the liability of the scheme to pay pensions. The
investment management is usually handled by third-party investment managers and
custodians. Other functions, such as scheme administration and the operation of the
pension payroll, may be handled in-house or by a third-party administrator.
Pensions legislation
16. There are three major pieces of legislation relating to pension schemes currently in
force: the Pension Schemes Act 1993 (PSA 1993), the Pensions Act 1995 (PA 1995) and
the Pensions Act 2004 (PA 2004). PSA 1993 is a consolidating Act which brought
together the legislation relating to contracting out of the State Earnings Related Pension
Scheme (now replaced by the State Second Pension – S2P) and that relating to the
requirements for the protection of scheme members, such as disclosure and restrictions
on employer-related investment. PA 1995 was a reforming law which resulted in new and
revised regulation of occupational pension schemes. The Act itself is largely enabling
legislation, with the detailed requirements set out in Regulations. There are numerous
sets of Regulations made under PA 1995, some of which replace regulations issued
under earlier legislation subsequently consolidated into PSA 1993.
17.
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PA 2004 was another piece of reforming law. As with PA 1995, the Act is largely enabling
legislation with detailed requirements set out in Regulations. The changes implemented
in PA 2004 were in part a result of experiences resulting from working with PA 1995 – for
example, replacement of Minimum Funding Requirement with Scheme Specific Funding,
the replacement of OPRA by TPR, and the need to comply with the EC Directive on the
Activities and Supervision of Institutions for Occupational Retirement Provision
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(commonly known as the ‘‘Occupational Pensions Directive’’), which Member States
were required to incorporate into their local laws before 23 September 2005.
18.
Only a few of the regulations made under PA 1995 and PA 2004 apply to public service
and statutory schemes, many of which are unfunded. Local Authority schemes, which
are funded, are subject to separate legislation. Auditors of public sector schemes need
to be aware of the legislation which applies to the particular scheme being audited.
19.
The Pensions Act 2008 is another key piece of pensions legislation, but most of its
provisions do not come into force until 2012.
Trust law
20. As most funded pension schemes are constituted under trusts they are subject to trust
law. A trust is usually established by a legal document, the trust deed, which places the
responsibility for the stewardship and custody of the assets on the trustees. The trustees
are required to comply with the general requirements of the trust, the general law and
legislation which almost entirely applies to pension scheme trusts, such as PSA 1993,
PA 1995 and PA 2004, some of whose provisions override those of the trust. The
principal powers and duties are as follows:
(a) to act fairly;
(b) to take reasonable care and skill in discharging their powers and duties;
(c) to obtain possession and control of the trust fund;
(d) to act in the beneficiaries’ best interests (i.e. of all scheme members);
(e) to act fairly between the interests of different classes of beneficiaries;
(f) to act prudently and diligently like an ordinary man of business, using any special
skill they possess;
(g) to invest the scheme’s assets;
(h) not to delegate their performance of their duties and powers (but see below);
(i) to appoint professional advisers;
(j) to keep records; and
(k) to provide information.
The above list is not to be taken as being exhaustive.
21.
The obligation not to delegate the performance of duties and powers is qualified in that
trustees may be permitted to delegate matters either under statute or, if specifically
authorised to do so, under the terms of their trust. As statutory provisions are limited,
many trust deeds include wide powers of delegation. Permission to delegate does not
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release trustees from responsibility. Given they are fiduciaries, the trustees must take
due care in selecting the delegate, in determining suitable guidelines for the
performance of the matter delegated, and in monitoring the delegate’s actual
performance and compliance with the guidelines set. A distinction needs to be drawn
between the delegation of the exercise or the performance of trustees’ duties and
powers with the employment of agents to carry out necessary activities on their behalf.
The law has long recognised that trustees do not have to take all administrative steps
themselves and Part IV of the Trustee Act 2000 expressly empowers trustees to employ
and pay agents at the expense of the trust fund. However Part IV of the Trustee Act 2000
does not permit trustees to authorise anyone to exercise any of the asset management
functions except if there is a policy statement in place and also a written agreement in
which the agent agrees to comply with the policy statement.
22.
Subject to the provisions of the trust, PA 1995, PA 2004 and the Trustee Act 2000, the
trustees’ main statutory duties and powers of investment are derived from the Trustee
Act 1925 and the Trustee Investments Act 1961. (In Northern Ireland, the equivalent
legislation is contained in the Trustee Act (Northern Ireland) 1962.) Trustees must act in
the best interests of beneficiaries of the scheme, and to ensure that no one who is not
entitled receives any trust property. Where a trustee is also a director or employee of the
sponsoring employer, he or she should set aside any other concerns, duties or
responsibilities when acting in the capacity as a trustee.
Financial reporting
23. Scheme trustees have a statutory duty under PSA 1993 s113, PA 1995 s41 and the
Occupational Pension Schemes (Disclosure of Information) Regulations 1996 (SI 1996/
1655) to produce a scheme annual report within seven months of the end of the scheme
year. The report will principally comprise:
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a trustees’ report, which provides a review of the management of the scheme,
membership statistics and developments during the period;
an investment report (not compulsory), which reviews the investment policy and
performance of the scheme;
a compliance statement (not compulsory), which contains any additional information
about the scheme which is required to be disclosed by law or is disclosed voluntarily
but which the trustees consider is not of such significance to the users of the annual
report that it requires the more prominent disclosure afforded by inclusion in the
trustees’ report;
except for schemes that are exempt, the financial statements (referred to throughout
the regulations as ‘‘accounts’’) which should show a true and fair view of the financial
transactions of the scheme during the period and of the disposition of its net assets
at the period end except liabilities to pay pensions and benefits after the scheme
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period end, together with the audit opinion and the auditor’s statement about
contributions;
24.
a copy of the latest certificate by the actuary as to the adequacy of the contributions
payable towards the scheme and a copy of the Summary Funding Statement
prepared by the trustees.
Whilst the individual components of the annual report are separate, it will be necessary
for the user to read the whole report to gain a fuller appreciation of the scheme’s financial
position.
Audited financial statements
25. Audited financial statements are required in a number of different circumstances. These
are outlined below.
Financial statements included in the annual report
26. As noted above, the annual report of a pension scheme should include audited financial
statements and the auditor’s statement about contributions. The detailed legislation
governing audited financial statements for inclusion in the annual report is contained in
the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a
Statement from the Auditor) Regulations 1996 (SI 1996/1975), as amended (most
recently by the Occupational Pension Schemes (Miscellaneous Amendments)
Regulations 2006 (SI 2006/778)).
Accounts for the purposes of an actuarial valuation
27. Trustees must consider obtaining an actuarial valuation earlier than is normal where it
appears to them that events have made it inappropriate for them to continue to rely on
the results of the previous valuation as a basis for the current level of contributions.
Some of the circumstances which the trustees may consider are:
–
present recovery plan is significantly inadequate;
–
employer ceases to participate in multi-employer scheme;
–
significant bulk transfers into or out of the scheme;
–
significant fall in market value of the assets of the scheme; and
–
significant member movements.
In such circumstances, trustees may request the scheme auditor to provide an audit
opinion for the purpose of a scheme funding valuation.
28.
For those schemes subject to such a valuation, the trustees are required to obtain a
valuation in accordance with the requirements of the Occupational Pension Schemes
(Scheme Funding) Regulations 2005 (SI 2005/3377).
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29.
January 2011
In most circumstances, trustees will request the scheme auditor to provide an audit
opinion for the purposes of a scheme specific funding valuation at a date other than the
scheme’s normal accounting date. It is recognised that the trustees do not need to
prepare a full annual report. For the purposes of the audit and subsequent valuation the
accounts should be prepared in accordance with the requirements of Regulation 3 of the
Occupational Pension Schemes (Requirement to obtain Audited Accounts and a
Statement from the Auditor) Regulations 1996 (SI 1996/1975). There may be
circumstances where, at the request of the scheme actuary, accounts are required for
the purposes of calculating a section 75 debt. To satisfy this request, accounts may need
to be prepared in accordance with Regulation 3.
Accounts required for a Pension Protection Fund valuation
30. The Pension Protection Fund (PPF) was established to pay compensation to members
of eligible defined benefit pension schemes, when there is a qualifying insolvency event
in relation to the employer and where there are insufficient assets in the pension scheme
to cover Pension Protection Fund levels of compensation.
31.
The PPF is a statutory fund run by the Board of the PPF, a statutory corporation
established under the provisions of the Pensions Act 2004. Further information on the
PPF is available on its website (www.pensionprotectionfund.org.uk).
Section 143 and section 179 valuations
32.
In the event of a qualifying insolvency event, the scheme will enter what is referred to as
the assessment period. In determining whether or not the PPF assumes responsibility for
a scheme, the PPF must, as soon as reasonably practicable, obtain an actuarial
valuation of the scheme as at the relevant time (as required by section 143 PA 2004). The
relevant time will depend upon the basis under which the PPF may assume
responsibility. The Pension Protection Fund’s website
(www.pensionprotectionfund.org.uk) contains guidance (updated December 2009) on
undertaking section 143 valuations.
33.
Eligible schemes are required to pay a levy to the PPF consisting of a risk based pension
protection levy and a scheme based pension protection levy. The calculation of the levy
will take account of a number of scheme specific factors including the extent of a funding
deficit. For the purposes of enabling the risk based pension protection levy to be
calculated in respect of eligible schemes, regulations make provision requiring scheme
trustees to provide the PPF (or TPR on PPF’s behalf) with an actuarial valuation under
section 179.
34.
For the purposes of obtaining a section 143 valuation or a section 179 valuation, the
trustees of the scheme will be required to produce ‘‘relevant accounts’’, as defined in the
Pension Protection Fund (Valuation) Regulations 2005 (SI 2005/672) and request the
scheme auditor to provide an audit opinion based on these ‘‘relevant accounts’’.
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35.
January 2011
Where an application for reconsideration is made to the PPF, it shall be accompanied by
audited scheme accounts. The form and content of those accounts is prescribed in
paragraph 25 of the Pension Protection Fund (Entry Rules) Regulations 2005 (SI 2005/
590).
Accounts required during PPF Assessment Period
36. During an assessment period, although the trustees may need to reduce certain benefit
payments to PPF levels pending the outcome of the assessment and to recover any
overpayments, the trustees continue to operate the scheme and the statutory obligation
to obtain audited accounts remains. Trustees of relevant schemes will be required to
prepare the full Annual Report and Accounts in accordance with the Occupational
Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the
Auditor) Regulations 1996 and with the guidelines set out in the Statement of
Recommended Practice. In preparing the Annual Report and accounts, and taking
account of the need to produce accounts for the purposes of a section 143 valuation,
trustees may wish to use the section 143 effective valuation date as a revised statutory
accounting reference date, thus consolidating the two audit processes. The trustees
may then wish to use the anniversaries of the effective section 143 valuation date for
future statutory accounting period ends. Further guidance is provided at the PPF website
on the accounting issues associated with such accounts:
www.pensionprotectionfund.org.uk/TrusteeGuidance/DetailedTrusteeGuidance/Pages/
AccountingIssues.aspx
Accounts for applications to the Fraud Compensation Fund
37. The Pensions Act 1995 established the Pensions Compensation Board. The Fraud
Compensation Fund was established in September 2005 as a result of the Pensions Act
2004 and replaced the Pensions Compensation Board. Financed by a levy on
occupational pension schemes, the compensation fund covers most trust based
occupational pension schemes where an offence involving dishonesty (such as theft or
fraud) has led to a shortfall of assets and the sponsoring employer is insolvent.
38.
In order to establish the amount of the loss for the purposes of compensation, the Board
of the PPF requires a statement of the value of the scheme assets as at the date
immediately before the date of application for compensation. The assets must be valued
on the valuation principles set out and adopted as in the most recent audited financial
statements and be certified by the scheme’s auditor. The assets before the loss should
be taken from the latest audited accounts or a PPF valuation adjusted (by an accountant
in the case of accounts or an actuary in the case of a PPF valuation) to the date
immediately before the loss. If there are no such accounts or valuation then the assets
should be ‘‘as reported by an accountant’’. The value of the assets immediately before
the application (after the loss) should be ‘‘as reported by an accountant’’.
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Taxation
39. Limitations35 on untaxed pension scheme benefits include:
a need for all schemes to be registered with HMRC;
a maximum annual tax allowable contribution or inflow of value into a member’s
pension fund which is known as the Annual Allowance;
a maximum lifetime fund limit that can be accumulated;
a minimum age at which retirement benefits can be taken;
penalties apply where registered pension schemes make ‘‘unauthorised’’ payments.
If a pension scheme continually makes unauthorised payments it may be
deregistered.
Details of the lifetime allowances and annual allowances and other limitations in
place currently are available at the HMRC website (www.hmrc.gov.uk).
Statutory rights and responsibilities of the various parties associated with pension
schemes
40. The rights and responsibilities of the various parties associated with pension schemes
are set out below. Most of the trustees’ responsibilities originate in trust law and
beneficiaries are able to take action for breach of trust in the civil courts. However, many
of the duties and responsibilities of trustees (and also of other parties associated with
occupational pension schemes) are now included in PA 1995 and PA 2004, and there
are civil and criminal penalties for failures to comply.
Trustees
Appointment and removal
41. Individual trustees are usually appointed and removed by deed. Where a corporate
entity is appointed trustee, directors’ appointment and removal is dealt with under the
terms of the memorandum and articles of the company. Trustees may be appointed as a
result of a statutory requirement as well as the terms of the trust deed and rules of the
scheme.
42.
Sections 241 to 243 of PA 2004 require schemes to make arrangements that provide for
at least one third of the Trustees in an occupational pension scheme to be member
nominated trustees. If the trustee is a company, the arrangements must provide for at
least one third of the directors to be member nominated directors.
35 More detailed information on current limits and other information can be obtained from the HMRC
website.
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43.
The Occupational Pension Schemes (Member Nominated Trustees and Directors)
Regulations 2006 (SI 2006/714) prescribe those type of schemes where the
requirements do not apply and modify the provisions in certain limited circumstances.
44.
In addition, PA 2004 and PPF guidance to insolvency practitioners includes a statutory
requirement for an independent trustee in defined benefit schemes where the
sponsoring employer is subject to insolvency procedures. A non-statutory independent
trustee may also be appointed in circumstances other than employer insolvency. It is
becoming increasingly common for paid professional trustees to be appointed to the
trustee body.
45.
A trustee may be removed by court order for misconduct or mismanagement. In
accordance with the Pensions Act 1995, as amended, TPR may prohibit a person from
being a trustee of a particular trust scheme, a particular description of trust schemes or
trust schemes in general. TPR may also suspend a trustee pending consideration being
given to a prohibition order. Where TPR prohibits a trustee, TPR may appoint a
replacement. TPR may also appoint a trustee of a trust scheme where they are satisfied
that this is necessary for the trustees as a whole to have, or to exercise, the necessary
knowledge and skill for the proper administration of the scheme, for the number of
trustees to be sufficient for the proper administration of the scheme or for the proper use
or application of the assets of the scheme.
Eligibility
46. The following are automatically disqualified from acting as trustee:
individuals with a conviction for an offence involving dishonesty or deception (unless
the conviction is spent);
undischarged bankrupts and those who have made arrangements with their
creditors;
individuals subject to a disqualification order as a company director; corporate
trustees if any of the directors is disqualified from acting as a trustee.
TPR can also disqualify a person from acting as trustee in certain circumstances.
47.
TPR maintains a record of trustees it has disqualified and must disclose on request
whether an individual is on this register with respect to a scheme specified in the request
or all schemes.
48.
Where the trustee board consists of one or more corporate trustees, the individual
directors of the corporate trustee may be liable as if they were trustees of the scheme for
the purposes of PA 1995.
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49.
January 2011
The auditor appointment is that of a firm (or a sole practitioner) and not an individual one:
no directors, partners or employees of the audit firm may act as trustee of a scheme that
is an audit client of the firm. Any scheme auditor who acts as trustee is guilty of an
offence and liable to a fine and/or imprisonment.
Functions of Trustees under PA 1995
50. PA 1995 imposes a number of statutory duties on trustees. The Act refers to trustees or
managers, so that where there are no trustees because the scheme is not set up under
trust, the scheme managers are responsible for compliance with the legislation. These
statutory duties include, in general terms:
51.
the preparation, maintenance and revision of a statement of investment principles
(s35);
the exercise of their powers of investment in accordance with the legislation (s36);
adherence to limits on employer related investment (s40);
obtaining and disclosing audited financial statements and actuarial valuations and
certificates (s41);
the appointment of professional advisers (s47);
the maintenance of proper books and records (s49);
drawing up and implementing dispute resolution procedures (s50).
The Act also gives trustees a number of powers, including:
the power of investment and delegation of investment management (s34);
the power to make payments of surplus to sponsoring employers if the trust deed
permits such payments in an ongoing scheme (s37) and on winding up (s76).
Powers relating to payments to employers may now only be exercised by trustees, in
accordance with the Occupational Pension Schemes (Payments to Employers)
Regulations 2006 (SI 2006/802).
Functions and powers of Trustees under PA 2004
52. PA 2004 further developed the functions and powers of the trustees. Some of the more
significant changes include:
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monitor investments to ensure scheme objectives are met (s244);
statutory duty to report to TPR (s70);
employees need to be consulted on pension changes by employer (s262);
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trustees required to have sufficient knowledge and understanding of pensions and
trust law (s249);
trustees to establish and operate internal controls which are adequate (s249A);
trustees to notify TPR of certain events (s69);
for defined benefit schemes that have had a valuation under the Scheme Funding
Regulations, trustees to put in place a statement of funding principles (s223), obtain
valuations of the scheme liabilities under the scheme funding rules (s224) agree a
schedule of contributions with the employer (s227) and, if the scheme is in deficit,
agree a recovery plan with the sponsoring company (s226).
Sponsoring employers
53. Sponsoring employers have a number of duties and responsibilities under the
legislation. These include the following:
payment of contributions in accordance with the schedule of contributions for a
defined benefit scheme or payment schedule for a defined contribution scheme. The
Occupational Pension Schemes (Scheme Administration) Regulations 1996 (SI
1996/1715) stipulate that member contributions are to be paid by the employer to
the trustees within 19 days of the end of the month in which they are deducted from
the employees’ pay. Failure to pay contributions deducted from members’ pay within
the prescribed time scale is an offence and TPR may fine the employer. In cases of
fraudulent evasion, the employer may be prosecuted and, if found guilty, fined or
imprisoned or both. In certain circumstances, trustees are required to report failures
to pay members’ contributions or contributions due under a schedule to TPR and/or
scheme members.
Where the employer operates the pension payroll on behalf of the pension scheme,
the employer must transfer into a separate bank account any payments of benefit
which have not been made to members within two days of receiving it. Failure to
comply may attract a penalty in the form of a fine.
The Scheme Administration Regulations impose on sponsoring employers a duty to
disclose to the trustees or managers ‘‘the occurrence of any event relating to the
employer which there is reasonable cause to believe will be of material significance
in the exercise by the trustees or managers or professional advisers of any of their
functions’’. The requisite disclosures have to be made within one month of the
occurrence.
The Scheme Administration Regulations also impose on the sponsoring employers
and former sponsoring employers a duty to disclose on request to trustees or
managers ‘‘such information as is reasonably required for the performance of the
duties of trustees or managers or professional advisers’’. This includes information
for the purpose of the scheme audit.
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Auditors
54. Section 47(1)(a) of PA 1995 requires the trustees or managers of every occupational
pension scheme to appoint a scheme auditor except where the scheme is exempt from
doing so by the Occupational Pension Schemes (Scheme Administration) Regulations
1996, as amended.
As a result of the amendments made by the Occupational Pension Schemes
(Administration and Audited Accounts) (Amendment) Regulations 2005 (SI 2005/2426),
the following schemes are exempt from the statutory requirement:
(a) a scheme which is:
(i) provided for, or by, or under an enactment (including a local Act);
(ii) guaranteed by a Minister of the Crown or other public authority.
(b) an occupational pension scheme which provides relevant benefits and which on or
after 6 April 2006 is not a registered scheme;
(c) unfunded occupational pension schemes;
(d) occupational pension schemes with less than two members;
(e) a scheme :
(i) with fewer than 12 members where all the members are trustees of the scheme
and either:
(aa) the provisions of the scheme provide that all decisions which fall to be
made by the trustees are made by unanimous agreement by the trustees
who are members of the scheme; or
(bb) the scheme has a trustee who is independent in relation to the scheme for
the purposes of section 23 of the 1995 Act (power to appoint independent
trustees), and is in the register maintained by TPR in accordance with
regulations made under subsection (4) of that section; or
(ii) with fewer than 12 members where all the members are directors of a company
which is the sole trustee of the scheme, and either:
(aa) the provisions of the scheme provide that any decisions made by the
company in its capacity as trustee are made by the unanimous agreement
of all the directors who are members of the scheme; or
(bb) one of the directors of the company is independent in relation to the
scheme for the purposes of section 23 of PA 1995, and is in the register
maintained by TPR in accordance with regulations made under subsection
(4) of that section;
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(f) occupational pension schemes with a superannuation fund such as is mentioned in
section 615(6) of the Income and Corporation Taxes Act 1988;
(g) the Devonport Royal Dockyard Pension Scheme;
(h) the AWE Pension Scheme established by a deed made on 29 March 1993;
(i) the Babcock Naval Services Pension Scheme, established by a deed made on 29
August 2002.
Also, in relation to a scheme to which section 47(1)(a) of PA 1995 does not apply, the
requirement to obtain accounts in accordance with paragraph (1)(a) or an auditor’s
statement in accordance with paragraph (1)(b) of the Occupational Pension Schemes
(Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations
1996 applies to a scheme which either:
(i) falls within (b) or (f) above and has 100 or more members; or
(ii) falls within (g), (h) or (i) above.
55.
The Audited Accounts Regulations require trustees of occupational pension schemes to
‘‘obtain’’ audited financial statements within seven months of the end of the scheme
year. The scheme auditor must be qualified to act as auditor of a company, or be
approved by the Secretary of State for Work and Pensions, and must comply with
independence requirements set out in the Occupational Pension Schemes (Scheme
Administration) Regulations (SI 1996/1715).
56.
The audit reporting requirements are set out in the Occupational Pension Schemes
(Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations
1996 (S1 1996/1975). The scheme auditor is required to give an opinion as to whether
the financial statements:
(i) contain the information specified in the schedule to SI 1996/1975 and
(ii) show a true and fair view of the financial transactions of the scheme during the
scheme year and of the amount and disposition, at the end of the scheme year, of
the assets and liabilities of the scheme, other than liabilities to pay pensions and
benefits after the end of the scheme year.
57.
The scheme auditor is also required to provide a statement about contributions, stating
whether or not in the auditor’s opinion contributions have in all material respects been
paid in accordance with the schedule of contributions or payment schedule. If the
statement is negative or qualified, the auditor must give its reasons. The trust deeds of
some schemes also require the auditor’s opinion as to whether contributions have been
paid in accordance with the rules of the scheme and the recommendations of the
actuary.
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58.
For money purchase insured schemes (‘‘earmarked schemes’’), only the scheme
auditor’s statement on contributions is required under the legislation. Where the
‘‘earmarked’’ scheme has more than 100 members, a copy of the insurance company’s
accounts should be provided with the summary of contributions and auditor’s statement,
where a member requests a copy of the financial statements.
59.
The Disclosure Regulations require scheme trustees to explain in the annual report the
reasons for any qualified auditor’s statement and to state how the situation has been or
is likely to be resolved. If such a situation was not resolved in a previous year, the
trustees must explain how it has been or is likely to be resolved.
The rights of the auditor in relation to information disclosure
60. The Scheme Administration Regulations require sponsoring employers (and former
sponsoring employers), their auditor or actuary to provide trustees with ‘‘such
information as is reasonably required’’ for the trustees’ professional advisers, including
the scheme auditor, to carry out their duties. Trustees must provide similar information to
their professional advisers and also make the scheme’s books, accounts and records
available. The statutory requirements relating to the maintenance of scheme records are
included in the Scheme Administration Regulations (SI 1996/1715), as amended.
Actuaries
61. PA 2004 sets out the framework for the legislation relating to the role of the actuary in
relation to defined benefit schemes. Section 224, PA 2004 and the Occupational Pension
Schemes (Scheme Funding) Regulations (SI 2005/3377), hereafter referred to as the
Funding Regulations, require ongoing actuarial valuations to be normally undertaken
every three years. The valuation has to enable the expected future course of the
scheme’s contribution rates and funding level to be understood. The Funding
Regulations specify the way in which the assets and liabilities of the scheme are to be
determined, calculated and verified by the actuary. Asset values are to be those stated in
the latest available audited financial statements.
62.
63.
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PA 2004 and the Funding Regulations require the preparation of a schedule of
contributions within 15 months after the effective date of an actuarial valuation showing:
separately the rates of contributions payable towards the scheme by or on behalf of
the employer and the active members of the scheme;
the dates on or before which the contributions must be paid, and where additional
contributions are required in order to give effect to a recovery plan, the rates and
dates of those contributions must be shown separately from other contributions.
The schedule must be signed by the trustees or managers of the scheme and make
provision for signature by the employer in order to signify agreement to matters included
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in it. The schedule must incorporate the actuary’s certification, as set out in the
regulations.
64.
The schedule must be reviewed and where necessary revised from time to time in
accordance with the Funding Regulations.
65.
Section 226 of PA 2004 requires that if an actuarial valuation shows that the scheme
does not meet the statutory funding objective, a recovery plan must be put in place by
the trustees. The recovery plan sets out how the statutory funding objective is to be met
and over what period. When preparing the recovery plan the trustees must obtain the
agreement of the employer and take actuarial advice. A copy of the recovery plan must
be sent to TPR.
The Pensions Regulator (‘‘TPR’’)
66. Whilst not an exhaustive list, the main powers conferred on TPR by the pensions
legislation include:
power to issue Contribution Notices and Financial Support Directions;
power to issue Third Party Notices and Improvement Notices;
power to request Skilled Person reports;
power to issue a Freezing Order;
power to direct or authorise schemes to be wound up;
power to make orders for the suspension of persons from office as trustees;
power to make orders for the prohibition of persons as trustees;
power to impose financial penalties;
power to appoint trustees including independent trustees;
right to apply to the courts for injunctions and interdicts to prevent persons from
misappropriating or misusing scheme assets;
power to apply to the court for restitution orders;
power to gather information and obtain warrants in relation to its investigative
powers;
right to share information with other Regulators.
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APPENDIX 3
LIST OF PUBLICATIONS
The Pensions Regulator (TPR)
TPR has issued a number of publications which auditors may find useful in providing
amplification of relevant areas of the regulations and in understanding its perspective.
Publications may be obtained on its website: www.thepensionsregulator.gov.uk or from the
TPR helpdesk on 0870 6063636. Alternatively, customer support can be contacted on the
following email address: [email protected].
In addition to the ‘‘Reporting Breaches of the Law’’ Code of Practice and supporting guidance,
which is referred to earlier in this Practice Note, there have been a number of other Codes of
Practice issued by TPR which may be useful to auditors. These publications include the
following:
Notifiable Events – this Code of Practice covers the duty to notify TPR of specified schemerelated events (which trustees or managers must report) and employer-related events
(which employers must report). This duty applies to all defined benefit schemes which are
eligible for entry to the Pension Protection Fund and to employers who sponsor such
schemes.
Funding Defined Benefits – this Code of Practice relates to the scheme-specific funding
requirements which replaced the MFR (minimum funding requirement).
Under the scheme-specific funding requirements trustees must specify how the
statutory funding objective will be met, obtain regular actuarial valuations, set out an
appropriate schedule of contributions, and prepare a recovery plan to meet any
funding shortfall.
This Code of Practice is directed at trustees but will also be of interest to anyone
professionally involved in the funding of defined benefit pension schemes.
The Code of Practice and associated guidance set out the funding process and
explain what trustees need to do in order to meet their key obligations.
This Code of Practice also provides specific guidelines in relation to the monitoring
of contributions and the procedures to be followed in the event of a contributions
failure for defined benefit schemes.
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Reporting late payment of contributions to occupational money purchase schemes – this
code of practice gives guidelines for trustees or managers of occupational money
purchase schemes on reporting late payment of contributions to TPR and to scheme
members.
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Trustees are only required to report late payment of contributions where the late
payment is likely to be of material significance to TPR. Trustees should use their
judgment to assess whether they need to make a report – the code provides
practical examples of when trustees should and should not report.
Internal Controls – this Code of Practice provides trustees with guidelines on their duty to
establish and operate adequate internal controls. The code is supported by guidance and
is intended to assist trustees in undertaking a risk review exercise to identify internal
control weaknesses.
These controls must be sufficient to ensure that the scheme is administered and
managed in accordance with the scheme rules and the relevant legislation. The
code provides practical guidelines on developing a risk management framework,
helping trustees to focus on the key risks to their schemes.
This code is primarily for trustees, but will also be of interest to advisers, employers,
service providers and scheme administrators.
Trustee Knowledge and Understanding – this Code of Practice sets out practical guidance
for trustees on how they can comply with legal requirements introduced from April 2006.
The code was reviewed in November 2009. Trustees of occupational schemes are
required to be conversant with their own scheme documents, and to have knowledge and
understanding (appropriate to their role as trustee) of trusts and pensions law and of the
principles of funding and investment. These requirements will apply to all trustees.
However, newly appointed trustees (other than corporate, professional or expert trustees)
are given six months from their date of appointment to meet the requirements.
Accounting guidance
An industry SORP, Financial Reports of Pension Schemes, has been prepared by the
Pensions Research Accountants Group (PRAG). The latest version was issued in May 2007.
The SORP applies to all pension scheme financial statements which are intended to show a
true and fair view and embraces all the information requirements of the Audited Accounts
Regulations. These Regulations require the inclusion of a statement whether the financial
statements have been prepared in accordance with the SORP ‘‘and, if not, an indication of
where there are any material departures from those guidelines’’.
The Pensions Research Accountants Group (PRAG) has also published a document entitled
‘‘Guidance on Investment Valuations’’ which looks at areas that trustees should consider and
questions that they should ask their investment managers to ensure that there is an
appropriate framework in place for determining fair values.
Pensions Terminology
A glossary of pensions terminology for pension schemes, published by the Pensions
Management Institute (PMI) and the Pensions Research Accountants Group (PRAG) is
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available from The Pensions Management Institute, PMI House, 4–10 Artillery Lane, London
E1 7LS, Telephone 0207 247 1452, Fax 0207 375 0603
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APPENDIX 4
ILLUSTRATIVE EXAMPLES OF APPOINTMENT AND RESIGNATION
LETTERS AND PARAGRAPHS FOR ENGAGEMENT LETTERS
The illustrative examples of letters in this appendix have been drafted to apply to an
occupational pension scheme that is subject to the requirement to obtain audited financial
statements and a statement about contributions imposed under section 41 of PA 1995 and the
Audited Accounts Regulations and to an ‘‘earmarked scheme’’ as defined by those
regulations. They are not necessarily comprehensive or appropriate to be used in relation to
every pension scheme, and must be tailored to specific circumstances – for example, to any
special reporting requirements imposed by regulation on particular types of scheme or by the
scheme documentation. Note also that certain categories of occupational pension scheme are
exempt from individual provisions of the various regulations made under PA 1995. The
provisions of the regulations described in the following letters therefore do not apply to all
occupational pension schemes.
Examples
1
Example notice of appointment as scheme auditor to an occupational pension scheme
under section 47 of PA 1995
2
Example acknowledgment of notice of appointment as scheme auditor
3
Example resignation letter as scheme auditor
4
Example paragraphs for terms of engagement as scheme auditor to an occupational
pension scheme that is required to obtain audited financial statements under PA 1995
5
Example paragraphs for terms of engagement as scheme auditor to an earmarked
scheme
1 Example notice of appointment as auditor36 to an Occupational
Pension Scheme under Section 47 of the Pensions Act 1995
This form of notice of appointment has been drafted to apply to an occupational pension
scheme that is subject to the requirement to appoint an auditor under section 47 of PA 1995.
36 If the audit appointment is of the ‘non-statutory’ type, then references to ‘auditor’ in the Notice should
be changed to ‘Non-Statutory Auditor’.
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(To be typed on the scheme’s letterhead)
(Addressed to the auditor)
Date
Dear Sirs,
Notice of appointment as auditor to the () Pension Scheme
In accordance with section 47 of the Pensions Act 1995 and the Occupational Pension
Schemes (Scheme Administration) Regulations 1996, we hereby give you written notice of
your appointment as auditor to the ()Pension Scheme.
Your appointment by us under the regulations is to take effect from (the date of your letter
of acknowledgement). You will take instructions from ........ and report to ........ 37 Your
appointment is initially in respect of the financial statements to be prepared as at ....... , the
scheme’s year-end. (The scheme’s previous auditor was ......... (name and address, if
applicable) A copy of the previous auditor’s statement/declaration on leaving office is
attached, and we have authorised them to provide information to you as necessary and
appropriate).
We confirm that, under section 27 of the Pensions Act 1995, no trustee of the scheme is
connected with, or is an associate of, (firm’s name), which would render (firm’s name)
ineligible to act as auditor to the Scheme.
Regulations require you to acknowledge receipt of this notice and accept appointment
within one month.
Yours faithfully,
Signed for and on behalf of the Trustees of the () Pension Scheme.
37 Auditor’s terms of engagement are normally determined by the trustees and the auditor’s reports are
normally addressed to the trustees although some trust deeds may require otherwise.
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2 Example acknowledgement of notice of appointment as Scheme
Auditor to an Occupational Pension Scheme
(To be typed on the firm’s letterhead)
The Trustees,
The () Pension Scheme
Date
Dear Sirs,
Acknowledgement of Appointment as Auditor of the () Pension Scheme
We write to acknowledge receipt of your Notice of Appointment dated ...........
Our appointment as auditor of the scheme is effective from (the date of this letter Note this
date cannot be retrospective). We understand that our appointment is initially in respect of
the financial statements to be prepared as at .......... , the scheme’s year-end.
We confirm that we will notify you immediately we become aware of the existence of any
conflict of interest to which we may become subject in relation to the scheme.
Yours faithfully,
3 Example resignation letter as scheme auditor to an Occupational
Pension Scheme
(To be typed on the firm’s letterhead)
The Trustees
The () Pension Scheme
Date
Dear Sirs,
Notice of resignation as Auditor of the () Pension Scheme38
We acknowledge receipt of your letter dated ...... informing us of your intention to appoint
....... as auditor to the scheme.
38 A clean notice of resignation cannot be issued if the auditor is aware of matters which are likely to be of
material significance to The Pensions Regulator (TPR). In such circumstances, the auditor must report
the matter to TPR and refer to them in the notice of resignation. A copy of any statement made on the
auditor’s resignation or removal which is negative or qualified has to be included in the scheme’s
annual report.
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We hereby give you formal notice of our resignation as auditor of the [NAME] scheme (‘‘the
Scheme’’) with effect from the date of this letter.
There are no circumstances connected with our resignation which we consider
significantly affect the interests of the members or prospective members of, or beneficiaries
under, the Scheme.
The Trustees are reminded of their responsibility to appoint a replacement auditor within
three months from the date of resignation, as required by Regulation 5(8) of the
Occupational Pension Schemes (Scheme Administration) Regulations 1996.
Yours faithfully,
4 Example paragraphs for terms of engagement as scheme auditor to
an Occupational Pension Scheme
Responsibilities of auditors and trustees
We will conduct our audit in accordance with International Standards on Auditing (UK and
Ireland) issued by the Auditing Practices Board (‘‘ISAs’’). Those standards require that we
comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material misstatement. An
audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the
financial statements.
Because of the inherent limitations of an audit, together with the inherent limitations of
internal control, there is an unavoidable risk that some material misstatements may not be
detected, even though the audit is properly planned and performed in accordance with
ISAs.
In making our risk assessments, we consider internal control relevant to the Pension
Scheme’s preparation of the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Pension Scheme’s internal control. However, we will communicate
to you in writing concerning any significant deficiencies in internal control relevant to the
audit of the financial statements that we have identified during the audit.
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Our audit will be conducted on the basis that the Trustees and, where appropriate, those
charged with governance acknowledge and understand that they have responsibility:
a. for the preparation and fair presentation of the financial statements in accordance with
the financial reporting framework set out above;
b. for such internal control as the Trustees determine is necessary to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error; and
c. to provide us with:
i.
access to all information of which the Trustees are aware that is relevant to the
preparation of the financial statements such as records, documentation and other
matters;
ii.
additional information that we may request from the Trustees for the purpose of the
audit; and
iii. unrestricted access to persons responsible for the operation of, and other advisers
to, the Pension Scheme from whom we determine it necessary to obtain audit
evidence.
As part of our audit process, we will request from the Trustees and, where appropriate,
those charged with governance, written confirmation concerning representations made to
us in connection with the audit.
In order to assist us with the examination of your financial statements, we shall request
sight of all documents or statements which are to be incorporated into the annual report of
which the financial statements will form part, including the trustees’ report, the actuarial
statements, summary of contributions, the compliance statement, and the investment
report. We have a professional responsibility to satisfy ourselves that they are consistent
with and do not undermine the credibility of the financial statements. However, our
responsibility in relation to reports by the Pension Scheme’s actuary and other scheme
advisers is limited to understanding the implications of those reports for the Pension
Scheme’s financial statements.
We look forward to full cooperation from your staff during our audit.
As Trustees of the Pension Scheme, you are responsible for maintaining records of
Trustees’ meetings and proper accounting records and preparing financial statements
which give a true and fair view and have been prepared in accordance with the financial
reporting framework specified above. You are also responsible for making available to us,
as and when required, all the Pension Scheme’s accounting records and all other records
and related information, including minutes of all management and Trustees’ meetings.
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[Your accounting records are kept by (name) and we shall require direct access to those
records.] We shall, subject to compliance with ethical standards, be pleased to assist with
accountancy and administrative matters if requested to do so, but such services are
distinct from our function as auditors.
Sponsoring employers and their auditors have statutory obligations to disclose information
to both the Trustees and ourselves. The Occupational Pension Schemes (Scheme
Administration) Regulations 1996 (‘‘Scheme Administration Regulations’’) require any
sponsoring employer to notify the Trustees of events relating to the employer which they
believe to be of material significance to the Trustees or managers or professional advisers.
You hereby undertake to notify us of matters which may be relevant to the financial affairs
of the scheme which have been notified to you by the sponsoring employers or have
otherwise come to your attention.
We confirm that we are Registered Auditors, eligible to conduct audits under the Scheme
Administration Regulations. We confirm that we will notify you immediately we become
aware of the existence of any conflict of interest to which we are subject in relation to the
scheme.
Reporting
We have a responsibility to report to the Trustees on whether in our opinion the financial
statements:
show a true and fair view of the financial transactions of the scheme during the scheme
year, and of the amount and disposition at the year-end of its assets and liabilities,
other than the liabilities to pay pensions and benefits after the end of the scheme year;
are prepared in accordance with United Kingdom Generally Accepted Accounting
Practice;
contain the information specified in the Schedule to the Occupational Pension
Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor)
Regulations 1996, made under the Pensions Act 1995.
We have a professional responsibility to report if the financial statements do not comply in
any material respect with applicable accounting standards.
Our professional responsibilities also require us to:
a. include in our report a description of the trustees’ responsibilities for the financial
statements where the financial statements or accompanying information do not include
such a description; and
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b. consider whether other information in documents containing audited financial
statements is consistent with those financial statements.
The form and content of our report may need to be amended in the light of our audit
findings.
Once we have issued our report we have no further direct responsibility in relation to the
financial statements for that financial year.
Auditors’ Statement about Contributions
The Trustees of the Pension Scheme are responsible for ensuring that there is prepared,
maintained and from time to time revised a [Schedule of Contributions/Payment Schedule]
(‘‘the Schedule’’) showing the rates of contributions payable to the Pension Scheme by or
on behalf of the employer and active members of the Pension Scheme and the dates on or
before which such contributions are to be paid.
The Trustees are also responsible for obtaining a statutory auditors’ statement about
contributions.
As auditors appointed under the Pensions Act 1995 we have and shall have a statutory
responsibility to report to the Trustees on whether in our opinion the contributions payable
to the Pension Scheme have been made, in all material respects, at least in accordance
with the Schedule (‘‘our Statement’’). In arriving at our opinion, we shall be required to
consider whether we have obtained all the information and explanations which we consider
necessary for the purposes of our work.
Our work will include an examination, on a test basis, of evidence relevant to the amounts
of contributions payable to the Pension Scheme and the timing of those payments. Our
work in relation to the Statement about Contributions will be separate from the audit of the
Pension Scheme and will be performed solely for the purposes of giving the required
statement about contributions. We will plan and perform our work so as to obtain all the
information and explanations we consider necessary in order to give reasonable
assurance that the contributions paid to the Pension Scheme under the Schedule have
been paid, in all material respects, at least in accordance with that Schedule.
Reporting to The Pensions Regulator
We have a statutory duty under section 70 of the Pensions Act 2004 to report to The
Pensions Regulator (‘‘TPR’’) if we have reasonable cause to believe that there is or has
been some failure to comply with any duty relevant to the administration of the Pension
Scheme imposed by any enactment or rule of law on the Trustees or managers, the
employer, any professional adviser or any prescribed person acting in connection with the
Pension Scheme and that the failure to comply is likely to be of material significance to
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TPR. We may have to make this report without your knowledge and consent and we
cannot undertake to you to fetter this discretion in any manner.
Section 70 does not require us to undertake work for the sole purpose of identifying
breaches likely to be of material significance to TPR. We shall fulfil our duty under this
section in accordance with the requirements and guidance published by the Auditing
Practices Board. In considering the need to make a report, we may decide to consult the
scheme actuary or other scheme advisers. You hereby authorise us to communicate
directly with the scheme actuary or other scheme advisers.
Communication of audit matters to those charged with governance
We will agree with the Trustees, and where appropriate those charged with governance,
the timing and form of communication between ourselves.
Termination of appointment
Our appointment as Pension Scheme auditors may only be terminated, by you or by us, by
notice in writing. The notice shall state the date with effect from which the appointment
terminates. In the case of a notice of resignation given by us, the notice shall contain either:
a) a statement specifying any circumstances connected with our resignation which, in our
opinion, significantly affect the interests of the members or prospective members of, or
beneficiaries under, the scheme; or
b) a declaration that we know of no such circumstances.
In the case of a notice of termination given by you, we shall provide you with the
aforementioned statement or declaration within 14 days of our receiving the written notice
of our termination of our appointment. You are required by the Scheme Administration
Regulations to provide a copy of the statement or declaration to our successors or
proposed successors as Pension Scheme auditors.
5 Example paragraphs for terms of engagement as scheme auditor to
an earmarked pension scheme
The following example has been drafted to apply to an earmarked scheme (other than a
‘‘relevant earmarked scheme’’) within the meaning of the Occupational Pension Schemes
(Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations
1996. It may need to be adapted to the particular circumstances of the individual scheme for
any special requirements imposed by regulation or by the scheme documentation.
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Introduction
You have determined that an audit of the financial statements of the scheme is not required
as the scheme is an ‘‘earmarked scheme’’ within the meaning of the Occupational Pension
Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor)
Regulations 1996 (‘‘the Audited Accounts Regulations’’). This letter therefore only deals
with the scheme auditors’ statutory statement about contributions under the scheme.
Should you instruct us to carry out an audit of the financial statements of the Scheme, a
separate letter of engagement will be required.
Responsibilities of trustees and scheme auditors
The respective statutory duties of trustees and scheme auditors in regard to financial
statements and audit are contained in the Occupational Pension Schemes (Disclosure of
Information) Regulations 1996 (‘‘the Disclosure Regulations’’) and the Audited Accounts
Regulations.
In summary, you are required under Regulation 6 of the Disclosure Regulations to make
available an annual report of the Scheme within seven months of the end of the scheme
year. This report will principally comprise a trustees’ report setting out information specified
in Schedule 3 to the Disclosure Regulations together with a summary of contributions, as
described below, and an auditors’ statement about contributions as specified in the
Audited Accounts Regulations.
Under section 87 of the Pensions Act 1995, you are responsible as trustees for ensuring
that there is prepared, maintained and from time to time revised a schedule (the payment
schedule) showing rates of normal contributions payable towards the scheme by or on
behalf of the employer and the active members of the scheme and the dates on or before
which such contributions are to be paid.
Trustees are responsible for maintaining books and records in accordance with the
regulations made under the Pension Schemes Act 1993 and the Pensions Act 1995,
including the Occupational Pension Schemes (Scheme Administration) Regulations 1996
(‘‘the Scheme Administration Regulations’’). These should include written records of
trustees’ meetings. Under Regulation 12 of the Scheme Administration Regulations, the
trustees are responsible for keeping records in respect of contributions received in respect
of any active member of the scheme.
You are also responsible for making available to us any of the scheme’s books and records
and other information as may reasonably be required for the performance of our duties.
For the purposes of our report, in particular, we will require a Summary of Contributions, for
inclusion in the trustees’ report and approved by you, showing the aggregate amount paid
to the scheme during the scheme year in respect of employer and members contributions
(other than any voluntary and any special contributions). [Your accounting records are
kept by (name) and we shall require direct access to those records.]
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As Trustees you are also responsible for providing us with unrestricted access to persons
responsible for the operation of, and other advisers to, the scheme from whom we
determine it necessary to obtain evidence.
As Trustees you are responsible for notifying us if you become aware that under Section 27
of the Pensions Act 1995 any trustee of the scheme is connected with, or is as associate of
(firm name) which would render (firm name) ineligible to act as auditor to the scheme.
We confirm that we are Registered Auditors, eligible to act as scheme auditors under the
Scheme Administration Regulations. We confirm that we will notify you immediately we
become aware of the existence of any conflict of interest to which we are subject in relation
to the scheme.
Our duty as scheme auditors is to provide you with a statement about contributions under
the scheme as required by Regulation 4 of the Audited Accounts Regulations. We shall
report to you whether, in our opinion, the contributions payable to the scheme during the
scheme year, as reported in the Summary of Contributions, have been paid, in all material
respects, at least in accordance with the payment schedule maintained under section 87 of
the Pensions Act 1995 or, where there is no such valid payment schedule in relation to all
or part of the scheme year, whether in our opinion contributions have been paid in
accordance with the scheme rules or contracts under which they were payable. If our
opinion is negative or qualified, we shall state the reasons.
Scope of our work
Our work will include an examination, on a test basis, of evidence relevant to the amounts
of contributions payable to the scheme and the timing of those payments. Our work will not
constitute an audit of the financial transactions and net assets of the scheme and will be
performed solely for the purposes of giving the required statement about contributions. We
will plan and perform our work so as to obtain all the information and explanations which
we consider necessary in order to give reasonable assurance that the contributions
payable as reported in the summary of contributions have been paid in accordance with
the payment schedule maintained by you under section 87 of the Pensions Act 1995 or,
where there is no such payment schedule in relation to the scheme year, contributions
payable as reported in the summary of contributions have been paid in accordance with
the scheme rules or contracts under which they were payable.
Our work is not designed to identify weaknesses in the scheme’s systems but, if such
weaknesses come to our attention during the course of our work which we consider should
be brought to your attention, we shall report them to you.
In order to carry out our duties as scheme auditors, we may need to consult with the
scheme’s actuary or other actuarial adviser appointed by you. You hereby authorise us to
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communicate directly with such persons for the purposes of performing our duties as
scheme auditors.
Information and explanations from the scheme’s personnel are an important part of our
work. In order to avoid any misunderstanding and as part of our normal procedures, we
may request you to provide written confirmation of certain oral representations which we
have received from trustees or your personnel during the course of our work on matters we
consider may have a material effect on the auditors’ statement about contributions.
The Scheme Administration Regulations also require employers and their auditors to
furnish you on request with such information as is reasonably required for the performance
of our duties as scheme auditors and the Regulations require you in turn to disclose such
information to us. In this context, we may require written confirmation of certain matters
from scheme employers and their auditors.
The Scheme Administration Regulations require any sponsoring employer to notify
trustees of the occurrence of events relating to the employer which they believe to be of
material significance to the trustees or managers or professional advisers. You hereby
undertake to notify us of matters which may be relevant to the financial affairs of the
scheme which have been notified to you by the sponsoring employers or have otherwise
come to your attention.
The responsibility for safeguarding the assets of the scheme and for the prevention and
detection of fraud, error and non-compliance with law or regulations rests with you.
However, we shall endeavour to plan our work so that we have a reasonable expectation of
detecting material misstatements in the Summary of Contributions (including those
resulting from fraud, error, non-compliance with law or regulations or breaches of trust),
but our examination should not be relied upon to disclose all such material misstatements
or frauds, errors or instances of non-compliance or breaches of trust as may exist.
Reporting to The Pensions Regulator
We have a statutory duty under section 70 of the Pensions Act 2004 to report immediately
to The Pensions Regulator (‘‘TPR’’) if we have reasonable cause to believe that there is or
has been some failure to comply with any duty relevant to the administration of the scheme
imposed by any enactment or rule of law on the trustees or managers, the employer, any
professional adviser or any prescribed person acting in connection with the scheme and
that the failure to comply is likely to be of material significance to TPR. We may have to
make this report without your knowledge and consent and we cannot undertake to you to
fetter this discretion in any manner.
Section 70 does not require us to undertake work for the sole purpose of identifying
breaches likely to be of material significance to TPR. We shall fulfil our duty under this
section in accordance with the requirements and guidance published by the Auditing
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Practices Board. In considering the need to make a report, we may decide to consult the
scheme actuary. You hereby authorise us to communicate directly with the scheme
actuary or other scheme advisers.
Communication of audit matters to those charged with governance
We will agree with those within the scheme charged with governance, the timing and form
of communication between ourselves.
Termination of appointment
Our appointment as scheme auditors may only be terminated, by you or by us, by notice in
writing. The notice shall state the date with effect from which the appointment terminates.
In the case of a notice of resignation given by us, the notice shall contain either:
(a) a statement specifying any circumstances connected with our resignation which, in our
opinion, significantly affect the interests of the members or prospective members of, or
beneficiaries under, the scheme; or
(b) a declaration that we know of no such circumstances.
In the case of a notice of termination given by you, we shall provide you with the
aforementioned statement or declaration within 14 days of our receiving the written notice
of our termination of our appointment. You are required by the Scheme Administration
Regulations to provide a copy of the statement or declaration to our successors or
proposed successors as scheme auditors.
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APPENDIX 5
ILLUSTRATIVE EXTRACTS FROM EXAMPLE OF REPRESENTATION
LETTER
An illustrative management representation letter is provided in Appendix 2 of ISA (UK and
Ireland) 580 ‘‘Written Representations’’. In the case of a pension scheme, such a
representation from the trustees of a scheme to its scheme auditor is normally in the form of a
letter, but it is not intended to be a standard letter, nor to imply that management
representations must necessarily be in the form of a letter from the trustees. However, the
auditor is required to request written representations. Representations by management vary
from one entity to another and from one year to the next.
Although seeking representations from the trustees on a variety of matters may serve to focus
their attention on those matters, and thus cause them to specifically address those matters in
more detail than would otherwise be the case, a scheme auditor is aware of the limitations of
management representations as audit evidence as set out in ISA (UK and Ireland) 580.
The illustrative management representation letter in ISA (UK and Ireland) 580 is applicable to
pension scheme audits, although the auditor will consider the following amendments which
may be appropriate:
1.
The introduction will include the opinion required under the Audited Accounts
Regulations and will also refer to the examination of the summary of contributions in
addition to the audit of the financial statements.
This representation letter is provided in connection with your [audit of the Scheme’s
financial statements/examination of the Scheme’s summary of contributions] for the year
ended [date] for the purpose of expressing an opinion as to whether the financial
statements show a true and fair view of the financial transactions of the scheme during the
period from [date] to [date] and of the amount and disposition at the end of the scheme
period of its assets and liabilities, other than liabilities to pay pensions and benefits after the
end of the period, in accordance with applicable law and United Kingdom Accounting
Standards (United Kingdom Generally Accepted Accounting Practice) and making a
statement about contributions.
2.
Other additional paragraphs specific to pension schemes which the auditor may wish to
include are:
We confirm that the scheme is a Registered Pension Scheme. We are not aware of any
reason why the tax status of the scheme should change.
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We have not made any reports to The Pensions Regulator nor are we aware of any such
reports having been made by any of our advisors. We confirm that we are not aware of any
late contributions or breaches of the [payment schedule/schedule of contributions] that
have arisen which we considered did not require reporting. We also confirm that we are not
aware of any other matters which have arisen that would require a report to The Pensions
Regulator.
There have been no other communications with The Pensions Regulator or other
regulatory bodies during the scheme year or subsequently concerning matters of noncompliance with any legal duty. [We have drawn to your attention all correspondence and
notes of meetings with regulators.]
We have not commissioned advisory reports except for [give details] which may affect the
conduct of your work in relation to the Scheme’s financial statements and [schedule of
contributions] [payment schedule].
We confirm that, under section 27 of the Pensions Act 1995, no trustee of the scheme is
connected with, or is an associate of (Scheme Auditor), which would render (Scheme
Auditor) ineligible to act as auditor to the Scheme.
Note
Set out below are some additional issues which, depending on the particular circumstances,
the materiality of the amounts concerned to the financial statements and the extent of other
audit evidence obtained, may be the subject of representations from management:
going concern, when events or conditions have been identified which may lead to the
winding up of the scheme;
whether scheme documentation is fully up to date [for example: you have been informed
of all changes to the scheme rules];
confirmation of propriety of transactions [for example: no transactions have been made
which are not in the interests of the scheme members or the scheme during the scheme
year or subsequently];
confirmation of particular disclosures [for example: there has been no ‘‘self-investment’’ in
a scheme employer or stock-lending];
confirmation that there are no plans or intentions that may materially affect the carrying
value or classification of assets and liabilities reflected in the financial statements;
material accounting estimates – confirming basis of estimation;
lack of evidence – material representations where no other evidence available, such as
absence of claims in connection with litigation;
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trustees’ opinions – confirmations of opinions concerning matters dealt with in the financial
statements;
accounting policies – confirming most appropriate, appropriately adopted and disclosed
as required by Financial Reporting Standard 18; and
confirmation, if relevant, that the scheme falls within the definition of an earmarked scheme
as set out in the Occupational Pension Schemes (Requirement to obtain Audited Accounts
and a Statement from the Auditor) Regulations 1996.
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APPENDIX 6
ILLUSTRATIVE EXAMPLES OF AUDITOR’S STATEMENTS ABOUT
CONTRIBUTIONS AND OTHER REPORTING SITUATIONS
The APB publishes, periodically, a ‘‘Compendium of Illustrative Auditor’s Reports on United
Kingdom Private Sector Financial Statements’’ in the form of a Bulletin. At the time of
publication of this Practice Note the latest Compendium Bulletin was 2010/2 which includes an
illustrative example relating to occupational pension schemes.
This appendix includes as example 1 an unmodified Auditor’s Statement about Contributions
and as example 2 a modified Auditor’s Statement about Contributions. Other situations where
an auditor will report in connection with an occupational pension scheme are set out in
example 3.
Example 1: Unmodified Auditor’s Statement about Contributions
The Statement about Contributions should be tailored to cover all contributions due under the
schedule of contributions/payment schedule.
Independent Auditor’s Statement about Contributions to the Trustees of the XYZ
Pension Scheme
We have examined the summary of contributions to the XYZ Pension Scheme for [or ‘‘in
respect of’’] the scheme year ended [ ... ] to which this statement is attached/ which is set
out in the Trustees’ Report on page x.
Respective responsibilities of Trustees and the auditor
As explained more fully in the Statement of Trustees’ Responsibilities, the scheme’s
trustees are responsible for ensuring that there is prepared, maintained and from time to
time revised a [schedule of contributions/payment schedule] showing the rates and due
dates of certain contributions payable towards the scheme by or on behalf of the employer
and the active members of the scheme. The Trustees are also responsible for keeping
records in respect of contributions received in respect of active members of the scheme
and for monitoring whether contributions are made to the scheme by the employer in
accordance with the [schedule of contributions/payment schedule].
It is our responsibility to provide a Statement about Contributions paid under the [schedule
of contributions/payment schedule] and to report our opinion to you.
Scope of work on Statement about Contributions
Our examination involves obtaining evidence sufficient to give reasonable assurance that
contributions reported in the attached summary of contributions have in all material
respects been paid at least in accordance with the [schedule of contributions/payment
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schedule]. This includes an examination, on a test basis, of evidence relevant to the
amounts of contributions payable to the scheme and the timing of those payments under
the [schedule of contributions/payment schedule].
Statement about Contributions payable under the [schedule of contributions]/
[payment schedule]
In our opinion contributions for the scheme year ended ............... as reported in the
summary of contributions and payable under the [schedule of contributions]/[payment
schedule] have in all material respects been paid at least in accordance with the [schedule
of contributions certified by the scheme actuary on [ ]/ payment schedule [dated ... ]].
Statutory Auditor
Date
Address
Example 2: Modified Auditor’s Statement about Contributions
Because schedules of contributions and payment schedules are specific in relation to dates
and rates, it is sometimes necessary to modify the auditor’s statement about contributions
under the scheme. An appropriate example for a defined benefit scheme, which may be
suitably adapted for a money purchase scheme with a payment schedule, is given below.
Defined benefit (final salary) scheme which has prepared a schedule of contributions.
Non-compliance with schedule – Extract from an auditor’s statement including a
negative statement about contributions
Basis for qualified statement about contributions
As explained on page [ ], [give brief details of the departure from the schedule including an
indication of the frequency of late payments, and quantification of the amounts involved –
e.g. ‘‘in relation to three months during the year contributions amounting in total to £X were
paid [specify timing of payment] later than the due date set out in the schedule of
contributions’’.]
Qualified statement about contributions payable under the [schedule of
contributions]/[payment schedule]
In our opinion, except for the effects of the departure from the schedule of contributions,
contributions for the scheme year ended ... as reported in the summary of contributions
and payable under the [schedule of contributions]/[payment schedule] have in all material
respects been paid at least in accordance with the schedule of contributions certified by
the actuary on [date].
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If the reason for the modified statement is both material and pervasive, for example, where no
contributions have been paid at all or an incorrect rate has been used, to the auditor makes an
‘‘adverse statement about contributions under the scheme’’ and the wording above will need
to be modified accordingly, including changing the heading to refer to an adverse statement.
Example 3: Other reporting situations
Accounts for actuarial valuations
As explained in paragraphs 30 to 36 of Appendix 2, there may be occasions when the auditor
is asked to provide audit reports for the purposes of PPF or other actuarial valuations.
The auditor and the trustees agree a separate engagement letter which covers:
the fact that the audit relates to a set of accounts prepared specifically for the purpose of a
PPF or other actuarial valuation; and
the period the accounts are to cover (normally the period from the last scheme year-end to
the date of the valuation).
Such accounts are statutory accounts required by the Pensions Act 2004 and related
regulations. However, the notes to the financial statements should refer to the reason for their
preparation and the fact that the financial statements are not the statutory annual financial
statements of the scheme. Suggested wording is given below. The audit report and trustees’
responsibilities statements should also be drafted to reflect the circumstances under which
they are being issued, and examples of these are also given below.
Independent Auditor’s Report to the Trustees of the XYZ Pension Scheme
We have audited the financial statements of [name of scheme] for the period ended [date]
which comprise the fund account, the net assets statement and the related notes. The
financial reporting framework that has been applied in their preparation is applicable law
and United Kingdom Accounting Standards (United Kingdom Generally Accepted
Accounting Practice).
Respective responsibilities of Trustees and auditor
As explained more fully in the Statement of Trustees’ Responsibilities, the trustees have
determined that audited financial statements should be prepared for the purposes of a
valuation under the Pension Protection Fund (Valuation) Regulations 2005 and they have
accepted responsibility for preparing such financial statements in accordance with
applicable law and UK Accounting Standards (UK Generally Accepted Accounting
Practice).
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Our responsibility is to audit the financial statements in accordance with applicable law and
International Standards on Auditing (UK and Ireland). Those standards require us to
comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
Either:
A description of the scope of an audit of financial statements is [provided on the APB’s
website at www.frc.uk/apb/scope/private.cfm] / [set out [on page ...] of the Annual
Report].
Or:
An audit involves obtaining evidence about the amounts and disclosures in the financial
statements sufficient to give reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the scheme’s
circumstances and have been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the trustees; and the
overall presentation of the financial statements.
Opinion on financial statements
In our opinion the financial statements:
show a true and fair view of the financial transactions of the scheme during the period
from [date] to [date] and of the amount and disposition at the end of the scheme
period of its assets and liabilities, other than liabilities to pay pensions and benefits
after the end of the period;
have been properly prepared in accordance with UK Generally Accepted Accounting
Practice; and
contain the information specified in Regulation 3 of, and the Schedule to, The
Occupational Pension Schemes (Requirement to Obtain Audited Accounts and a
Statement from the Auditor) Regulations 1996 made under the Pensions Act 1995, as if
those requirements applied under the Pension Protection Fund (Valuation)
Regulations 2005 made under the Pensions Act 2004.
Statutory Auditor
Date
Address
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Notes to the financial statements
The notes to the financial statements should refer to the reason for their preparation and the
fact that they are not the statutory annual financial statements of the scheme, as follows:
Note in relation to the financial statements produced for the purposes of a Pension
Protection Fund Valuation
These financial statements have been prepared as at [date] for the purposes of a valuation
in accordance with the Pension Protection Fund (Valuation) Regulations 2005 and with the
Statement of Recommended Practice ‘‘Financial Reports of Pension Schemes’’.
The financial statements summarise the transactions of the scheme and deal with the net
assets at the disposal of the trustees. They do not take account of obligations to pay
pensions and benefits which fall due after the end of the period.
They do not constitute the statutory annual financial statements of the scheme, the
most recent of which were prepared for the scheme year ended [date].
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APPENDIX 7
ILLUSTRATIVE EXAMPLE STATEMENT OF TRUSTEES’
RESPONSIBILITIES
Statutory audit
The following illustrative wording may be used as the basis for preparing a statement for
inclusion in a scheme’s annual report.
The financial statements, which are prepared in accordance with UK Generally Accepted
Accounting Practice, are the responsibility of the Trustees. Pension scheme regulations
require the trustees to make available to scheme members, beneficiaries and certain other
parties, audited financial statements for each scheme year which:
show a true and fair view of the financial transactions of the scheme during the scheme
year and of the amount and disposition at the end of the scheme year of its assets and
liabilities, other than liabilities to pay pensions and benefits after the end of the scheme
year; and
contain the information specified in the Schedule to the Occupational Pension
Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor)
Regulations 1996, including a statement whether the financial statements have been
prepared in accordance with the Statement of Recommended Practice ‘‘Financial
Reports of Pension Schemes’’.
The Trustees have supervised the preparation of the financial statements and have agreed
suitable accounting policies, to be applied consistently, making any estimates and
judgments on a prudent and reasonable basis.
The Trustees are also responsible for making available certain other information about the
scheme in the form of an Annual Report.
Defined benefit schemes
The Trustees are responsible under pensions legislation for ensuring that there is
prepared, maintained and from time to time revised a schedule of contributions showing
the rates of contributions payable towards the scheme by or on behalf of the employer and
the active members of the scheme and the dates on or before which such contributions are
to be paid. The trustees are also responsible for keeping records in respect of
contributions received in respect of any active member of the scheme and for monitoring
whether contributions are made to the Scheme by the employer in accordance with the
schedule of contributions. Where breaches of the schedule occur, the Trustees are
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required by the Pensions Acts 1995 and 2004 to consider making reports to The Pensions
Regulator and the members.
Money purchase schemes
The Trustees are responsible under pensions legislation for ensuring that there is
prepared, maintained and from time to time revised a payment schedule showing the rates
of contributions payable towards the scheme by or on behalf of the employer and the
active members of the scheme and the dates on or before which such contributions are to
be paid. The trustees are also responsible for keeping records in respect of contributions
received in respect of any active member of the scheme and for monitoring whether
contributions are made to the Scheme by the employer in accordance with the payment
schedule. Where breaches of the schedule occur, the Trustees are required by the
Pensions Acts 1995 and 2004 to consider making reports to The Pensions Regulator and
the members.
The following paragraph applies to both defined benefit and money purchase schemes.
The Trustees also have a general responsibility for ensuring that adequate accounting
records are kept and for taking such steps as are reasonably open to them to safeguard
the assets of the scheme and to prevent and detect fraud and other irregularities, including
the maintenance of an appropriate system of internal control.
Note: further reporting about contributions
In addition to the statutory requirements, the trust deed and rules of many schemes require
the auditor to report on whether contributions have been paid to the scheme in accordance
with the rules of the scheme and with the recommendations of the actuary, where one is
appointed. In such cases, to make it clear that compliance with the rules and
recommendations is in the first instance a matter for the trustees, references to the ‘‘schedule
of contributions’’ or ‘‘payment schedule’’ in the paragraphs set out above will need to be
extended to include ‘‘the scheme rules and recommendations of the actuary’’ (if appointed).
Audited financial statements prepared for a PPF valuation
If audited financial statements are being prepared for the purposes of a PPF valuation (S.143
or S.179, as explained further in paragraphs 30–36 of Appendix 2) and there is no
accompanying annual report, the opening paragraph of the above Statement of Trustees’
Responsibilities will need to be amended to read as follows:
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These audited financial statements, which are the responsibility of the trustees, have been
prepared as at [insert date], for the purposes of an actuarial valuation being undertaken in
accordance with [Section 143 or Section 179] of the Pensions Act 2004. The trustees have
applied the requirements of the Pension Protection Fund (Valuation) Regulations 2005 so
as to:
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APPENDIX 8
IMPACT OF THE SCHEME BENEFIT STRUCTURE ON RISK
The nature of the benefit structure of an individual scheme can affect the nature of the records
that are maintained by the scheme administrator, the risks of misstatement of the financial
statements or the trustees’ summary of contributions, and possibly the trustees’ expectations
about the audit work required to support the audit opinions. The following sections describe
some of the features of the audit of defined contribution, defined benefit and hybrid schemes
which may give rise to specific risks.
Defined contribution schemes
In most defined contribution schemes, contributions are received and invested for the benefit
of individual members, and there is no pooling or cross-subsidy as there is in defined benefit
schemes. Although individual schemes may offer only one type of investment vehicle (such as
unitised funds or an insurance arrangement) members will typically be able to make a choice
between a range of different investment exposures, for example, to UK or foreign investments
and to equity or fixed interest instruments.
The ultimate benefit receivable by a member will depend upon their individual history of
contributions (and related investments) made by them and/or on their behalf. It is therefore
essential that the administration arrangements of defined contribution schemes accurately
record the contributions paid in on behalf of each member, and that contributions are
allocated according to the scheme’s investment arrangements, reflecting members’ choices
where applicable.
While systematic errors in the administrative records may give rise to a risk of misstatement in
the financial statements, individual errors are unlikely to be material. The financial statements
present the aggregate position of members’ interests in the scheme so the audit opinion, and
therefore the work required to support it, is based on an assessment of materiality and risk to
the financial statements as a whole, not on the position of individual members.
Trustees may commission auditors to carry out additional work to review the administrative
effectiveness and accuracy of individual records and the allocation of contributions. The scope
of this work will be subject to discussion and agreement between the auditor and the trustees;
it does not have a direct relationship with the auditor’s opinion on the financial statements and
is not considered further in this Practice Note.
The risk of misstatement to particular audit assertions may arise in the following areas:
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Completeness of investment assets
(a) Notionally unitised funds
Where a scheme operates a notionally unitised managed portfolio of investments, errors in the
unitisation process may result in the misallocation of interests between members without
affecting the overall balance of the fund and the assets disclosed in the financial statements.
However, it is vital that the aggregate allocation and revaluation of units is reconciled regularly
with the value of actual investments made and held to ensure that the aggregate value of units
is supported by an equivalent value of real assets.
(b) Insurance policies or managed fund units
Where trustees invest members’ contributions in insurance policies or managed fund units,
the auditor will be concerned to ensure that the information about scheme assets that is
reported by the insurer or fund manager is complete. Relevant controls include:
reconciliations carried out of the units (and their values) of individual member allocations
with the total units in issue and the value of assets held by the scheme; and
where third-party providers maintain records at an individual member level and not on an
aggregated scheme level, with aggregation only for periodic financial reporting purposes,
reconciliation of the increase/decrease in the number of members at the beginning and
end of the scheme financial period with the joiners and leavers during that period.
Accuracy of contributions reflected in the trustees’ summary of contributions
The rules of a defined contribution scheme may permit members to select and change their
contribution rate, and the rate of employer contribution may also vary, possibly in tandem with
that of the member. Such complexities may increase the risk that contributions are not
collected and paid over, with consequential effect on the auditor’s statement about
contributions.
Proper presentation of additional voluntary contributions (AVCs)
On retirement the funds resulting from AVC contributions are subject to different rules in
respect of how they are applied in providing benefits. Accordingly the contributions and,
where they are invested separately from normal contributions, the related investments (where
material) are required to be disclosed separately in the financial statements. If administration
records do not clearly distinguish AVCs from other contributions, the separate disclosure of
AVCs in the financial statements may be misstated.
Non-compliance with the timing requirements of the payment schedule
The trustees of a pension scheme will have agreed a payment schedule with the employer.
The auditor’s statement about contributions gives assurance that this schedule has been
adhered to.
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Particular features of the payment arrangements of insured schemes that may increase the
risk of late payments include the following:
direct debit payment arrangements may not be adjusted immediately for the effects of
changes in pensionable salaries and/or the contribution rates used in making payroll
deductions;
contributions may be deducted from new members’ pay but not collected by the insurer
until the direct debit is next adjusted; and
the direct debit may fall on a non-banking day and it is processed on the next available
banking day which happens to fall after the date set out in the payment schedule, resulting
in a breach of the timing requirements of the schedule and possibly of Section 49 of the PA
1995.
An additional problem may arise if contributions are paid each month on the basis of the actual
contribution liability but the insurer’s administration systems cannot accept the payments
because the amounts do not equal premiums set at the last renewal date.
Defined benefit schemes
Completeness and disclosure of investment assets
Investment assets are not designated to the interests of individual members but are held on a
pooled basis. As a result, with the exception of money purchase AVCs, the accurate
designation of investments to individual members is not a relevant audit issue.
However, where a scheme participates along with a number of other schemes in a common
investment fund, the trustees (and therefore the auditor) of an individual participating scheme
will be concerned to ensure that the portion of the common investment fund that is attributed
to ‘‘their scheme’’ accurately represents its interest in the fund.
In situations where participating schemes are allocated units in the common investment fund,
it is vital that the aggregate allocation and revaluation of units is reconciled regularly with the
value of actual investments made and held to ensure that the aggregate value of units is
supported by an equivalent value of real assets. In other situations it may be necessary for the
auditor to examine the basis on which contributions into the fund, withdrawals (if any) from the
fund and investment income and growth are attributed to the scheme’s share of the common
fund.
Accuracy of contributions reflected in the trustees’ summary of contributions
Variable rates of contributions may exist where:
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some members, for example, senior executives, pay different rates to the rest of the
members; or
there are variable offsets, such as the NI lower earnings limit.
Such complexities may increase the risk that contributions are not correctly calculated. To
address this risk, the auditor considers whether there are controls over the administration
records and the employer’s payroll, which ensure the accurate identification and application of
contribution rates for individual members and the employer.
Hybrid schemes
Hybrid schemes offer both defined benefit and defined contribution benefits. Trustees may
permit surplus funds in the defined benefit section to fund employer contributions to the
defined contribution section (or vice versa) by means of a transfer of assets between the
sections for accounting purposes. Where this occurs, the auditor confirms that the
arrangement is permitted by the scheme’s deed and rules and supported by the scheme
actuary. The auditor also considers whether the transfer in lieu of cash contributions is paid or
credited in a timely manner.
Accuracy of the split of assets between the sections of the scheme
The rules of hybrid schemes may allow members to transfer between sections. This gives rise
to a risk that members’ choices may not be properly reflected in the financial records, and
therefore that the analysis of assets between the defined benefit and defined contribution
sections may be misstated. In these situations the auditor will consider the controls over the
recording of such transfers.
Accuracy of calculation of benefits
Certain hybrid schemes may have an ‘‘underpin’’, such that the members are entitled to
benefits calculated as the higher of those accumulated under the defined contribution and
defined benefit rules. When auditing scheme benefits, the auditor pays particular attention to
the application of this aspect of the scheme rules in the calculations.
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APPENDIX 9
NON-STATUTORY AUDIT APPOINTMENTS
This appendix covers the particular considerations that apply when the trustees of a scheme
are exempt from the statutory obligation to obtain audited financial statements and an
auditor’s statement about contributions but the trust deed and rules requires the trustees to
obtain ‘‘audited’’ financial statements.
APPOINTMENT AND REMOVAL
A non-statutory auditor falls within the definition of the term ‘‘professional adviser’’ used in the
Occupational Pension Schemes (Scheme Administration) Regulations, so the provisions
relating to the appointment and removal of the scheme auditor (as discussed in paragraphs 47
to 57 and 69 to 71 of this Practice Note) apply equally to the appointment of a non-statutory
auditor.
ENGAGEMENT LETTER
The engagement letter will need to be tailored to reflect the particular circumstances of the
individual scheme, the nature and scope of the auditor’s role (as set out in the trust deed and
rules) and the form and content of the annual report and financial statements.
Where the form and content of the financial statements is not specified in the trust deed but a
‘‘true and fair’’ audit opinion is required, the financial statements fall within the scope of the
Pensions SORP so they should be prepared so as to comply in all material respects with its
recommendations.
A non-statutory auditor may wish to use the example letter for a statutory audit set out in
Example 4 of Appendix 4 as a starting point for the tailoring, but then have regard to the
following:
Responsibilities of trustees and auditor – The trustees’ responsibility to obtain audited
accounts (and therefore to appoint the auditor) arises under the requirements of the trust
deed, rather than regulations made under the Pensions Act 1995; also the form and
content of the financial statements will be determined by the requirements of the trust
deed, rather than regulations. The responsibility of the auditor to audit and report on the
financial statements also arises from the trust deed not regulations. The wording will
therefore need to be tailored to the requirements of the Trust Deed.
Scope of work – Where the auditor is required to express a ‘‘true and fair’’ audit opinion,
the auditor’s work will be governed by the requirements of ISAs (UK and Ireland). Whether
the auditor is to test and report on contributions to the scheme will depend on the
presence of a requirement in the trust deed.
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Representations by trustees and third parties – Information and explanations from the
scheme’s personnel are likely to be an equally important part of the work of a nonstatutory auditor, so the auditor is likely to wish to obtain relevant written representations
towards the end of the audit.
Reporting to those charged with governance – These paragraphs are likely to be
equally relevant to the non-statutory audit.
Reporting to The Pensions Regulator – A non-statutory auditor of an occupational
pension scheme falls within the definition of ‘‘professional adviser’’ (as used in Section 70
of the Pensions Act 2004) so (like the statutory auditor) is subject to the duty to report to
TPR under Section 70 of the Pensions Act 2004.
Electronic communications and reporting – The non-statutory auditor needs to
determine whether the financial statements or the annual report with which the auditor’s
report is to be circulated are to be made available electronically.
Auditor’s Statement about Contributions – It is unlikely that a non-statutory auditor will
be required to report about contributions by reference to a Payment Schedule. However,
where the trust deed imposes a requirement (probably to report whether contributions
have been paid in accordance with the trust deed and rules), these paragraphs should be
carefully tailored to replace references to a statutory statement about contributions with
the form of opinion required by the terms of the trust deed.
Termination of appointment – As noted above, the termination of the appointment of a
non-statutory auditor is subject to the same legal requirements as the termination of a
statutory appointment.
APPLICATION OF ISAs (UK AND IRELAND)
Registered auditors are required to comply with ISAs (UK and Ireland) when conducting
audits, although the way in which they are applied needs to be adapted to suit the particular
characteristics of the scheme being audited. Non-statutory auditors therefore have regard to
the commentary on the application of ISAs (UK and Ireland) set out in this Practice Note.
REPORTING
Trustees’ responsibilities statement
The first part of the example statement in Appendix 7 will typically need to be amended to read
as follows:
The non-statutory financial statements are the responsibility of the trustees. The trust deed
and rules of the scheme require the trustees to prepare audited financial statements for
each scheme year which:
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show a true and fair view of the financial transactions of the scheme during the scheme
year and of the amount and disposition at the end of that year of the assets and
liabilities, other than liabilities to pay pensions and benefits after the end of the scheme
year, and
contain the information specified in the Statement of Recommended Practice
‘‘Financial Reports of Pension Schemes (Revised May 2007)’’ and the Trust Deed.
Audit report
Auditor’s reports resulting from non-statutory audits retain the same structure as a standard
audit report, as shown in the current APB Compendium Bulletin of Audit Reports but the
wording needs to be tailored for the particular circumstances. A tailored example is shown
below:
Auditor’s report to the Trustees of the ABC Pension Scheme
We have audited the non-statutory financial statements of the ABC Pension Scheme for the
year ended .... which comprise the fund account, the net assets statement and the related
notes. These non-statutory financial statements have been prepared under the accounting
policies set out therein.
Respective responsibilities of Trustees and Auditor
As explained more fully in the Statement of Trustees’ Responsibilities, the scheme’s
Trustees are responsible under the Trust Deed for preparing the non-statutory financial
statements in accordance with the requirements of the Trust Deed, applicable law and
United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting
Practice).
Our responsibility is to audit the non-statutory financial statements in accordance with the
requirements of the Trust Deed and International Standards on Auditing (UK and Ireland).
Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical
Standards for Auditors.
Scope of the audit
Either:
A description of the scope of an audit of financial statements is [provided on the APB’s
website at www.frc.uk/apb/scope/private.cfm] / [set out [on page ...] of the Annual
Report].
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Or:
An audit involves obtaining evidence about the amounts and disclosures in the financial
statements sufficient to give reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the scheme’s
circumstances and have been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the trustees; and the
overall presentation of the financial statements.
Opinion on non-statutory financial statements
In our opinion the non-statutory financial statements:
show a true and fair view, of the financial transactions of the Scheme during the year
ended [date], and of the amount and disposition at that date of its assets and liabilities,
other than the liabilities to pay pensions and benefits after the end of the year;
have been properly prepared in accordance with United Kingdom Generally Accepted
Accounting Practice; and
have been prepared in accordance with the requirements of the Trust Deed.
Statutory Auditor
Date
Address
THE AUDITING
PRACTICES BOARD
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Practice Note 15
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APPENDIX 10
DEFINITIONS
Terms in this Practice Note are used as defined in the Glossary of terms issued by the APB in
conjunction with ISAs (UK and Ireland), and Pensions Terminology – a Glossary for Pension
Schemes published by the Pensions Management Institute (PMI) and the Pensions Research
Accountants Group (PRAG).
Terms and abbreviations in this Practice Note for frequently used terms are as follows:
Assurance reports on
internal controls of service
organisations made
available to third parties
Reports on internal controls, usually those at service
organisations, issued in accordance with guidance published
by the Institute of Chartered Accountants in England and
Wales in Technical Release AAF 01/06
Audited Accounts
Regulations
The Occupational Pension Schemes (Requirement to obtain
Audited Accounts and a Statement from the Auditor)
Regulations 1996 (SI 1996/1975), as amended
Disclosure Regulations
The Occupational Pension Schemes (Disclosure of
Information) Regulations 1996 (SI 1996/1655), as amended
Earmarked schemes
Money purchase schemes under which all benefits are
secured by one or more policies of insurance or annuity
contracts specifically allocated to individuals or their
dependants. Such schemes are not required by statute to
obtain audited financial statements.
FRS
Financial Reporting Standard issued by the Accounting
Standards Board, a part of the Financial Reporting Council
Funding Regulations
The Occupational Pension Schemes (Scheme Funding)
Regulations 2005 (SI 2005/3377)
HMRC
HM Revenue & Customs
ISAs (UK and Ireland)
Auditing standards issued by the Auditing Practices Board
that are based on International Standards on Auditing issued
by the International Auditing and Assurance Standards Board
(revised October 2009)
PSA 1993; PA 1995; PA
2004
The Pension Schemes Act 1993; The Pensions Act 1995; The
Pensions Act 2004
Pensions SORP
The Statement of Recommended Practice ‘‘Financial reports
of pension schemes’’ (May 2007)
PRAG
The Pensions Research Accountants Group
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Practice Note 15
January 2011
PSA 1993
The Pension Schemes Act 1993
Scheme
An occupational pension scheme as defined by Part 1 Section
1 of PSA 1993; the activities of occupational pension
schemes are defined in s255 of PA 2004
Scheme Administration
Regulations
The Occupational Pension Schemes (Scheme Administration
Regulations 1996 (SI 1996/1715), as amended
TPR
The Pensions Regulator
THE AUDITING
PRACTICES BOARD
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Practice Note 15
January 2011
APPENDIX 11
SOME SIGNIFICANT TOPICS RELEVANT TO AUDITS OF PENSION
SCHEMES
Topic
Paragraph
Numbers
Section
Statement about
contributions
20–22
219
332–367
57
–
Introduction
ISA (UK and Ireland) 320
The auditor’s Statement about
Contributions (the Statement)
Appendix 2
Appendix 6
Reports to TPR
24–27
107–108
109–163
371(e)
–
Introduction
ISA (UK and Ireland) 250A
ISA (UK and Ireland) 250B
Liaison with the scheme actuary
Appendix 3
Liaison with actuaries
32–35
248–249
301–304
368–376
61–65
Introduction
ISA (UK and Ireland) 500
ISA (UK and Ireland) 620
Liaison with the scheme actuary
Appendix 2
Reliance on third parties
31–42
226–247
248–249
301–304
Introduction
ISA (UK and Ireland) 402
ISA (UK and Ireland) 500
ISA (UK and Ireland) 620
Reporting to those
charged with governance
85
104–105
164–165
166–168
ISA
ISA
ISA
ISA
and
and
and
and
Ireland)
Ireland)
Ireland)
Ireland)
240
250A
260
265
Trust deed
13
88, 93–94, 100
186, 211
301
306
20–22
Introduction
ISA (UK and
ISA (UK and
ISA (UK and
ISA (UK and
Appendix 2
Ireland)
Ireland)
Ireland)
Ireland)
250A
315
620
700
6
209
6–7, 39
Introduction
ISA (UK and Ireland) 315
Appendix 2
Taxation
176
THE AUDITING
PRACTICES BOARD
(UK
(UK
(UK
(UK
Practice Note 15
January 2011
15
92
142
185, 187–188
255–256, 261,
270, 274
277, 279
283, 287
311–312, 321
Accounting
guidance
Introduction
ISA (UK and
ISA (UK and
ISA (UK and
ISA (UK and
Appointment of the
scheme auditor
47–57
–
ISA (UK and Ireland) 210
Appendix 4
Non-statutory audits
47–48
163
367
54
–
ISA (UK and Ireland) 210
ISA (UK and Ireland) 250B
The Auditor’s Statement about
Contributions (the Statement)
Appendix 2
Appendix 9
Pensions SORP
Ireland)
Ireland)
Ireland)
Ireland)
250A
250B
315
540
ISA (UK and Ireland) 550
ISA (UK and Ireland) 570
ISA (UK and Ireland) 700
Appendix 3
THE AUDITING
PRACTICES BOARD
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THE AUDITING PRACTICES BOARD
The Auditing Practices Board (APB), which is part of the Financial Reporting Council
(FRC), prepares for use within the United Kingdom and Republic of Ireland:
Standards and guidance for auditing;
Standards and guidance for reviews of interim financial information performed by
the auditor of the entity;
Standards and guidance for the work of reporting accountants in connection with
investment circulars; and
Standards and guidance for auditors’ and reporting accountants’ integrity,
objectivity and independence
with the objective of enhancing public confidence in the audit process and the quality
and relevance of audit services in the public interest.
The APB comprises individuals who are not eligible for appointment as company
auditors, as well as those who are so eligible. Those who are eligible for appointment
as company auditors may not exceed 40% of the APB by number.
Neither the APB nor the FRC accepts any liability to any party for any loss, damage or
costs howsoever arising, whether directly or indirectly, whether in contract, tort or
otherwise from any action or decision taken (or not taken) as a result of any person
relying on or otherwise using this document or arising from any omission from it.
The purpose of Practice Notes issued by the APB is to assist auditors in applying
auditing standards of general application to particular circumstances and industries.
Practice Notes are persuasive rather than prescriptive. However, they are indicative of
good practice, even though they may be developed without the full process of
consultation and exposure used for auditing standards.
This Practice Note, when finalised, will replace Practice Note 15: The audit of
occupational pension schemes in the United Kingdom (Revised), which was issued in
March 2007.
# Financial Reporting Council Limited 2011
ISBN 978-1-84798-419-7
The APB is part of the Financial Reporting Council Limited a company limited by guarantee.
Registered in England number 2486368.Registered Office: 5th Floor, Aldwych House,
71-91 Aldwych, London WC2B 4HN
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January
2011
Further copies, £8.00, post-free, can be obtained from:
UP/APBD-BI11248
Further copies, £15.00, post-free, can be obtained from:
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or ordered online at: www.frcpublications.com
Practice
Note
15
(Revised)
THE AUDIT OF OCCUPATIONAL
PENSION SCHEMES IN THE
THE UNITED KINGDOM