UK: Pension Trustee Bulletin - Autumn 2014

FRS 102: A Time For Change
Last Updated: 19 September 2014
Article by Smith & Williamson


As the SORP is updated in keeping with FRS102 requirements, we look at the effect the financial reporting standard is set to have on pension scheme accounts.

Key facts

  • From 1 January 2015, significant pension scheme reporting changes will be introduced.
  • There will be an increase in the level of disclosure in relation to scheme investments included in the notes to the accounts.
  • No significant changes in accounting are expected – except for the first-time inclusion of values for certain insurance policies.


  • March 2013 – FRS102 published
  • Spring 2014 – draft revised SORP issued for consultation
  • Autumn 2014 – revised SORP to be issued
  • 1 January 2015 – implementation date

A change to the accounting framework for pension schemes is underway following the release of Financial Reporting Standard 102 (FRS102) by the Financial Reporting Council (FRC). This will bring UK Generally Accepted Accounting Practice (UK GAAP) into line with the International Financial Reporting Standards (IFRS) framework.

The Pensions Statement of Recommended Practice (SORP) is currently being updated in line with FRS102 requirements. Despite being defined as 'financial institutions' in FRS102, pension schemes have their own specific requirements that are less onerous than the additional disclosures required for other financial institutions.

Insurance policies

All material assets of a pension scheme should be valued at the reporting date at fair value. If this asset is an insurance policy that matches exactly the amount and timing of some or all of the benefits payable under the scheme, the fair value of the insurance policy is deemed to be the value of the related obligation.

FRS102 therefore removes the current option (which the majority of schemes tend to take) of valuing such policies at nil. It instead reflects the treatment required for reporting scheme assets in employer accounts – although the result may be two different valuations for the same assets, as the discount rate used for schemes will be based on the scheme funding valuation rather than the discount rate on bonds as for the employer accounts.

Key changes

Risk disclosures for investments

FRS102 introduces the requirement for the disclosure of investment credit and market risks. Credit risk is the risk that a counterparty fails to discharge an obligation on them, while market risk includes price, currency and interest rate risks.

The disclosures will need to cover the risk exposures and their objectives, together with policies and processes for risk management and changes during the period of the accounts.

It currently appears likely that pooled funds will have to provide risk disclosures on a look-through basis, in line with underlying investments.

Fair value hierarchy for investments

Pension schemes will need to provide an analysis of investments based on a specific valuation hierarchy, which is different to the one required under IFRS. The hierarchy is split into three levels.

Level A – the quoted price of an identical asset regularly and readily traded, e.g. shares traded daily on the London Stock Exchange.

Level B – the price of a recent transaction of an identical asset, e.g. weekly priced investments, where the year-end does not fall on a trade date.

Level C – an estimation of fair value using a valuation technique where level A or B values are not available, e.g. unquoted shares or private equity.

Investment analysis

Investment assets will need to be suitably classified to enable users to evaluate their significance. Existing regulation already requires analysis so, unless these regulations are amended, schemes will need to ensure that both sets of requirements are met in the investment analysis note.

Taking action

  • Trustees should discuss these upcoming changes on disclosure and accounting policy with their accounts preparers.
  • Responsibilities should be assigned and clear action taken to ensure that the required information needed to meet these changes is obtained and incorporated into scheme accounts.
  • Trustees will need to identify all material insurance policies held in their names.
  • Trustees may wish to carry out a 'tidy-up' process sooner rather than later, assigning obligations under these policies to individual members where possible. By doing so, they would remove these assets from the scheme and the subsequent requirement to be valued under FRS102.


The FRC has warned company boards against using asset-backed contribution arrangements that result in pension obligations being reclassified as equity instruments in their accounts.

An asset-backed contribution may help employers meet their scheme funding obligations and, as a result, could be of interest to employers and trustees of defined benefit and hybrid schemes. While the Financial Reporting Council (FRC) acknowledges that genuine commercial reasons may exist for establishing such arrangements, companies that have reclassified pension liabilities as equity instruments may face investigation by the FRC.

Reviewing arrangements

The FRC reported that the Financial Reporting Review Panel (FRRP) has, over recent years, considered several annual reports and accounts of companies that have implemented arrangements to provide additional collateral to their pension schemes in exchange for reduced annual contributions and a longer period to fund the pension scheme deficit.

Some of these arrangements have involved establishing a Scottish Limited Partnership to hold the collateral, as well as additional features that appear to have been introduced to achieve an accounting outcome whereby the company's obligation to make future payments to its pension scheme is transformed into an equity instrument in the company's consolidated accounts. Despite the fact that the company retains the obligation to fund the pension deficit, this has a favourable impact on financial solvency, gearing and reported comprehensive income.

The companies investigated have either revised the arrangements or the amounts recognised, addressing the FRRP's concerns – now and in the future – from the date of change.

Richard Fleck, chairman of the FRC's Conduct Committee and chair of the FRRP, said: "The FRRP believes that it is important that companies and their advisers are aware that the FRRP will ordinarily open an enquiry into the financial reporting of any company in which material pension liabilities are reclassified from debt to equity."

Full text of the press release can be found at:


A professional independent trustee should not be seen as another cost to running a pension scheme, but as a worthwhile investment for existing trustees, scheme members and sponsors alike.

Appointing a professional independent trustee to a defined benefit pension scheme should not be seen – by the corporate sponsor or the pension scheme – as just an added expense to running the scheme.

Adding value

A professional independent trustee can provide significant value to existing trustees, scheme members and even the scheme sponsor. For example, existing trustees may need support in creating and maintaining an integrated funding and risk management plan. Alternatively, they may not have enough time or experience to deal with the pension scheme and the need to keep their trustee knowledge and understanding up to date – particularly in relation to investment.

The scheme may have existing adviser performance and cost issues that need managing. A professional independent trustee will have knowledge of the industry, the adviser market and services providers. He or she will be able to review the existing advisers and, if needs be, identify more appropriate ones based on the type and size of the scheme – which can provide cost savings.

Conflicts of interest

Conflicts of interest are a particular issue for employer-nominated trustees during pension scheme funding and recovery plan negotiations or during a corporate deal that might impact on the strength of the employer covenant. It is important that the company does not have undue influence on the decisions of trustees in these circumstances or when there are fundamental changes to the pension scheme benefits. A professional independent trustee can lead these discussions and ensure that there are no conflict issues.

Sponsors of small to medium-sized defined benefit schemes may be particularly sensitive to paying fees for a professional independent trustee to support existing trustees and trustee boards. However, it may be a worthwhile appointment and a positive investment – emotionally and financially – for all.

How we can help

Smith & Williamson Trust Corporation Ltd provides independent professional trustee services to small to medium-sized defined benefit schemes with up to 1000 members, and under £50m in assets.

We are appointed to assist existing trustees and trustee boards to ensure the efficient running and administration of their defined benefit pension schemes, while offering support in establishing good governance procedures. If the trust deed and rules allow, we can also be appointed as sole professional trustee to a pension scheme where the existing trustees wish to resign or retire from the scheme.


We are often told that saving for retirement is a 'good thing', with carrots and sticks offered to drive home the message. Yet many people are being left to go it alone.

If you aspire to retire at 60 then you may be on your own, as in a growing number of cases the UK Government is unlikely to pay you a state pension until much later.

The good news is that income tax and national insurance savings can make pensions a tax-efficient, long-term savings plan. However, many pension scheme members are often being left alone to make important and difficult decisions about their pension arrangements.

Burden of responsibility

Among the challenges faced by pension scheme members are:

  • the need to shoulder more responsibility for investment decisions
  • a dysfunctional annuity market in which there is considerable choice (set to become even greater from April 2015 with the removal of the requirement to provide a pension payable for life) and access to independent advice is beyond the reach of most savers
  • excessive charges on many pre-2001 defined contribution pension savings
  • pension liberation fraud, resulting in scheme members losing around £1bn of pension assets
  • advice on how to mitigate or avoid the annual allowance tax charge
  • a punitive 55% tax charge on residual funds paid as a lump sum on death to beneficiaries, where pensioners are in income drawdown, which acts as a significant barrier to pension saving for owner-managed businesses and higher earners, in particular.

Pension schemes must provide members with a pension savings statement if their savings exceed the annual allowance in a pension input period. However, no account is taken of any carry-forward relief available to the member or, indeed, whether the member is paying into any other schemes.

Trustees and employers have sent out considerable information about the new annual and lifetime allowances, but even the most numerate scheme member may be left scratching their head. With no obligation on employers or trustees to provide access to advice, the confused pension saver is often required to seek out and pay for independent, professional advice in order to fully understand their options.

Trustees and employers to the rescue

While trustees and employers are not required to provide access to advice, they can often do more than just issue statutory disclosures. An immediate helping hand may be to:

  • provide members with access to independent pension and tax advisers who can assess their personal circumstances
  • make members aware of a potential tax charge on death
  • consider alternative ways of providing death-in-service benefits so that the multiple salary lump sum death-in-service benefit is taken out of the lifetime allowance test on death.

Longer-term planning might consist of alternative remuneration strategies for members potentially affected by the annual and lifetime allowances. This may include:

  • moving employee remuneration and duties into associated companies that do not participate in the pension scheme
  • providing other forms of incentivised remuneration, such as share option and enterprise management incentive schemes
  • providing other non-cash benefits in lieu of pensionable salary increases, such as income protection, critical illness and private medical insurance, as well as access to independent financial advice.

A pure pensions and tax-planning issue for a scheme member could lead to a discussion about much broader issues, such as pay and reward, benchmarking, new remuneration and incentive strategies or new forms or revised levels of benefit provision, and could therefore be a worthwhile exercise in itself.


In the case of ATP Pension Services, the Court of Justice of the European Union has concluded that a defined contribution pension arrangement may qualify as a 'special investment fund,' meaning that fees for managing such a fund should be exempt from VAT if:

  • the scheme is funded by the members
  • the funds are invested on a risk-spreading basis, and
  • the pension recipients bear the investment risk.

This seems capable of being applied – retrospectively – to many UK pension funds and is likely to lead to scheme trustees looking to their fund managers for VAT refunds. For the fund managers, this is bad news: it will involve submitting a claim to HMRC and (as we saw following the JP Morgan Claverhouse decision a few years ago) recalculating a number of their past VAT returns and handing back possibly significant sums of input VAT that they had previously recovered.

The definition of 'fund managers' for this purpose is currently unclear.

This decision is in sharp contrast to the Court's recent decision in the Wheels case, where it was held that the management of a defined benefit pension scheme did not qualify for VAT exemption.

HMRC has not yet commented on how the case will affect UK VAT policy – we expect them to confer with the industry before issuing any guidance on backdated claims or the future treatment of pension fund management fees.

What next?

Schemes with any defined contribution benefits should consider putting in a protective claim against their suppliers to reclaim over-charged VAT.

In the meantime, anyone who supplies pension funds with services should be thinking about how they may be affected. They should also consider whether they need to put in a claim for VAT already paid to HMRC.

We are happy to provide you with suitable wording to do this or specific advice if you need it.

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.

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