Changes to accounting standards and recent guidance issued are imposing additional obligations on Trustees…………….Do you know what is expected of you?
Changes in accounting standards and guidance issued by the Pensions Research Accountants Group (‘PRAG’) around going concern assessment and material uncertainty disclosures in scheme accounts may (OK, will) have gone unnoticed by many trustees. To be honest, it is not really being flagged by some advisers. They are however:
- imposing an additional obligation on trustees that many may not be aware of; and
- can create issues with timely sign off of accounts if left to the last minute.
For the majority of trustees where the Scheme is considered to have a ‘Strong’ or ‘Tending to Strong’ covenant there may be no noticeable change in the year-end audit process or wording included in the scheme accounts. For those wrestling with a ‘Tending to Weak’ and particularly those with a ‘Weak’ covenant however, this potentially adds more to the Trustees ever growing ‘to do list’.
TRUSTEES now have a requirement to prepare and document THEIR ASSESSMENT (it is hard to emphasise the word “their” enough) of going concern. The PRAG guidance suggests this is best addressed at the planning stage of the audit (which clearly it is) but experience suggests this is being left until far too late in the process on more then the odd scheme audit!
The good news is the going concern assessment should be relatively straight forward. A Scheme is accounted for as a going concern ‘unless the trustees or employer have taken the formal decision to wind up the scheme or have no realistic alternative but to do so, for example where there has been a cessation event (these are normally set out in the trust deed and rules)’. Noted, not an issue lets move on.
The bad news is there is potentially much more to consider in forming the TRUSTEES VIEW (again the TRUSTEES view, not the advisers, accountants, auditors etc) as to whether a material uncertainty exists and if it should be disclosed, on what basis. Whilst suggesting Trustees do not need to crystal ball gaze, the PRAG Guidance does ask ‘trustees to consider whether there are ANY circumstances that lead them to believe the employer may not be able to pay contributions for the next 12 months’. With a weak employer covenant or an employer in the middle of a restructuring….ANY circumstances, I can think of a few! In reality, in these situations Trustees may need to get more involved in understanding the employers forecasts and challenging around them.
Not only does this create challenges for trustees who will be required to sign off the accounts, for employers in the above position, wresting with a turnaround situation or potential restructuring, such disclosures in the scheme accounts are unlikely to be welcomed with open arms. This issue is magnified where the employer and scheme have the same year ends given the scheme accounts will need to be signed off in 7 months but for non-listed businesses, the employer will have 9 months. No hiding behind what the employer says in that situation, not that a Trustee should be hiding.
Fear not, being aware of the issue and being properly prepared can help trustees deal with the challenges presented. My tips to navigate through?
- Raise early with the auditor and agree a plan (don’t wait to be asked).
- Engage with the employer early and seek their input around any required disclosures.
- Ensure as trustees you have a properly documented review and paper trail.
- Watch out for new paragraphs being added to the auditor management representation letter on this…….if they ask you to sign to say you’ve done it, make sure you have and have done it properly!
Make sure you have proactive advisers who bring these issues to you, as they arise, not with a pen in hand to sign the accounts!