Exposure Draft: Practice Note 15 (Revised) The audit of occupational pension schemes in the United Kingdom

Transcription

1 Expsure Draft Financial Reprting Cuncil April 2017 Expsure Draft: Practice Nte 15 (Revised) The audit f ccupatinal pensin schemes in the United Kingdm

2 The Financial Reprting Cuncil (FRC) is the UK s independent regulatr respnsible fr prmting high quality crprate gvernance and reprting t fster investment. The FRC sets the UK Crprate Gvernance and Stewardship Cdes and UK standards fr accunting and actuarial wrk; mnitrs and takes actin t prmte the quality f crprate reprting; and perates independent enfrcement arrangements fr accuntants and actuaries. As the Cmpetent Authrity fr audit in the UK the FRC sets auditing and ethical standards and mnitrs and enfrces audit quality. The FRC des nt accept any liability t any party fr any lss, damage r csts hwsever arising, whether directly r indirectly, whether in cntract, trt r therwise frm any actin r decisin taken (r nt taken) as a result f any persn relying n r therwise using this dcument r arising frm any missin frm it. This Practice Nte replaces the previus Practice Nte 15 issued in January The Financial Reprting Cuncil Limited 2017 The Financial Reprting Cuncil Limited is a cmpany limited by guarantee. Registered in England number Registered Offi ce: 8th Flr, 125 Lndn Wall, Lndn EC2Y 5AS

3 PRACTICE NOTE 15 THE AUDIT OF OCCUPATIONAL PENSION SCHEMES IN THE UNITED KINGDOM (Revised) Cntents Page Preface 3 Intrductin 4 Occupatinal pensin schemes key characteristics 5 ISAs (UK) 200 Overall Objectives f the Independent Auditr and the Cnduct f an Audit in accrdance with Internatinal Standards n Auditing (UK) Agreeing the Terms f Audit Engagements The Auditr's Respnsibilities Relating t Fraud in an Audit f Financial Statements 250 Sectin A Cnsideratin f Laws and Regulatins in an Audit f Financial Statements Sectin B The Auditr s Right and Duty t Reprt t Regulatrs f Public Interest Entities and Regulatrs f Other Entities in the Financial Sectr Cmmunicatin with Thse Charged with Gvernance Cmmunicating Deficiencies in Internal Cntrl t Thse Charged with Gvernance and Management Planning an Audit f Financial Statements Identifying and Assessing the Risks f Material Misstatement Thrugh Understanding the Entity and its Envirnment Materiality in Planning and Perfrming an Audit Audit Cnsideratins Relating t an Entity Using a Service Organisatin Audit evidence 38 Financial Reprting Cuncil 1

4 520 Analytical Prcedures Auditing Accunting Estimates, Including Fair Value Accunting Estimates, and Related Disclsures Related Parties Ging Cncern Written Representatins Using the Wrk f an Auditr s Expert Frming an Opinin and Reprting n Financial Statements The Auditr s Respnsibilities Relating t Other Infrmatin 51 The Auditr s Statement abut Cntributins (the Statement) Liaisn with the Scheme Actuary Appendices 1 Illustrative examples f appintment and resignatin letters 60 2 Illustrative extracts frm example f representatin letters 63 3 Illustrative examples f Auditr s Statements abut Cntributins 65 4 Illustrative example statement f trustees respnsibilities 67 5 Definitins 68 2 Expsure Draft: PN 15: The Audit f Occupatinal Pensin Schemes in the UK (Revised) (April 2017)

5 Preface This Practice Nte cntains guidance n the applicatin f auditing standards issued by the Financial Reprting Cuncil (FRC) t the statutry audit f ccupatinal pensin schemes established under the Pensins Acts in the United Kingdm. This guidance is als applicable t audits undertaken slely under the terms f a scheme's trust deed r ther agreement requiring an auditr t prvide a similar reprt, including requests frm trustees where the scheme is therwise exempt frm audit r fr financial statements prepared ther than at the nrmal scheme year-end. Similar cnsideratins apply t the audits f Cmmn Investment Funds ("CIFs") which are usually set up under trust and require an audit under their trust deed. Much f the guidance will als be f assistance t auditrs f public sectr pensin schemes, althugh these schemes are subject t different financial reprting framewrks and different legislatin. This Practice Nte is intended t assist auditrs in applying the requirements f, and shuld be read in cnjunctin with, Internatinal Standards n Auditing (ISAs) (UK), which apply t all audits undertaken in the United Kingdm in respect f accunting perids cmmencing n r after 17 June This Practice Nte sets ut the special cnsideratins relating t the audit f ccupatinal pensin schemes which arise frm the individual ISAs (UK). This Practice Nte des nt and is nt intended t prvide detailed guidance n the audits f ccupatinal pensin schemes, s where n special cnsideratins arise frm a particular ISA (UK), n material is included. This Practice Nte des nt cntain cmmentary n all f the requirements included in the ISAs (UK) and reading it shuld nt be seen as an alternative t reading the relevant ISAs (UK) in their entirety. This Practice Nte has been prepared with advice and assistance frm staff f The Pensins Regulatr (TPR) and is based n the legislatin and regulatins in effect at 12 April Financial Reprting Cuncil 3

6 Intrductin 1. Wrk-based pensins in the UK may be divided int tw main types: cntract based persnal pensin schemes and ccupatinal trust based pensin schemes. 2. Cntract based persnal pensin schemes are individual arrangements made by individuals with the pensin prvider and need nt have a link with an emplyer. These arrangements are subject t different legislatin frm ccupatinal pensin schemes and generally are nt subject t the pensin scheme audit regime. These arrangements are pen t all individuals whether r nt they als cntribute t an ccupatinal pensin scheme. They may accept cntributins frm the emplyer as well as the emplyee. Sme emplyers set up grup persnal pensin schemes, which are arrangements fr the emplyees f a particular emplyer t participate in a persnal pensin scheme n a gruped basis. 3. Occupatinal trust based pensin schemes are thse run by emplyers fr the benefit f their emplyees and, frm an emplyee viewpint must have a spnsring emplyer(s) and are linked with emplyment. On leaving the service f the emplyer, active membership ceases, thugh the emplyee may leave the benefits accrued t date in the scheme. Mst ccupatinal pensin schemes in the UK are required t prduce annual financial statements and t appint a scheme auditr t reprt n thse financial statements and n the payment f cntributins t the scheme. There are sme exemptins frm these requirements althugh where statutry prvisins d nt require an audit, a scheme's trust deed and rules may still require its financial statements t be audited. 4. Audits f ccupatinal pensin schemes may nly be carried ut by a registered auditr r ther persn apprved by the Secretary f State fr Wrk and Pensins. A registered auditr is required t cmply with ISAs (UK) when cnducting audits. This principle applies in the cntext f ccupatinal pensin schemes in the same way as t entities in any sectr, irrespective f their size, but the way in which ISAs (UK) are applied needs t be adapted t suit the particular characteristics f the entity audited. 4 Expsure Draft: PN 15: The Audit f Occupatinal Pensin Schemes in the UK (Revised) (April 2017)

7 Occupatinal pensin schemes - key characteristics Benefit structures 5. Occupatinal pensin schemes have tw main types f benefit structure: defined benefit nrmally a final salary r career average arrangement. Final salary benefits are calculated by reference t the member's pensinable earnings usually fr a perid ending at r befre nrmal pensin date r leaving service and n pensinable service. Career average benefits are calculated fr each year f service based n pensinable earnings fr that year. Because f the uncertainties in determining the extent f future liabilities f such schemes, the trustees f such schemes are required t btain regular actuarial assessments f the schemes' liabilities and estimated future csts; and defined cntributin (r mney purchase) a pensin scheme where the individual member's benefit is determined by reference t cntributins paid int the scheme in respect f that member, increased r decreased by an amunt reflecting the investment return n thse cntributins. Because the scheme's cmmitment t pay future pensins is determined by the extent f funds available, n actuarial valuatin is nrmally required. 6. An ccupatinal pensin scheme can have bth defined benefit and defined cntributin sectins, r its benefits may be calculated as the better f tw alternatives n a defined benefit and a defined cntributin basis. These types f scheme are generally bth referred t as hybrid schemes. Spnsring, principal, participating and assciated emplyers 7. Mst ccupatinal schemes in the UK are established by an emplyer fr their emplyees. Where this is the case the emplyer is ften referred t as the principal r spnsring emplyer and has certain specified respnsibilities set ut under the scheme dcumentatin. Where the emplyees f emplyers ther than the spnsring emplyer are allwed t be members f the pensin scheme these ther emplyers are referred t as participating emplyers. Assciated emplyers are participating emplyers wh are under cmmn cntrl. Master trusts 8. Sme ccupatinal schemes in the UK are set up as master trusts. Under these arrangements the master trust is typically established by a funder and is pen, nrmally by invitatin, t nn-assciated participating emplyers and their emplyees. Gvernance and peratinal structures 9. Occupatinal pensin schemes are established under trust and are a separate legal entity frm the emplyer. The main activities f an ccupatinal pensin scheme typically cmprise the cllectin f cntributins frm the emplyer and members, the investment f thse cntributins and the payment f benefits t retiring r leaving members. 10. The trust is gverned by trustees. They may be individual trustees r a crprate trustee with trustee directrs. Trustees f ccupatinal pensin schemes wh d nt necessarily have first-hand actuarial, accunting r ther relevant experience frequently rely n advice r services frm experts in rder t fulfil their respnsibilities t safeguard the interests f scheme members. The Pensins Act 1995 (PA 95) als requires trustees t appint prfessinal advisers in certain areas (fr example, the scheme auditr, scheme actuary and investment managers). Financial Reprting Cuncil 5

8 11. Trustees will nrmally be supprted by scheme management in gverning the scheme. The spnsring emplyer may prvide trustee management and supprt services r they may be prvided by third party prviders, r in the case f master trusts, typically by the funder. 12. The emplyer will typically be respnsible fr the cllectin f cntributins frm members and remittance f member and emplyer cntributins t a pensin scheme. The trustees make arrangements fr the receipt f pensin cntributins by the scheme administratr frm the emplyer. 13. The scheme administratr will nrmally receive member and emplyer cntributins, maintain member recrds and calculate and pay benefits n behalf f the trustees. Trustees f pensin schemes may delegate aspects f administratin (althugh nt ultimate respnsibility) t a third party, pssibly the spnsring emplyer. 14. Trustees will nrmally appint third party investment managers t undertake the management f the funds available fr investment but the trustees retain ultimate respnsibility fr the prper use f the scheme's funds. The investment plicy is set ut in the trustees' Statement f Investment Principles. If the scheme invests in direct securities the trustees will als nrmally appint a third party custdian t hld the scheme investments n behalf f the trustees. 15. When trustees have appinted third party service prviders t undertake wrk n their behalf, including the emplyer, the scheme auditr cnsiders the system f cntrls perated by the trustees ver the service prviders (refer t ISA (UK) 402 fr further guidance). 16. The Occupatinal Pensin Schemes (Scheme Administratin) Regulatins 1996 N ( the Administratin Regulatins ) require spnsring emplyers (and frmer spnsring emplyers), their auditr r actuary t prvide trustees with such infrmatin as is reasnably required fr the trustees prfessinal advisers, including the scheme auditr, t carry ut their duties. Trustees must prvide similar infrmatin t their prfessinal advisers and als make the scheme's bks, accunts and recrds available. Scheme actuary 17. Fr the majrity f defined benefit schemes, trustees are specifically required by statute t appint a scheme actuary t prvide them with necessary valuatins and advice. Further cmmentary cncerning liaisn with the scheme actuary is set ut in a separate sectin f this Practice Nte (see paragraphs 291 t 295). 18. Trustees r managers f defined cntributin schemes are nt required by statute t appint a scheme actuary, althugh they may take actuarial advice t assess the ptential level f benefits available and/r the ptential level f cntributins required t fund a particular level f benefits. Sme but nt all defined cntributin schemes buy annuities frm third parties t avid uncertainty and the nging bligatin t pay pensins. Legislative and regulatry framewrk 19. Occupatinal pensin schemes perate within a cmplex framewrk invlving bth trust law and specific statutry prvisins, set ut primarily in Pensin Schemes Act 1993 (PSA 1993), PA 1995 and Pensins Act 2004 (PA 2004) and The Occupatinal Pensin Schemes (Requirement t btain Audited Accunts and a Statement frm the Auditr) Regulatins 1996 N.1975 (the Audited Accunts Regulatins ) made under thse Acts. T the extent necessary t carry ut their audits, it is essential fr auditrs f ccupatinal pensin schemes t have a gd understanding f current pensins 6 Expsure Draft: PN 15: The Audit f Occupatinal Pensin Schemes in the UK (Revised) (April 2017)

9 legislatin and assciated regulatins. In additin, the activities f ccupatinal pensin schemes are subject t HM Revenue & Custms (HMRC) regulatins and financial services legislatin. Scheme auditrs need t be aware f the accunting and auditing implicatins f these requirements. Auditr eligibility 20. Audits f ccupatinal pensin schemes may nly be carried ut by a registered auditr r ther persn apprved by the Secretary f State fr Wrk and Pensins. 21. The auditr appintment is that f a firm (r a sle practitiner) and nt an individual. N directr, partner r emplyee f the audit firm may act as trustee f a scheme that is an audit client f the firm. Furthermre, a persn cannt be appinted as auditr where: That persn is a member f the scheme; That persn is emplyed under cntract f service by the trustees r managers f the scheme; r That persn is an emplyer in relatin t the scheme. 22. In additin, a firm cannt audit a pensin scheme if an audit partner f that firm is a directr f a participating emplyer. Hwever, this ineligibility rule des nt apply in relatin t the accunts and auditr s statement fr a relevant scheme which had at least 500 participating emplyers n the first day f its accunting perid. 23. Any scheme auditr wh acts as trustee is guilty f an ffence. Trust law and trustees 24. Occupatinal pensin schemes cnstituted under trusts are subject t trust law. A trust is usually established by a legal dcument, the trust deed, which places the respnsibility fr the stewardship and custdy f the assets n the trustees. The trustees are required t cmply with the general requirements f the trust, the general law and legislatin which almst entirely applies t pensin scheme trusts, such as PSA 1993, PA 1995 and PA 2004 and related Regulatins, sme f whse prvisins verride thse f the trust. 25. The general duties and pwers f pensin scheme trustees are essentially the same as thse f ther trustees. The principal elements f their respnsibilities under trust law and statute are the prper management f funds prvided by emplyees and their spnsring emplyers during the curse f their emplyment s as t prvide pensin benefits and, subsequently, the payment f these benefits t thse entitled t them. 26. Trustees must act in the best interests f beneficiaries f the scheme, and ensure that n ne wh is nt entitled receives any trust prperty. Where a trustee is als a directr r emplyee f the spnsring emplyer, he r she shuld set aside any ther cncerns, duties r respnsibilities when acting in the capacity as a trustee. 27. There is a legal bligatin fr trustees nt t delegate the perfrmance f their duties and pwers, hwever this is qualified in that trustees may be permitted t delegate matters either under statute r, if specifically authrised t d s, under the terms f their trust. As statutry prvisins are limited, many trust deeds include wide pwers f delegatin. Permissin t delegate des nt release trustees frm respnsibility. Given they are fiduciaries, trustees must take due care in selecting the delegate, in determining suitable guidelines fr the perfrmance f the matter delegated, and in mnitring the delegate s actual perfrmance and cmpliance with the guidelines set. 28. Sectins 241 t 243 f PA 2004 require schemes t make arrangements that prvide fr at least ne third f trustees in an ccupatinal pensin scheme t be member Financial Reprting Cuncil 7

10 nminated. If the trustee is a cmpany, the arrangements must prvide fr at least ne third f the directrs t be member nminated. Schemes have t g thrugh this prcess t appint ne third but culd have less if there are insufficient nminatins. TPR s Cde f Practice 08 prvides guidance fr trustees in this area. 29. Master trusts must have at least three trustees. The majrity f the trustees, including the chair f the trustees, must be nn-affiliated i.e. must be independent f any undertaking which prvides advisry, administratin, investment r ther resurces t the master trust. Where there is a chair f the trustees at the time any ther trustee is appinted, the chair must be cnsulted n the appintment. Refer t the Administratin Regulatins fr further details. 30. A trustee may be remved by curt rder fr miscnduct r mismanagement. In accrdance with the Pensins Act 1995, as amended, The Pensins Regulatr (TPR) (see belw) may prhibit a persn frm being a trustee f a particular trust scheme, a particular descriptin f trust schemes r trust schemes in general. TPR may als suspend a trustee pending cnsideratin being given t a prhibitin rder. Where TPR prhibits a trustee, TPR may appint a replacement. TPR may als appint a trustee where they are satisfied that this is reasnable in rder t enable the trustees as a whle t have, r t exercise, the necessary knwledge and skill fr the prper administratin f the scheme, fr the number f trustees t be sufficient fr the prper administratin f the scheme r therwise t prtect the interests f the generality f scheme members. The Pensins Regulatr 31. TPR is the bdy respnsible fr the regulatin f wrk-based ccupatinal pensin schemes and is able t make use f a wide range f statutry pwers. Cdes f Practice and ther TPR guidance are relevant t auditrs f ccupatinal pensin schemes and can be fund n TPR s website at A scheme auditr is required by sectin 70 f PA 2004 t cnsider reprting directly t TPR breaches f law which affect the pensin scheme. The decisin t reprt will depend whether there is reasnable cause t believe there has been a breach f the law and, if s, whether the breach is likely t be f material significance t TPR. The scheme auditr is nt required t put int place arrangements t detect matters t be reprted under sectin 70 as the auditr s bligatin is limited t reprting thse which cme t its attentin. Further guidance fr scheme auditrs n reprting is given in TPR s Cde f Practice 01 Reprting breaches f the law. 33. The statutry duty t reprt matters f material significance t TPR applies t the scheme actuary, the trustees and all thers wh are invlved in the administratin f a scheme, as well as t the scheme auditr. The Pensin Prtectin Fund 34. The Pensin Prtectin Fund (PPF) was established t pay cmpensatin t members f eligible defined benefit pensin schemes, when there is a qualifying inslvency event in relatin t the emplyer and where there are insufficient assets in the pensin scheme t cver Pensin Prtectin Fund levels f cmpensatin. 35. The PPF is a statutry fund run by the Bard f the PPF, a statutry crpratin established under the prvisins f the Pensins Act Further infrmatin n the PPF is available n its website ( 36. When a pensin scheme enters a PPF assessment perid the trustees cntinue t gvern the scheme and the statutry bligatin t btain audited accunts remains. 8 Expsure Draft: PN 15: The Audit f Occupatinal Pensin Schemes in the UK (Revised) (April 2017)

11 Tax status 37. All schemes need t register with HMRC t becme Registered Pensin Schemes and therefre receive certain tax reliefs. Hwever, Registered Pensin Schemes remain subject t sme taxes, including VAT and withhlding taxes. Limitatins 1 n untaxed pensin scheme benefits include: a maximum annual tax allwable cntributin r inflw f value int a member s pensin fund which is knwn as the Annual Allwance; a maximum lifetime fund limit that can be accumulated which is knwn as the Lifetime Allwance; a minimum age at which retirement benefits can be taken; penalties apply where registered pensin schemes make unauthrised payments. If a pensin scheme cntinually makes unauthrised payments it may be deregistered; and where benefits exceed tax free limits, tax is payable. 38. Details f the lifetime allwances and annual allwances and ther limitatins in place currently are available at the HMRC website ( Scheme funding and actuarial matters 39. PA 2004 sets ut the framewrk fr the legislatin relating t the rle f the actuary in relatin t defined benefit schemes. Sectin 224, PA 2004 and the Occupatinal Pensin Schemes (Scheme Funding) Regulatins (SI 2005/3377), hereafter referred t as the Funding Regulatins, require nging actuarial valuatins t be nrmally undertaken every three years. The valuatin has t enable the expected future curse f the scheme's cntributin rates and funding level t be understd. The Funding Regulatins specify the way in which the assets and liabilities f the scheme are t be determined, calculated and verified by the actuary. Asset values are t be thse stated in the latest available audited financial statements. 40. PA 2004 and the Funding Regulatins require the preparatin f a schedule f cntributins within 15 mnths after the effective date f an actuarial valuatin shwing: separately the rates f cntributins payable twards the scheme by r n behalf f the emplyer and the active members f the scheme; and the dates n r befre which the cntributins must be paid. Where additinal cntributins are required in rder t give effect t a recvery plan, the rates and dates f thse cntributins must be shwn separately frm ther cntributins. 41. The schedule must be signed by the trustees r managers f the scheme and make prvisin fr signature by the emplyer (unless the scheme rules prvide therwise) in rder t signify agreement t matters included therein. The schedule must incrprate the actuary s certificatin, as set ut in the Regulatins. 42. The schedule must be reviewed by the trustees and where necessary revised frm time t time in accrdance with PA 2004 and the Funding Regulatins. 43. Sectin 226 f PA 2004 requires that if an actuarial valuatin shws that the scheme des nt meet the statutry funding bjective, a recvery plan must be put in place by the trustees. The recvery plan sets ut hw the statutry funding bjective is t be met and ver what perid. When preparing the recvery plan the trustees must btain the 1 Mre detailed infrmatin n current limits and ther infrmatin can be btained frm the HMRC website. Financial Reprting Cuncil 9

12 agreement f the emplyer, unless the rules f the scheme prvide therwise, and take actuarial advice. A cpy f the recvery plan must be sent t TPR. Annual reprt 44. Trustees f nearly all ccupatinal pensin schemes are required by Regulatins made under PA t make available t members an annual reprt within seven mnths f the scheme year end. The cntent f the annual reprt varies with the type f scheme but generally cmprises the fllwing: trustees' reprt, giving a review f the management f the scheme, membership statistics, investment perfrmance develpments and cmpliance matters during the perid; a statutry Chair s gvernance statement in respect f DC arrangements; financial statements shwing a true and fair view f the financial transactins f the scheme during the perid and f the dispsitin f its assets and liabilities (ther than liabilities t pay pensins and benefits after the end f the scheme year) at the end f the perid; an independent auditr s reprt n the financial statements; an independent auditr s statement abut cntributins payable t the scheme; trustees summary f cntributins; fr defined benefit schemes a reprt n actuarial liabilities as required by FRS 102 t be prvided alngside the financial statements; and fr defined benefit schemes, the actuarial certificatin f the schedule f cntributins. Financial statements, bks and recrds 45. The Audited Accunts Regulatins require scheme trustees t btain financial statements which: (a) cntain specified infrmatin; and (b) shw a true and fair view f the financial transactins f the scheme during the scheme year and f the amunt and dispsitin as at the end f the scheme year f its assets and f its liabilities, ther than liabilities t pay pensins and benefits after the end f the scheme year. 46. The Audited Accunts Regulatins require trustees t state whether the financial statements have been prepared in accrdance with the relevant financial reprting framewrk applicable t pensin schemes, which is currently FRS 102 The Financial Reprting Standard applicable in the UK and Republic f Ireland, and the Statement f Recmmended Practice Financial Reprts f Pensin Schemes ( the Pensins SORP ) 3 and, if nt, an indicatin f where there are any material departures frm this framewrk. 47. FRS 102 applies t pensin scheme financial reprting and in particular sets ut specific accunting requirements fr ccupatinal pensin schemes in its sectin dealing with Specialised Activities. Under FRS 102 the financial statements include liabilities ther than the actuarial present value f prmised retirement benefits which are required t 2 The Occupatinal and Persnal Pensin Schemes (Disclsure f Infrmatin) Regulatins SI 2013 N Issued by the Pensins Research Accuntants Grup (PRAG) in accrdance with the Financial Reprting Cuncil s Plicy and Cde f Practice fr SORPs. 10 Expsure Draft: PN 15: The Audit f Occupatinal Pensin Schemes in the UK (Revised) (April 2017)

13 be disclsed tgether with ther actuarial infrmatin in a reprt alngside the financial statements. 48. The Pensins SORP prvides further guidance n financial reprting fr ccupatinal pensin schemes. Cnsequently, it is nrmally necessary t fllw FRS 102 and the guidance in the Pensins SORP in rder fr pensin scheme financial statements t shw a true and fair view. 49. Sectin 49 f PA 1995 requires trustees t maintain bks and recrds f the transactins f the scheme. The nature f the accunting bks and recrds t be maintained are set ut in the Scheme Administratin Regulatins and cnsist f particular items specified in the Regulatins 4. Further requirements relating t recrds f cntributins fr defined benefit schemes are set ut in Funding Regulatins. Cntents f the auditr's reprt n pensin scheme financial statements 50. Under the Audited Accunts Regulatins and FRS 102 ccupatinal pensin scheme financial statements exclude the actuarial present value f prmised retirement benefits. Thus, the Audited Accunts Regulatins d nt require a scheme auditr t express an pinin as t whether the financial statements f a pensin scheme shw a true and fair view f its state f affairs but whether the financial statements btained by the trustees shw a true and fair view f the scheme's: (a) financial transactins and assets; and (b) liabilities, ther than liabilities t pay pensins and benefits, after the end f the scheme year. 51. When frming an pinin n the view shwn by an ccupatinal pensin scheme s financial statements which have been prepared in accrdance with FRS 102 and the SORP, the scheme auditr is therefre nt required t express an pinin as t the cmpleteness and accuracy f the lng term liabilities t pay benefits as determined by the scheme actuary. 52. A scheme auditr s statutry respnsibilities under PA 1995 d nt require the auditr t undertake wrk t determine whether the trustees' reprt r ther sectins f the scheme's annual reprt, including the Reprt n Actuarial Liabilities, are prperly prepared Hwever, the auditr is subject t the requirements f ISA (UK) 720 t cnsider whether ther infrmatin included in the annual reprt, which cntains r accmpanies the financial statements and the auditr s reprt theren, is materially incnsistent with the financial statements r the auditr s knwledge btained in the audit. Obtaining audited financial statements fr purpses ther than the annual reprt 54. Trustees may btain audited financial statements fr reasns ther than the requirement t include them in the annual reprt, fr example: Accunts fr the purpses f an actuarial valuatin. Trustees may wish t btain an actuarial valuatin at a date ther than the statutry accunting date. The scheme actuary will nrmally require audited financial statements in rder t prvide an actuarial valuatin; and 4 These requirements are the minimum. Trustees are likely t require mre detailed and histric recrds fr the effective management f their scheme than the minimum set dwn in legislatin. 5 Hwever, a breach f requirements relating t the annual reprt may give rise t a statutry duty t reprt directly t The Pensins Regulatr. Financial Reprting Cuncil 11

14 Accunts required fr Pensin Prtectin Fund valuatins. When a scheme enters the PPF assessment perid it is required t btain an actuarial valuatin as required by Sectin 143 f the PA T calculate the PPF levy, trustees must prvide the PPF with an actuarial valuatin under Sectin 179. Fr the purpses f btaining a sectin 143 valuatin r a sectin 179 valuatin, the trustees f the scheme will be required t prduce relevant accunts, as defined in the Pensin Prtectin Fund (Valuatin) Regulatins 2005 (SI 2005/672) and request the scheme auditr t prvide an audit pinin based n these relevant accunts. 6 Reprting n cntributins 55. The Audited Accunts Regulatins require the scheme auditr t prvide a statement as t whether r nt in the auditr s pinin cntributins have in all material respects been paid at least in accrdance with the payment schedule fr defined cntributin schemes r the schedule f cntributins, as certified by the scheme actuary, fr ther schemes unless the scheme had mre than 20 participating emplyers at the start f the scheme year (in such cases there is n requirement t btain an auditr s statement 7 ). The wrk undertaken by the scheme auditr in respect f cntributins takes int accunt bth the auditr s bligatin t reprt its pinin n the financial statements and, separately, t reprt whether cntributins have in all material respects been paid at least in accrdance with the schedule f cntributins r payment schedule. If a schedule f cntributins r payment schedule is nt in place the scheme auditr is required t reprt whether cntributins have been paid in accrdance with the scheme rules r cntracts under which they were payable, and (where apprpriate) recmmendatins f the scheme actuary. 56. The Occupatinal and Persnal Pensin Schemes (Disclsure f Infrmatin) Regulatins 2013 (the Disclsure Regulatins ) require scheme trustees t explain in the annual reprt the reasns fr any qualified r negative auditr s statement and t state hw the situatin has been r is likely t be reslved. Earmarked schemes 57. An earmarked scheme is a scheme under which all the benefits ther than death benefits are mney purchase benefits and all are secured by ne r mre plicies f insurance r annuity cntracts, and such plicies r cntracts are specifically allcated t the prvisin f benefits fr individual members r any ther persn wh has a right t benefits under the scheme. An earmarked scheme is nrmally required t appint an auditr t issue a reprt abut cntributins but is exempt frm having t btain audited financial statements, unless the deed and rules specifically require them (see paragraph 105). Audit exemptins 58. Schemes which meet the fllwing criteria are exempt frm appinting a scheme auditr under PA 1995: fewer than 2 members; fewer than 12 members where all the members are trustees f the scheme; and either: 6 The PPF (Valuatin) Regulatins were nt amended at the same time as the Audited Accunts Regulatins, hence the Schedule requiring additinal investment disclsures is still applicable. 7 The Occupatinal Pensin Schemes ( Requirement t btain Audited Accunts and a Statement frm the Auditr) Regulatins 1996 N (c) 12 Expsure Draft: PN 15: The Audit f Occupatinal Pensin Schemes in the UK (Revised) (April 2017)

15 the prvisins f the scheme prvide that all decisins which fall t be made by the trustees are made by unanimus agreement by the trustees wh are members f the scheme; r the scheme has a trustee wh is independent in relatin t the scheme fr the purpses f sectin 23 f the 1995 Act (pwer t appint independent trustees), and is recrded in the register maintained by TPR in accrdance with regulatins made under subsectin (4) f that sectin. 59. This exemptin therefre des nt apply if, fr example, there are deferred members wh are nt trustees. Even if the exemptin 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 frm the requirement t appint an auditr are als exempt frm the requirement t prepare a payment schedule. Auditing financial instruments 60. Occupatinal pensin schemes typically invest in a range f investments which include financial instruments such as equities, bnds, derivatives (bth exchange traded r ver the cunter) and pled investment vehicles. These are reprted at fair value under FRS 102 and are typically the mst material item in the financial statements. The FRC has issued Practice Nte 23 Special cnsideratins in auditing financial instruments which is relevant t the audit f all entities which use financial instruments, including pensin schemes f all sizes. The practice nte prvides backgrund infrmatin t financial instruments and a discussin f audit cnsideratins relating t financial instruments. Auditrs f pensin schemes shuld be aware f and cnsider the guidance in Practice Nte 23 where it is applicable t the engagement. Ging cncern 61. The principal liabilities f a defined benefit scheme cnsist f bligatins t pay future pensins, the extent f which are assessed by the scheme actuary rather than the scheme auditr. Such liabilities d nt arise in defined cntributin schemes, as the benefits payable are determined by the extent f funds available and prevailing annuity rates. 62. The ging cncern basis is assumed in the preparatin f the financial statements f pensin schemes unless a decisin has been made t wind up the scheme, an event triggering wind up has ccurred, e.g. inslvency f the emplyer, r the scheme has entered the PPF assessment perid and there is n realistic alternative t the eventual winding up f the scheme and the transfer f its assets and liabilities t the PPF. The auditr s respnsibilities in relatin t the cnsideratin f ging cncern are discussed further in the sectin n ISA (UK) 570 in this PN. Financial Reprting Cuncil 13

16 ISA (UK) 200: Overall Objectives f the Independent Auditr and the Cnduct f an Audit in Accrdance with Internatinal Standards n Auditing (UK) 63. ISA (UK) 200 deals with the independent auditr s verall respnsibilities when cnducting an audit f financial statements in accrdance with ISAs (UK). 64. ISAs (UK) include a requirement fr the auditr t cmply with the FRC's Ethical Standard and relevant ethical guidance issued by the auditr's prfessinal bdy in the cnduct f any audit f financial statements, which apply equally t audits f pensin schemes. A fundamental principle is that practitiners shuld nt accept r perfrm wrk which they are nt cmpetent t undertake. Practitiners shuld nt undertake the audit f ccupatinal pensin schemes unless they are satisfied that they have r can attain the necessary level f cmpetence. 65. Befre cmmencing the audit f an ccupatinal pensin scheme, a firm ensures that it has enugh staff wh have adequate knwledge and experience f such audits. Staff invlved in an audit f an ccupatinal pensin scheme will have a brad understanding, cmmensurate with the individual s rle and respnsibilities in the audit prcess f: the type f scheme being audited (e.g. defined benefit, defined cntributin r hybrid); the status f the scheme (e.g. pen, clsed t new members, clsed t future accrual); key risks affecting the scheme; the scheme's trust deed and rules; pensins legislatin and regulatins; relevant TPR Cdes f Practice and guidance; and the principles f FRS 102 and the Pensins SORP. 66. An audit firm must be eligible t act as a scheme auditr. Audits f ccupatinal pensin schemes may nly be carried ut by a registered auditr r ther persn apprved by the Secretary f State fr Wrk and Pensins. 67. The auditr appintment is that f a firm (r a sle practitiner) and nt an individual. N directr, partner r emplyee f the audit firm may act as trustee f a scheme that is an audit client f the firm. Any scheme auditr wh acts as trustee is guilty f an ffence. The specific requirements fr eligibility and ineligibility as scheme auditr are set ut in Regulatin 4 t the Occupatinal Pensin Schemes (Scheme Administratin) Regulatins In additin, a firm cannt audit a pensin scheme if an audit partner f the firm is a directr f a participating emplyer. Hwever, this ineligibility rule des nt apply in relatin t the accunts and auditr s statement fr a relevant scheme which had at least 500 participating emplyers n the first day f its accunting perid. 14 Expsure Draft: PN 15: The Audit f Occupatinal Pensin Schemes in the UK (Revised) (April 2017)

17 ISA (UK) 210: Agreeing the Terms f Audit Engagements 69. ISA (UK) 210 sets ut the auditr s respnsibilities when agreeing the terms f audit engagements. These include establishing that the precnditins fr an audit are present and that there is a cmmn understanding between the auditr and management and, where apprpriate, thse charged with gvernance. Fr a pensin scheme audit the terms f engagement are agreed with the trustees. 70. ISA (UK) 210 requires that an engagement letter be btained fr all audit appintments. This requirement supplements that included in PA 1995 whereby trustees are required t appint the scheme's auditr. The appintment f the scheme auditr 71. Sectin 47(1)(a) f PA 1995 requires the trustees r managers f mst ccupatinal pensin schemes t appint a scheme auditr. 72. T be effective, the appintment f a scheme auditr (r, where a scheme is exempt frm the requirement t appint a scheme auditr, the auditr) must be made in accrdance with the Regulatins 8. The trustees r managers f the scheme frward a Ntice f Appintment t the auditr specifying: the date the appintment is due t take effect; t whm the auditr is t reprt; and frm whm the auditr will take instructins. 73. The date the appintment is due t take effect ( the effective date ) is at a future date. The date f appintment des nt becme effective until the auditr has acknwledged receipt f the Ntice f Appintment. This being the case, a practical apprach may be fr the Ntice f Appintment t specify the effective date as being the date f the auditr s acknwledgement f the appintment. 74. The name f the scheme and the year-end shuld be clear. If the appintment is in relatin t a scheme year which has already ended the engagement terms shuld specify which scheme year(s) will be subject t audit. 75. In the case f an appintment cvering a number f schemes, there shuld nrmally be separate Ntices f Appintment fr each r, if particular circumstances warrant it such as a cmmn trustee bdy fr a number f schemes, a schedule detailing the separate schemes. 76. Fr the appintment t be effective, PA 1995 and the Scheme Administratin Regulatins requires the auditr t acknwledge receipt f the Ntice f Appintment within ne mnth f its date f receipt. The appintment is nt effective unless and until this acknwledgement is sent by the auditr within the ne mnth perid. If the auditr des nt acknwledge appintment within ne mnth, the Ntice f Appintment ceases t be valid. The trustees r managers will then need t prvide a new Ntice f Appintment. 77. PA 1995 and the Scheme Administratin Regulatins als require the auditr t cnfirm in writing that he will ntify the trustees r managers immediately he becmes aware f 8 The Occupatinal Pensin Schemes (Scheme Administratin) Regulatins 1996, SI 1996 N. 1715, as amended. Financial Reprting Cuncil 15

18 the existence f any cnflict f interest t which the auditr is subject in relatin t the scheme. 78. An example Ntice f Appintment and an example letter f Acknwledgement f Appintment are set ut in Appendix If the resignatin, remval r death f a scheme auditr ccurs, the Scheme Administratin Regulatins require that a new appintment be made within three mnths. Failure t appint a new auditr within the three-mnth perid may be a matter f material significance t TPR. If an auditr is requested t accept appintment after three mnths frm the date when a previus auditr left ffice, r if there was n previus auditr appinted under PA 1995 and the scheme is nt a new ne 9, the breach will need t be nted and may need t be reprted t TPR. 80. There is n legal time limit fr the appintment f a scheme auditr fr new schemes (r schemes which n lnger qualify fr an exemptin) but frm a practical perspective the appintment shuld be made in sufficient time t enable the trustees duties relating t btaining audited accunts t be met. 81. Where there is n statutry requirement fr a scheme auditr, the trustees may nevertheless appint an auditr, which must be dne using the same statutry prcess as utlined abve, with the fllwing differences: the appintment is as prfessinal adviser rather than scheme auditr ; the eligibility and ineligibility rules in the Regulatins d nt apply t prfessinal adviser appintments; and the three mnth limit n vacancy in ffice des nt apply. The letter f engagement 82. The scheme auditr agrees the terms f the audit engagement with the trustees f the scheme and addresses the letter f engagement t the trustees. 83. The scheme auditr sets ut the nature and scpe f its audit bligatins under PA 1995 s as t ensure that trustees are aware f the extent f thse respnsibilities. In particular, the auditr includes reference t its respnsibility t reprt n the cntributins payable t the scheme (if applicable) and t the statutry duty t reprt t TPR in certain circumstances, making it clear that the duty is t reprt matters if fund, and des nt invlve undertaking additinal wrk t identify reprtable matters. 84. Under PA 1995, the scheme auditr des nt have a right f access t infrmatin held by third parties. Cnsequently, it is necessary fr the scheme auditr t request such infrmatin, thrugh the trustees when necessary fr the external audit. The scheme auditr therefre includes in the engagement letter a paragraph relating t access t third parties t whm the trustees delegate particular functins, and t their recrds relating t the pensin scheme. The scheme auditr may require infrmatin frm the: administratr; investment manager(s); custdian(s); 9 There is n time perid in the PA 1995 fr the appintment f an auditr by newly-cnstituted schemes. Schemes are simply required t have ne in place. Nrmally, appintments will take place as the scheme is established as ne f a series f adviser and service prvider appintments by the trustees. 16 Expsure Draft: PN 15: The Audit f Occupatinal Pensin Schemes in the UK (Revised) (April 2017)

19 spnsring emplyer r emplyers where there is a multi-emplyer scheme and the spnsring emplyer's auditr; and scheme actuary. 85. When a pensin scheme uses anther rganisatin r the spnsring emplyer t deal with the administratin f cntributins and benefits and t maintain membership and financial recrds, the trustees arrange fr the scheme auditr t have direct access t the recrds and persnnel f the relevant rganisatin acting as scheme administratr. 86. In view f the imprtance f the scheme actuary's wrk t the infrmatin cntained in the scheme's annual reprt, it is nrmally apprpriate fr the scheme auditr t btain the trustees' agreement t direct dealings between the auditr and the scheme actuary, bth in terms f nging liaisn regarding the affairs f the scheme and als in respect f the scheme actuary's and scheme auditr s duty t reprt matters f material significance directly t TPR, and t dcument this agreement in the engagement letter. 87. Regulatins made under PA 1995 and the Scheme Administratin Regulatins require the emplyer t ntify the trustees, within ne mnth, f the ccurrence f any event relating t the emplyer which there is reasnable cause t believe will be f material significance t the trustees r the scheme's prfessinal advisers in the exercise f their functins. The scheme auditr may wish t include a term in the engagement letter requiring the trustees t infrm the scheme auditr f any matters which cme t their attentin which may be relevant t the audit. Resignatin r remval f the auditr 88. The Scheme Administratin Regulatins require a written ntice f resignatin by the scheme auditr which shuld cntain either: a statement specifying the circumstances; r a declaratin f n circumstances. 89. The statement is made by the utging scheme auditr specifying any circumstances cnnected with their resignatin which, in its pinin, significantly affect the interests f the members r prspective members f, r beneficiaries under, the scheme. Under the Disclsure Regulatins, the annual reprt must include a cpy f any statement made n resignatin r remval in accrdance with Regulatins made under sectin 47(6) PA Where the auditr knws f n such circumstances, and hence makes a declaratin t that effect, there is n requirement t include this declaratin in the annual reprt, althugh it is ften included fr the avidance f dubt. The trustees are required t prvide a cpy f the statement r declaratin t the succeeding scheme auditr. Financial Reprting Cuncil 17

20 ISA (UK) 240: The Auditr s Respnsibilities Relating t Fraud in an Audit f Financial Statements 90. ISA (UK) 240 deals with the auditr s respnsibilities relating t fraud in an audit f financial statements. 91. Auditrs f pensin schemes are aware that the ptential fr fraud exists in all schemes. Even if the auditr cnsiders that the nature f pensin schemes (nt prfit-making and nt trading) reduces the risk f fraudulent financial reprting, the risk f misapprpriatin f assets remains. Prfessinal scepticism therefre remains key. 92. The trustees f a pensin scheme are respnsible fr ensuring that the assets and revenues f the scheme are adequately safeguarded against the effects f fraud thrugh the implementatin f apprpriate cntrls. This legal respnsibility remains with trustees even if they have delegated sme r all f their executive functins t third parties. 93. Examples f cnditins r events which may increase the risk f fraud include: failure by the trustees t establish and perate adequate internal cntrl mechanisms, as required by legislatin; trustees r scheme management displaying a significant disregard fr the varius regulatry authrities; trustees r scheme management having little r n invlvement in the day-t-day administratin f the scheme; trustees r scheme management having ready access t the scheme's assets and an ability t verride any internal cntrls; trustees r scheme management failing t put in place arrangements t mnitr activities undertaken by third parties, including the emplyer; trustees r scheme management displaying a lack f candur in dealings with members, the scheme actuary r the scheme auditr n significant matters affecting scheme assets; the spnsring emplyer perating in an industry with increasing business failures, r itself having financial difficulties; significant levels, r unusual types, f related party transactins (including emplyer-related investments) invlving unaudited entities r entities audited by ther firms; and paque investment arrangements where the flw f infrmatin t the trustees is restricted and therefre making it mre difficult t cntrl the investment and understand the psitin. 94. The audit planning prcess includes an assessment f the risk f material misstatements arising frm fraud. Cnditins r events which increase the risk f fraud include previus experience r incidents which call int questin the cmpetence r integrity f persns invlved in the peratin f the scheme. 95. The risk f material misstatements arising frm fraud is nrmally mst likely t arise in relatin t investments as investment transactins and balances are nrmally much larger than transactins and balances with members. 96. In practice, investment related frauds are fairly uncmmn. Althugh member related fraud is relatively mre cmmn, fr example the cntinuing payment f benefits t a 18 Expsure Draft: PN 15: The Audit f Occupatinal Pensin Schemes in the UK (Revised) (April 2017)

21 deceased pensiner, amunts invlved are unlikely t be material t the pensin scheme financial statements. 97. Under the requirements f ISA (UK) 240 (paragraph 47) if the auditr has cncluded that the risk f material misstatement due t fraud related t revenue recgnitin is nt applicable in the circumstances f the engagement, the auditr shall include in the audit dcumentatin the reasns fr that cnclusin. 98. Revenue in a pensin scheme generally cmprises cntributins and investment incme. Pensin schemes are nt prfit-making entities and pensin scheme accunts are nt publicly available. Additinally, unlike sales revenue f a cmmercial entity, there is little scpe t manipulate revenue f a pensin scheme, fr example, thrugh false invicing r misuse f credit ntes. Given these facts, there is nrmally little incentive r pprtunity fr revenue t be fraudulently misstated and therefre limited risk f material misstatement arising due t fraud. Hwever, the scheme auditr gives cnsideratin t the risks arising in cnnectin with the types f fraud that may ccur in the cntext f an ccupatinal pensin scheme (see paragraph 93 abve) and dcuments its cnclusin and the reasning behind it. 99. There has been increasing cncerns ver pensin scams whereby pensin scheme members transfer ut their benefits t unapprved r inapprpriate arrangements. Trustees are required under guidance frm TPR t put in place cntrls t check that transfers ut are made t authrised pensin schemes and in certain circumstances t check that the member has sught advice befre making the transfer. If the auditr becmes aware f a pssible scam during the curse f their audit wrk they raise the matter with the trustees. Financial Reprting Cuncil 19