UK Pensions Industry disapproves of IFRS accounting proposals

From Global Pensions

Just a quarter of the UK pensions industry supports plans to make all schemes compliant with International Financial Reporting Standards, a poll shows.

A poll - conducted by Deloitte - revealed 75% of trustees, administrators and accountants did not support the Accounting Standards Board's plans to classify pension schemes as ‘publicly accountable' entities to comply with IFRS.

The poll of 80 respondents also showed a further 43% said pension schemes' financial reporting requirements did not need changing at all.

Deloitte audit partner Sue Barratt said: "We are surprised that all pension schemes are being proposed as publicly accountable entities, given that there are many small schemes with few members.
"It is doubtful whether such schemes hold assets for a ‘broad group of outsiders', which is part of the ASB's definition of ‘publicly accountable'."

Under the proposals, pension schemes would be classified as tier 1 in the ASB tier structure, putting them on par with a listed company in their accounting requirements.

The survey also found 29% thought accounting standards needed changing, with 28% saying they were unsure.

A concern expressed by many respondents was that the potential administrative burden and expense of changing existing frameworks may not lead to a greater understanding of pension scheme accounts by members.

Barratt added: "While the ASB has indicated minimal changes in reporting by pension schemes, examples from other countries that have adopted the equivalent IFRSs for pension scheme accounts have led to significant, additional disclosures in financial statements.

"Considering this, there is likely to be more debate as to which accounting standards would be most relevant for pension schemes, in advance of the ASB's consultation period closing on 30 April."

Sovereign Investor:   The great majority of UK trustees, administrators and accountants believes that managing money on behalf of others does not make them publicly accountable.  It seems worth exploring the possible reasons why, because the same principles may apply - in a more general way - to sovereign funds.

The Chartered Accountants in Canada have this definition of 'publicly accountable':

A publicly accountable enterprise is an entity, other than a not-for-profit organization, or a government or other entity in the public sector, that:

• has issued, or is in the process of issuing, debt or equity instruments that are, or will be, outstanding and traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or  

• holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. 

In the United Kingdom, the definition provided by the Financial Reporting Council is very similar:

An entity has public accountability if:

• (a) at its reporting date, its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over‐the‐counter market, including local or regional markets); or
• (b) as one of its primary businesses, it holds assets in a fiduciary capacity for a broad group of outsiders and/or is a deposit taking entity for a broad group of outsiders. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks.

In both cases, the holding of assets in a fiduciary capacity for a group of outsiders is expressly included in the definition of public accountability, and so it ought to be.  The Sovereign Investor wonders, then, whether the trustees have a problem with IFRS per se or, whether having taken hold of their members' money, they regard the funds as somehow being their own property, at least for the time being.


They wouldn't understand more comprehensive reporting, anyway

The argument that more comprehensive reporting may not be understood by members is an old chestnut.  In many countries sovereign funds hold assets on behalf of people who may not even be literate, and this should make them more accountable, if anything.  The fact that not everyone is financially literate merely provides an excuse for the trustees and their colleagues to try and avoid accountability to those members, other stakeholders and industry commentators, who do understand these matters.  In finance, as we know and was proved during the GFC, the devil is always in the details. 

Yes, IFRS reporting can be bulky.  It's just as well that in December 2010 the International Accounting Standards Board issued a Practice Statement about having a management commentary.  The Practice Statement provides a broad, non-binding framework for the presentation of management commentary that relates to financial statements prepared in accordance with IFRS.

Management commentary is a narrative report that provides a context within which to interpret the financial position, financial performance and cash flows of an entity. It also provides management with an opportunity to explain its objectives and its strategies for achieving those objectives. Management commentary encompasses reporting that jurisdictions may describe as management’s discussion and analysis (MD&A), operating and financial review (OFR), or management’s report.

We don't have to understand the technicalities of air bags, advanced braking systems and other safety features before being allowed to drive our cars.  The Sovereign Investor would, however, like to think that its ignorance on these matters shouldn't be used as an excuse by car manufacturers to avoid accountability to the relevant authorities for compliance at a technical level with safety standards.