Many employers providing pensions to their employees have to allow for the cost of pensions in their accounting figures. For those providing “defined benefit” pensions such as the LGPS – i.e. those where the pension amount is defined by a set of rules based on earnings, period of service, inflation levels, etc – there are specific rules and processes to follow. The reasoning for this is:
- Pensions are a form of (deferred) pay and so a business expense, and the cost of providing them needs to be recognised in the employer’s accounts.
- Providing a defined benefit pension involves long-term liabilities and risks. Having a defined benefit scheme which is underwritten by the employer is effectively a form of borrowing, so the pension assets and liabilities should be shown on the employer’s balance sheet.
- The measurement of the costs and liabilities should be consistent from one employer to another (this can allow comparisons between different employers).
Employers will receive the following documents with their individual FRS 101/102 Pension Scheme Accounting Figures, which are designed to specifically address the general queries typically raised by auditors following an LGPS accounting exercise.
The papers provided alongside the accounting results are:
- the Audit Compliance paper (formerly referred to as the Supplementary Paper)
- the Actuarial Assumptions and Other Considerations paper
- the NewsAlert (containing final financial assumptions)
- Audit FAQ (Frequently Asked Questions)
These documents will contain much of the information that an auditor requires, and can be shared with your auditor to address queries relating to process, methodology or assumptions. Additionally, the audit compliance paper contains an “Audit Declaration” that covers key compliance information required.
Employers will in addition receive an employer support paper that provides useful information for employers (particularly those that are new to LGPS accounting) and answers questions frequently raised by employers as part of the accounting results papers.
Employers should encourage their auditors to refer to these documents before raising queries with the fund or the actuary as this will help to cut down on additional costs associated with the accounting exercise.
Employers need to be aware that any queries sent to Mercers will usually result in additional charges, so they should refer to these documents in the first instance, and make sure their auditors do as well. The Audit FAQ document in particular is designed for this purpose.