New fair value hierarchy, new investment risk disclosures and additional transaction cost disclosures all feature in guidance from the Pensions Research Accounts Group and Investment Association.
The guidance is designed for helping pension schemes, their accounts preparers and investment professionals fulfill responsibilities in implementing the new Pensions Statement of Recommended Practice (Sorp) investment disclosure requirements.
Under the new ‘fair value hierarchy’, the changes in brief include analysis of investments by fair value, according to a tiered valuation hierarchy on the basis on market valuation.
This is different to the International Financial Reporting Standards valuation hierarchy, which is currently adopted by listed companies.
Shona Harvie, partner at national audit, tax and advisory firm Crowe Clark Whitehill and joint-chair of the Prag/Investment Association joint working group, said the guidance recommends considering the valuation hierarchy for pooled funds at a unit level, rather than looking under the wrapper.
“This approach will help to simplify this requirement for many pensions’ schemes which invest solely or partly in pooled funds and is consistent with the Sorp requirement to consider pooled fund investment risk disclosures at a unit level rather than having to quantify the risks within pooled funds.”
The new investment risk disclosures for both defined benefit and defined contribution pension schemes mean trustees will be required to explain the nature and extent of investment risks, quantify the risk exposures where figures in the accounts are not sufficient, explain how they arise and set out policies for risk management.
The Statement of Investment Principles (Sip) will provide much of the information required, however more is likely to be needed.
Ms Harvie said investment risk disclosures that in many cases it will be worth considering what the Sip says about the specific risks on which schemes are required to make disclosures. “Where the Sip is silent on specific risks, consideration could be given to whether it should be updated to clarify the trustee’s approach to those risks.”
In terms of transaction costs, previously only one figure was disclosed. Now, analysis is required of direct transaction costs with respect to the main asset class and type of cost and comparative display is required.
The Prag and Investment Association set up a joint working group following the publication of the new accounting framework referred to as FRS 102, and the consequent need to revise the Sorp.
The revised Pensions Sorp was published in November 2014, setting out the new investment disclosure requirements, which are applicable for years commencing on or after 1 January 2015.