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Klumpes and Manson, 2000

Executive summary

Introduction

Over 10 million individuals in the UK now participate in over 200,000 occupational pension schemes. The trustees of these schemes are legally required to provide them with certain information about scheme funds and funding. Section 41 of the Pensions Act 1995 requires that trustees obtain auditor statements about contributions, actuarial valuations and audited financial statements which show a ‘true and fair view’. In July 1996 a Revised Statement of Recommended Practice, ‘Financial Reports of Pension Schemes’, (‘Revised SORP’) was issued by the Pension Research Accountants Group (PRAG). The SORP was effective for pension scheme years ending on or after 6 April 1997, when the Pensions Act became operational. Although the Occupational Pensions Regulatory Authority (OPRA) is empowered under the Pensions Act to legally enforce these requirements, very little is known about the extent of voluntary compliance by pension funds with the various financial reporting provisions of the SORP.

The research report was commissioned by PRAG, an independent research and discussion group comprising UK pensions industry experts, to provide preliminary evidence on the extent of compliance with the Revised SORP by UK pension funds. The Revised SORP was introduced in to update SORP 1 for changes in accounting standards and for the revised requirements for annual reports introduced by new regulations made under the Pensions Act 1995. This was also an apt time because of the criticisms that had been made of the apparent shortcomings in the accountability of trustees of UK pension schemes identified in the light of the Maxwell scandal. This report documents the empirical findings relating to an investigation of the extent and level of voluntary compliance with various aspects of the SORP by a representative sample of UK pension funds over the three years (1996-1998), that is, including the periods both prior to and immediately after its effective date.

This investigation is of interest for a number of reasons. First, although in general SORPs, unlike accounting standards issued by the Accounting Standards Board, are not usually mandatory, the SORP Financial Reports of Pension Schemes is effectively mandated because of the introduction of recent UK pensions legislation, which is supervised by OPRA, effective for reporting years ending on or after 6 April 1997. Hence this study provides evidence on the extent of ‘voluntary’ compliance with a SORP effectively mandated by law. More generally, this study evaluates the effectiveness of the financial reporting provisions of a recently Revised SORP. Our study focuses on the extent of voluntary compliance with the Revised SORP in multiple dimensions. We report the extent of compliance by annual accounts with a range of both format and content requirements, and the timing of the preparation of the accounts. We also examine the level of consistency of summary members’ reports, separately produced by funds, with the SORP checklist.

The report summarises the findings of empirical research, funded by PRAG and administered by ACCA, which investigated the level of voluntary compliance with various aspects of the Revised SORP. The extent of compliance with various aspects of the Revised SORP was determined by examining a random sample of 262 UK pension schemes over the period 1996-1998, i.e. both prior and subsequent to its implementation.

Our primary analysis focuses on the extent and level of compliance of the formal annual accounts provided by the sample funds with various content requirements and presentation guidelines contained in the Revised SORP.

We found that the overall level of compliance increased after the SORP was effectively mandated by legislative backing, that is, the government regulations issued pursuant to the enactment of the Pensions Act. However a number of the financial reports issued by funds in our sample do not fully comply with the suggestions contained in the Revised SORP. The most frequent problem encountered was the failure to dis-aggregate the investment portfolio composition sufficiently in the net assets statement. In addition, the overall level of compliance was significantly higher for the format guidelines contained in the SORP than for its content requirements.

It was also found that during the three reporting years 1996-1998 many funds did not distribute formal annual reports to their members and, in fact, received very few requests for this information. Approximately 60% of the total sample of pension fund trustees who participated in the survey separately distributed summary reports to their members. The Revised SORP contains a checklist of items which trustees might consider including in summary reports. Using a sample of 159 pension scheme summary annual reports distributed to members by the sample funds, for the same periods in which the formal accounts were issued, we investigated the extent of consistency with the Revised SORP’s checklist. This was facilitated using a disclosure index constructed from both the SORP checklist and other, what we term, ‘best practice’ disclosures. The results of this analysis suggest that the overall level of disclosure contained in the summary reports gradually increased from 1996 to 1998. A significant proportion of the sample summary reports did not, however, contain a number of the individual items recommended by the SORP checklist. It was also found that the strength of association between pension fund trustees’ policy towards voluntary compliance with the SORP in preparing both their summary reports and annual accounts gradually increased over time.

In addition to the analysis of the annual accounts, a survey questionnaire was sent to those pension scheme trustees who provided copies of annual scheme accounts. Responses to the questionnaire identified a number of issues regarding the implementation of the Revised SORP. The final stage of the research project consisted of a series of semi-structured interviews with a number of individuals involved in various ways with the UK pensions industry.

The major purpose of the interviews was to elicit views about the perceived decision-usefulness of the Revised SORP and to provide a forum for the exchange of views about any contentious issues arising from its implementation. From these interviews a number of specific issues were identified which warrant consideration by the PRAG committee responsible for producing the Revised SORP. These include the valuation of insurance policies relating to AVC investments, and the lack of specified requirements for summary reporting relative to the full scheme accounts.

The findings that the majority of pension schemes were effectively complying with the Revised SORP, even before it was mandated, are contrary to those obtained by earlier Australian surveys of compliance with pension scheme accounting standards. Given that our sample selection procedure and research design is largely consistent with these earlier studies, we interpret this anomaly as being attributable primarily to the fact that the UK SORP was effectively developed by the UK pensions industry, whereas the Australian accounting standard was opposed by the industry in that country.

Our findings regarding the level of compliance with the Revised SORP are tempered by our other findings that the majority of our sample of UK pension schemes issue informal or abbreviated financial reports to members, which need not comply with the SORP. Since the vast majority of members of these schemes do not appear subsequently to request copies of the formal accounts, which are subject to the SORP, we question whether these formal reports are relevant to this vast and diffuse group of potential users.

The results of the analysis concerning the extent of voluntary compliance by summary reports with both the SORP checklist and other non-SORP best practice disclosures should be viewed cautiously, given the extent of subjective discretion involved in the construction of the disclosure index, particularly in scoring the extent of compliance with each individual item and in the weighting of items both within and across categories. Nevertheless, despite these limitations, our results, based on the UK pension funds’ summary reports supplied, indicate a significantly lower level of voluntary compliance with the recommended SORP checklist for summary reports.

The mixed results obtained for the level of compliance with both SORP checklist and non-SORP best practice disclosures by the sample of summary reports perhaps reflect the fact that, unlike the vast bulk of the SORP guidelines that apply to formal annual accounts, the disclosure checklist for summary reports is indicative only.

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