Adding value to Pension scheme reports

The significance of the pension scheme year end accounts is different to those of a company. In the corporate world the financial performance of the business is susceptible to scrutiny by shareholders and the directors are answerable to any perceived failings.

Pension scheme accounts generally have a small circulation and it is rare for trustees to be challenged on the annual result. But trustees should be considering the information being disclosed and how this can be best conveyed to the parties interested in the scheme.  

The need for trustees to communicate effectively is not just a case of responding to the needs of stakeholders, it is a fundamental element of good governance.

Who reads the annual report?

The annual reports of pension schemes are generally only read by the trustees and the actuary. Although members and others have a legal right to see the full annual report which includes the financial statements, they rarely exercise this right.

There is, however, little doubt that members are more interested in the financial affairs of their scheme as events in the financial markets and the economy over the last eighteen months have raised awareness.

In addition the sponsoring employer is also likely to be taking a greater interest in a defined benefit scheme’s affairs due to the significance of the scheme on the employer’s balance sheet and the on-going cashflow demands.

The approach to the annual report and financial statements may well be different depending who the users are.

Targeted report

The content of the annual report and financial statements is set out by regulations. However, the trustees can add to the minimum statutory requirements and introduce relevant employer or scheme themes and branding as appropriate. The level of detail and the format needs to be attuned with the user.

If the user is primarily the trustees and the actuary, it may be appropriate to include a high level of detail in the annual report. For example, individual reports from each investment manager may be an important source of information for trustees and so these should form part of the annual report. However, this can make the overall document voluminous and difficult to read.

Members usually prefer a more focussed report that is concise. In the context of investment reports, a single report conveying the overall strategy and performance of the scheme can be more user-friendly and an effective way to clearly convey complex information.

It is therefore essential that, at the outset of the annual reporting process, trustees assess who the users are and the information that is most appropriate to include. It is also an opportunity to consider any areas where the disclosure is above the statutory requirement. Additional information may have been introduced to address a particular concern in a particular year. The trustees must ask themselves whether such information is still needed.

The form of the report does have an impact on cost. As a general guide, the greater the level of detail and the longer the report, the higher the cost as the auditor needs to perform additional work in relation to the disclosures. It may, of course, also have an impact on the costs incurred by the administrators and scheme accountants.

Engaging the members

One way to effectively communicate with members is to provide them with summary or popular reports.

A summary report can provide valuable information about the scheme to the members. It is an opportunity for trustees to demonstrate their good governance of the scheme, to help defined contribution members understand the nature of their pension and the choices they have and to keep defined benefit members aware of funding issues.

Summary reports do not need to be an expensive publication and trustees should consider the opportunities that technology can now offer. Websites and other means of electronic publication are cost effective ways of communicating with members.

It is, however, important that the approach is planned early. This ensures that the information is provided on a timely basis and that it is still current when it is made available. The Pensions Research Accountants Group (PRAG) has published guidance for the preparers of summary reports on their website.

Maximising value 

Value can be gained from the statutory annual reporting process by targeting the annual report at the primary users and using alternative means of communication to engage the members.