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Implementing FRS17: Letter from Pensions Panel to LGPS administering authorities providing some operational guidance
To All Local Government Pension Scheme Administering Authorities
22 April 2002
Dear Colleague
IMPLEMENTING FRS17 - PENSION PANEL GUIDANCE
- You are probably aware that CIPFA/LASAAC, as the designated SORP preparers for Local Authority accounting, have decided to adopt the recognition requirements of FRS17 in the 2003 SORP. Interim disclosures are required for the 2001-02 and 2002-03 accounts and these are detailed in SORP Update Bulletin 2 for 2001 (http://www.cipfa.org.uk/pt/sorpupdate.cfm). You are also probably aware of the development of a valuation model by William M Mercer to roll forward actuarial valuations. In this letter the CIPFA Pensions Panel provides some guidance as to the implications of the CIPFA/LASAAC pronouncements and the application of the Mercer valuation model for the 2001-02 accounts.
SORP Update Bulletin
- In the Bulletin the Local Government Pension Scheme (LGPS) as operated for local authorities is classified as a defined benefit (DB) multi employer scheme. Full FRS 17 disclosures will be required for 2001-02 accounts, amended slightly as follows:
- Authorities are only required to disclose the proportions of assets in each class, not to show an attributable value to individual classes; and
- The discount rate to be applied to calculate the value of liabilities, as determined by Government Actuary's Department, is 3.5% real rather than the AA corporate bonds rate.
- The Panel's expectation is that many non local authority employers in the fund will conclude, in conjunction with their auditors, that they are required to make defined contribution (DC) scheme disclosures as it is unlikely that they will have an individual employer rate, particularly where employers are grouped for valuation purposes. DB disclosure may be required if non local authority employers have a differential rate and they should refer to their auditors and to the SORP preparers for their own sector in determining the relevant approach.
- You should note that the majority of town, parish and community councils fall outside the scope of the SORP, as they have budgeted income under £500k per annum. For the town, parish and community councils covered by the SORP it is the Panel's expectation that individual LGPS employer contribution rates will not have been set (as the Fund actuary will not be able to separately identify the assets / liabilities in the Fund for such bodies on a consistent and reasonable basis) and that, subject to auditor agreement, disclosures should be on a DC basis.
- Police and Fire authorities (whose schemes are designated as single employer DB in the Bulletin), many of whom do not have sufficient information at this time to calculate FRS17 disclosures, will be able to apply a valuation model developed by GAD which is based on transfer values.
- Until full adoption of FRS17 (2003-04 accounts) SSAP 24 pensions disclosures will also be required and that you will need to plan for two sets of actuarial costs.
The legality of carrying material negative reserves in the accounts is under investigation although disclosure requirements are unlikely to change.
For the purpose of the accounts, Foundation Schools should be treated as part of the relevant Local Education Authority.
William M Mercer Valuation Model for Local Government
- William M Mercer have designed a valuation model (the model) for application by Local Authority employers. Any other employers seeking to use the model as an estimation technique should discuss the applicability of the model to their individual situation with their auditors Where applicable they will also wish to have regard to guidance issued by SORP preparing bodies in their particular sectors.
- The model, which will roll forward triennial valuations to provide the basis of FRS17 disclosures in the intervening years, has been prepared in draft. However, an endorsement from the Association of Consulting Actuaries (ACA) is awaited and it will then be discussed with the Audit Commission and Audit Scotland.
- When use of the model is deemed appropriate, auditors are likely to require certification or assurance from actuaries that:
- The model is appropriate for use by the authority;
- The model has been properly applied; and
- There is no known material misstatement as a result of using the model.
- The Pensions Panel's expectation is that the LGPS scheme actuary will provide the core information needed for application of the model. It is essential that there is close co-operation between the scheme administering authority, the scheme actuary, the reporting entity and the reporting entity's auditor. There is however no requirement on employers in the Fund to use the Fund's actuary for the provision of DB FRS17 calculations. Employers could appoint their own actuarial adviser(s).
You should therefore continue to plan for actuarial costs although these may be limited to costs of checking the application of the model by the authority.
Unfunded Liabilities
- The LAAP Bulletin 51 on unfunded liabilities, whilst remaining in force for the SSAP 24 disclosures, will not apply to FRS 17 disclosures, as FRS17 applies to both funded and unfunded liabilities.
- The Panel's understanding is that the disclosure requirements for unfunded liabilities, whilst being dependent on particular administrative arrangements, could include (where material):
- Discretionary compensatory added years (LGPS and Teachers schemes);
- Teachers mandatory compensation;
- Non contributory pensions;
- Injury allowances paid on termination of contract;
- Gratuities;
- Employers element of any shared cost AVCs; and
- Any pensions increase that is still being recharged separately to the former employer.
- The actuary may request personal information to value the unfunded liabilities (such as ID, sex, DOB, pension start date, annual pension, annual pensions increase), all identified by employer, and together with amounts paid under the relevant headings during the year.
The Panel would appreciate examples of other payments which administering authorities feel require further clarification and will build these into the ongoing review process.
It is important to distinguish between retirement benefits, which should be included in the liability, and termination or other benefits (such as redundancy payments), which should not. For example, injury allowances awarded in respect of reduction in earnings of a current employee should not be included in the calculations.
Actions for Administering Authorities
- Administering Authorities should bring the relevant parts of this letter to the attention of employers participating in their Fund, pointing out that:
- The Administering Authority is willing to supply information that employers, having consulted with their auditors and having regard to their SORP, request; and
- Whilst the employer is free to obtain it's own actuarial advice, the Administering Authority may be able to get a better "bulk" deal from the Fund's actuary.
Yours faithfully
|
Peter Scales |
Philip Little |