FRC highlights good practice and scope for improvements in audits of pension obligations

News types: Codes and Standards Announcements

Published: 26 July 2018

There is room for improvement in the audit of pension balances and disclosures in company accounts, according to a new report from the Financial Reporting Council (FRC), ‘ The audit of defined benefit pension obligations . The FRC focussed on the quality of audit of pension balances and related disclosures in 51 of its audit inspections in 2017/18 and found that in almost half, improvement was required in at least one aspect of the audit work, as well as identifying areas of good practice.

In many cases the existence of multiple pension arrangements and/or financial and risk management transactions, such as liability-driven investment strategies, partial buy-outs and longevity swaps, have made valuation judgements and their audit complex.

Melanie Hind, Executive Director, Audit and Actuarial Regulation at the FRC, said,

“The valuation of pension obligations is complex requiring significant judgements and assumptions which carry the risk of material misstatement and/or manipulation. Auditors need to understand the work of actuaries inputting to their work and pay attention to assets as well as liabilities. We hope to raise standards by highlighting good practice and areas for continuous improvement.”


Auditors can bring about improvement by:
  • assessing the sensitivity of the valuation to changes in assumptions,
  • clearly evidencing the work done by actuarial experts and the rationale for conclusions reached,
  • considering whether the source data used to calculate the valuation of the defined benefit obligation is materially accurate and complete,
  • identifying different categories of investment assets and obtaining sufficient audit evidence to support the valuation of each,
  • paying attention to evidence to support the allocation of the defined benefit obligation and pension scheme assets in multi-employer schemes,
  • focussing on the completeness and accuracy of the pensions related disclosures; not just the valuation; and
  • considering whether given the material nature and risks, the audit work on pensions should be explained in the auditor’s report.

Notes to editors:

The FRC’s mission is to promote transparency and integrity in business.  The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the competent authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.

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