The responsibilities of a pension scheme trustee are complex and wide-ranging. The role has been compared to that of a company’s board of directors, although, as Christophor Ward of the Government Actuary’s Department points out: “A trustee’s duty is not to do with profits, but to ensure that members receive their pension.” As with company directors, a key part of a trustee’s role is to deal with information requests from auditors. When dealing with these requests, trustees have an opportunity to work efficiently and effectively with auditors to deliver orderly, well-planned audits. 

Pension scheme trustees need to deal with pension scheme auditors and the auditors of the sponsoring entity, but often face separate requests from both sets of auditors for the same or similar information for audit purposes. This is the first of two articles that aim to assist trustees in this situation. It covers the relationship between scheme trustees and scheme auditors, and between scheme trustees, sponsoring entity management and their auditors. 

January 2022 ICAEW guidance for auditors of sponsor entity accounts notes that the scope and structure of a pension scheme audit is necessarily distinct from that of a sponsor entity audit for several reasons. These include differences in stakeholder needs, auditing standards, accounting treatments and materiality. This guidance highlights that the sponsoring entity should be the primary source for information for the sponsor auditor. 

Nevertheless, in practice, the sponsor entity is not directly involved with the scheme and does not hold the information auditors require to complete their procedures. Trustees are therefore often asked to assist the sponsor auditor and might end up being asked to provide the same or similar information to both the pension scheme auditors and sponsor entity auditors, the latter in relation to pension balances and related disclosures in the sponsor’s accounts. This can feel like being audited twice.

The pension scheme is an independent separate legal entity from the sponsoring entity with its own regulatory, governance and control environment. Scheme trustees and the sponsoring entity directors are both typically required to produce their own statutory annual financial statements and to each appoint an auditor.

Contractual relationships and rights of access

It goes without saying that maintaining trust in the audit of pension assets and obligations is important. Stiff fines and other sanctions have been imposed by the Financial Reporting Council (FRC) on several large audit firms and individual audit partners in recent years in relation to the audit of pension scheme assets and liabilities. 

The FRC’s report on findings from its 2017/18 inspections of audit work over defined benefit (DB) pension balances in sponsor entity accounts notes that sponsor auditors were intensifying their focus on areas such as testing of source data, evaluation and challenge of management and their actuaries, and communication with those charged with scheme governance (trustees). Strengthening the audit work performed over pensions balances remains a key area of focus for many audit firms.

Pension scheme trustees are necessarily the people to whom sponsor management will direct requests for information requested by sponsor auditors relating to the audit of DB pension balances. Neither the scheme auditors nor the sponsor entity auditors have any right of direct access to information held by third parties. This means that investment managers and other third parties can only respond to requests for information such as confirmations and other supporting evidence once authorisation has been provided by the trustees, because they are generally the only people with whom they have a contractual relationship. 

How can trustees manage similar requests for information from different auditors efficiently? The following are worth considering.

1. Appreciating the obstacles impacting the ability of sponsor and scheme auditors to share information. 
2. Being aware of sponsor entity audit planning.
3. Working with the management and auditors of the sponsor entity to clarify responsibilities for audit requests.
4. Asking auditors for clarity on the purpose of their requests.

Let’s consider each of these in more detail.

1. Appreciating the obstacles impacting the ability of sponsor and scheme auditors to share information

First, a health warning.

It may seem that an obvious solution to alleviate the perceived burden on trustees is to simply permit sponsor and scheme auditors to communicate and share information with each other directly. Although there are certain limited situations where this might work, the reality is that circumstances where this is feasible are rare.

A scheme auditor cannot simply share their audit working papers with the sponsor auditor – even if the trustees give the green light. This is especially the case if the two are from different audit firms. Rigorous protections for the pension scheme auditor are needed to manage the risk of assuming a duty of care and responsibility to a third party (in this case, the sponsor auditor) – a party to whom they are not contractually obliged. The scheme auditor could have a ‘hold harmless’ letter in place stating that they hold no duty in relation to information shared and that information is to be relied upon at the third party’s own risk. However, once the scheme auditor effectively washes their hands of any duty of care, the reliability of any information shared is undermined.

Similarly, sponsor auditors often require information to be provided directly from source, to limit the possibility that it is obsolete or has been altered. Therefore, even if something has already been provided for the scheme audit, the sponsor auditor may still be obliged to make a direct request for the information rather than obtaining it second-hand. 

The situation is a complex one. There are clear benefits to be gained from having a framework in place by which information can be shared via the scheme auditor to the sponsoring entity auditor – even if from different firms. Such a framework is yet to be established. ICAEW is considering future engagement with the Pensions Regulator and other parties to explore the options and reduce duplication of requests to trustees.

Meanwhile, if the scheme and sponsor auditor are from the same firms, it may be more feasible for the sponsor auditor to use information received from the scheme auditor, such as, say, their work on the scheme’s investments – if trustees authorise this. 

This itself has its challenges. For instance, where the scheme year-end differs from the sponsor entity year-end, the investment values at the two dates will not be the same and therefore any work the scheme auditor may have done on the balances will be of limited use to the sponsor entity auditor. The timings of scheme and sponsor entity audits therefore play a significant role. 

Additionally, the required disclosures are different for scheme and sponsor entity accounts, so even where information is shared, receiving additional requests from the sponsor entity auditor is inevitable. 

Materiality

Materiality is a benchmark figure which auditors use to perform their risk assessment, determine sample sizes and assess the significance of any misstatements. The figure used will differ depending on what auditors assess is of most importance to users of the financial statements. The users of sponsor entity accounts may be primarily interested in the financial performance of the entity, such as revenue and profit, so materiality for the sponsor audit will be calculated with reference to these figures. Pension scheme accounts users are generally interested in scheme assets, so scheme auditors usually calculate their materiality with reference to total assets. Sponsor auditor materiality is therefore generally much lower than scheme auditor materiality, meaning that sponsor auditors are likely to select larger samples and will identify much smaller audit differences as reportable misstatements. This can lead to auditors performing different procedures and potentially reaching different conclusions, even when testing the same data.

The key takeaway here is clear. Even in those narrow circumstances where information sharing is possible, trustees are still almost certain to face requests from both sponsor and scheme auditors. There are, however, things that trustees can do to lessen the burden, as we explore below.

2. Being aware of sponsor entity audit planning 

Sponsor entities and scheme financial statements may have non-coterminous year-ends. Trustees may find it useful to know when the sponsor entity audit starts and may even wish to get involved in the early planning stages. This will allow trustees to obtain early notice of what information they are likely to be asked for and agree a timeline in advance for when this can be provided.

During this time the sponsor entity auditor will:

• agree with sponsor management the timing, nature and extent of the audit, including when audit requests in relation to pension balances are to be made;
• clarify which individuals within the sponsor entity will be the main point of contact for each area of the annual report and financial statements; and
• look to gather information, not only about the sponsor, but about its pension assets and liabilities.

If trustees make themselves aware at the outset when they may be called upon to assist with sponsor auditor requests, they can agree the arrangements for access to information with sponsor management and prepare as much as possible in advance. 

It may also be helpful in this initial planning phase for trustees to communicate with the sponsor auditor about when the scheme audit is scheduled. This will enable sponsor auditors to factor in responsibilities for the scheme audit when soliciting information from trustees. A detailed timetable for both audits shared between all parties, including third party custodians and service providers, may be helpful in managing workload.

ICAEW’s January 2022 guidance for sponsor auditors explains the roles of these parties and how they interact with the scheme. Trustees might find it useful to relay to or remind sponsor auditors:

• that trustees often do not specialise in accounting or actuarial disciplines and such functions are commonly outsourced to third parties; 
• of the scheme’s structure and management including the type and designation of the investments it holds and how these are managed, whether a third-party administrator is responsible for scheme administration and whether the scheme remains open to future accrual, etc. This may help minimise superfluous requests;
• of the key terms of the Employer Covenant and Schedule of Contributions;
• of the specific scheme risks, which may differ from financial reporting risks and often include investment performance and future funding requirements; and
• of potential issues that may be involved in obtaining direct confirmation of the fair value of certain investments. This includes consideration of whether internal control reports for service organisations are available and whether these confirmations and reports will cover the relevant financial period. 

3. Working with the management and auditors of the sponsor entity to clarify responsibilities for audit requests

Sponsor entity management should be the first port of call for sponsor auditor requests, not scheme trustees. Nevertheless, direct confirmation from third parties – such as confirming the fair value of investments with scheme investment custodians and investment managers at the year-end – will often be necessary. Trustees may need to provide their permission for third parties to release information to the sponsor auditor as it is the trustees to whom third parties are contractually obligated. 

Trustees can work with the sponsor entity’s management and auditors throughout the sponsor entity audit to plan and coordinate the nature and timing of requests for information and to reduce duplicate requests to the extent possible. 

Continued communication on progress is important. If, for example, third-party respondents are not responsive or if internal controls reports requested by the sponsor auditors are not coterminous with the scheme year-end, timely information on this is essential to allow sponsor auditors to plan and perform alternative or additional procedures, if necessary.

4. Asking auditors for clarity on the purpose of their requests

Trustees should ask for updates from the sponsor’s management and auditor to clarify what they need, when and why. The Pensions Regulator website states that a “good relationship […] is one where you feel comfortable in requesting clarification and confident in challenging”. 

Trustees should not be afraid to ask auditors to spell out, in plain English, exactly what they are asking for and why. 

To assist trustees to better understand auditors’ requests for information, a companion article offers a non-exhaustive list and explanation of some of the more common requests for information that trustees may encounter in their dealings with sponsor auditors.

Helen Pierpoint, Technical Manager, Audit and Assurance Faculty, ICAEW
Amelia Pickard, Technical Manager, Audit and Assurance Faculty, ICAEW