Compliance with the Revised SORP Financial Reports of Pension ...

Occasional Research Paper No. 32

Compliance with the Revised SORP‘Financial Reports of Pension Schemes’:empirical evidence

Paul Klumpes

and

Stuart Manson

The Association of Chartered Certified Accountants

Certified Accountants Educational Trust, London 2000

Compliance with the Revised SORP‘Financial Reports of Pension Schemes’:

empirical evidence

Paul KlumpesWarwick Business School, University of Warwick

and

Stuart MansonDepartment of Accounting, Finance and Management, University of Essex

Acknowledgments

The authors of this report wish to acknowledge PRAG for fully funding the cost of this research andto ACCA for supervising its conduct. Our thanks are also due to the large number of pension fundtrustees whose participation enabled the research to be undertaken. We are extremely grateful toTeresa Sienkiewicz for co-ordinating feedback on earlier drafts of this report from the PRAG sub-committee.

© The Association of Chartered Certified Accountants, 2000

ISBN: 1 85908 318 8

The Council of The Association of Chartered Certified Accountants and the members of the ResearchCommittee consider this study to be a worthwhile contribution to discussion but do not necessarily share theviews expressed, which are those of the authors alone. No responsibility for loss occasioned to any person acting orrefraining from acting as a result of any material in this publication can be accepted by the authors or publisher.Published by Certified Accountants Educational Trust for The Association of Chartered Certified Accountants,29 Lincoln’s Inn Fields, London WC2A 3EE.

Compliance with the Revised SORP ‘Financial Reports of Pension Schemes’: empirical evidence

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Contents

Executive Summary ..................................................................................................................................................... 5

1. Introduction ...................................................................................................................................................... 7

2. Institutional background................................................................................................................................. 9

3. Scheme accounts – compliance with Revised SORP............................................................................ 13

4. Summary reports – consistency with Revised SORP checklist ......................................................... 21

5. Industry views about the Revised SORP ................................................................................................. 27

6. Conclusion ..................................................................................................................................................... 33

Notes .......................................................................................................................................................................... 35

References .................................................................................................................................................................. 37

Appendix 1: Voluntary disclosure checklist – members’ summary reports ............................................... 39

Appendix 2: Questionnaire survey sent to pension scheme trustees .......................................................... 43

Appendix 3: List of interview questions .............................................................................................................. 45

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Over 10 million individuals in the UK nowparticipate in over 200,000 occupational pensionschemes. The trustees of these schemes arelegally required to provide them with certaininformation about scheme funds and funding.1

Section 41 of the Pensions Act 1995 requiresthat trustees obtain auditor statements aboutcontributions, actuarial valuations and auditedfinancial statements which show a ‘true and fairview’. In July 1996 a Revised Statement ofRecommended Practice, ‘Financial Reports ofPension Schemes’, (‘Revised SORP’) was issued bythe Pension Research Accountants Group(‘PRAG’). The SORP was effective for pensionscheme years ending on or after 6 April 1997,when the Pensions Act became operational.Although the Occupational Pensions RegulatoryAuthority (OPRA) is empowered under thePensions Act to legally enforce theserequirements, very little is known about theextent of voluntary compliance by pension fundswith the various financial reporting provisions ofthe SORP.

This report summarises the findings of empiricalresearch, funded by PRAG and administered byACCA, which investigated the level of voluntarycompliance with various aspects of the RevisedSORP. The extent of compliance with variousaspects of the Revised SORP was determined byexamining a random sample of 262 UK pensionschemes over the period 1996-1998, i.e. bothprior and subsequent to its implementation.

Our primary analysis focuses on the extent andlevel of compliance of the formal annual accounts

provided by the sample funds with variouscontent requirements and presentationguidelines contained in the Revised SORP. Wefound that the overall level of complianceincreased after the SORP was effectivelymandated by legislative backing, that is, thegovernment regulations issued pursuant to theenactment of the Pensions Act.1 However anumber of the financial reports issued by funds inour sample do not fully comply with thesuggestions contained in the Revised SORP. Themost frequent problem encountered was thefailure to dis-aggregate the investment portfoliocomposition sufficiently in the net assetsstatement.

It was also found that during the three reportingyears 1996-1998 many funds did not distributeformal annual reports to their members and, infact, received very few requests for thisinformation. Approximately 60% of the totalsample of pension fund trustees whoparticipated in the survey separately distributedsummary reports to their members. The RevisedSORP contains a checklist of items whichtrustees might consider including in summaryreports. Using a sample of 159 pension schemesummary annual reports distributed to membersby the sample funds, for the same periods inwhich the formal accounts were issued, weinvestigated the extent of consistency with theRevised SORP’s checklist. This was facilitatedusing a disclosure index constructed from boththe SORP checklist and other, what we term,‘best practice’ disclosures. The results of thisanalysis suggest that the overall level of

Executive summary

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disclosure contained in the summary reportsgradually increased from 1996 to 1998. Asignificant proportion of the sample summaryreports did not, however, contain a number ofthe individual items recommended by the SORPchecklist. It was also found that the strength ofassociation between pension fund trustees’policy towards voluntary compliance with theSORP in preparing both their summary reportsand annual accounts gradually increased overtime.

In addition to the analysis of the annual accounts,a survey questionnaire (see Appendix 2) was sentto those pension scheme trustees who providedcopies of annual scheme accounts. Responses tothe questionnaire identified a number of issuesregarding the implementation of the Revised

SORP. The final stage of the research projectconsisted of a series of semi-structuredinterviews with a number of individuals involvedin various ways with the UK pensions industry.

The major purpose of the interviews was toelicit views about the perceived decision-usefulness of the Revised SORP and to provide aforum for the exchange of views about anycontentious issues arising from itsimplementation. From these interviews anumber of specific issues were identified whichwarrant consideration by the PRAG committeeresponsible for producing the Revised SORP.These include the valuation of insurance policiesrelating to AVC investments, and the lack ofspecified requirements for summary reportingrelative to the full scheme accounts.


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The research reported here was commissionedby the Pensions Research Accountants Group(PRAG), an independent research and discussiongroup comprising UK pensions industry experts,to provide preliminary evidence on the extent ofcompliance with the Revised SORP by UKpension funds. The Revised SORP wasintroduced in 1996 to update SORP 1 forchanges in accounting standards and for therevised requirements for annual reportsintroduced by new regulations made under thePensions Act 1995. This was also an apt timebecause of the criticisms that had been made ofthe apparent shortcomings in the accountabilityof trustees of UK pension schemes identified inthe light of the Maxwell scandal. This reportdocuments the empirical findings relating to aninvestigation of the extent and level of voluntarycompliance with various aspects of the SORP bya representative sample of UK pension fundsover the three years (1996-1998), that is,including the periods both prior to andimmediately after its effective date.

This investigation is of interest for a number ofreasons. First, although in general SORPs, unlikeaccounting standards issued by the AccountingStandards Board, are not usually mandatory, theSORP Financial Reports of Pension Schemes iseffectively mandated because of the introductionof recent UK pensions legislation, which issupervised by the Occupational PensionsRegulatory Authority (OPRA), effective forreporting years ending on or after 6 April 1997.

Hence this study provides evidence on theextent of ‘voluntary’ compliance with a SORPeffectively mandated by law. More generally, thisstudy evaluates the effectiveness of the financialreporting provisions of a recently Revised SORP.Our study focuses on the extent of voluntarycompliance with the Revised SORP in multipledimensions. We report the extent of complianceby annual accounts with a range of both formatand content requirements, and the timing of thepreparation of the accounts. We also examinethe level of consistency of summary members’reports, separately produced by funds, with theSORP checklist.

The rest of this paper is organised as follows. Inchapter 2 we discuss the institutional backgroundto the Revised SORP. Chapter 3 gives details ofthe sample selection procedures and reportspreliminary evidence on various aspects ofcompliance by pension fund annual accounts withboth the form and content requirements of theRevised SORP. Chapter 4 extends the analysis toexamine the extent of consistency of pensionfunds’ summary reports with the SORP’schecklist. Chapter 5 discusses the results of asurvey of pension fund trustees’ perceptions ofthe Revised SORP and considers the semi-structured interviews conducted with a numberof pension industry representatives. Finally,chapter 6 summarises our findings and drawssome conclusions based on the findings, includingproposals for further research.

1. Introduction

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This chapter provides the institutionalbackground required to understand the financialreporting environment facing UK pension funds.First, we briefly outline the background andmajor changes in the Revised SORP from theoriginal SORP 1. We then discuss theimplications of non-compliance with the newregulations.

2.1 Origins of the Revised SORP

PRAG was recognised in 1996 by the AccountingStandards Board (‘ASB’) as the appropriateorganisation to issue Statements ofRecommended Practice (SORPs) for pensionschemes. The original Statement ofRecommended Practice (SORP 1) PensionScheme Accounts, had been issued in May 1986.Since then a number of important developmentshave occurred in the economic and accountingenvironment in which pension schemes operate.These include changes in UK GAAP and in thenature of pension provision as it moves towardsmoney purchase schemes and group personalpensions. The greatest impact on occupationalpension schemes, however, has been the politicalresponse to the Maxwell Affair. The Governmentestablished the Pension Law Review Committeeunder the chairmanship of Professor Goode toreview the implications for the then existingpension scheme regulations, including thoserelating to scheme annual reports. The GoodeCommittee’s Report recommended a review ofSORP 1 on the grounds that ‘the value of theannual report to members and other users could

be improved if a review of its form and contentwere undertaken.’ It recommended thatinformation concerning cash flows, total returnson investments and specification of the contentsof the trustee’s report and investment reportshould be considered.

A revision of SORP 1, Pension Scheme Accounts,was subsequently undertaken by PRAG with aview to updating its guidance to take intoaccount developments in disclosure legislation,regulation and accounting practice and toimprove the usefulness and intelligibility of theannual report. An Exposure Draft (ED) of theRevised SORP was published by PRAG inSeptember 1995. Following an invitation forfurther comment on a range of issues, the finalversion of the SORP, entitled Financial Reports ofPension Schemes was published on 9 September1996. The SORP applies to scheme years endingon or after 6 April 1997 although early adoptionwas permitted (most schemes have a 31 Marchor 5 April year end).

2.2 Areas of compliance investigated

In general, SORPs are designed to set outcurrent best accounting practice and are notmandatory. The Revised SORP is interesting,however, because, under the OccupationalPensions Schemes (Requirement to obtainAudited Accounts and a Statement from theAuditor) Regulations 1996 (the AuditedAccounts Regulations), pension scheme accountsmust contain a statement as to whether the

2. Institutional background

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accounts have been prepared in accordance withthe SORP Financial Reports of Pension Schemesand, if not, indicate where there are any materialdepartures from the guidelines in the SORP. Inthis way compliance with the SORP is backed bystatute and may be regarded as mandatory forthose schemes to which it is applicable.

Accounts not prepared in accordance with theSORP may be subject to a qualified audit reporton the grounds that the accounts do not containall of the information specified by the regulations.Furthermore, non-compliance with the SORP,for example, the use of inappropriate accountingtreatments or insufficient disclosure, may leadthe auditor to conclude that the accounts do notshow a true and fair view.

Such qualifications may lead the auditor, underthe Pensions Act 1995, to notify the regulatoryauthority established under the Act, theOccupational Pensions Regulatory Authority(OPRA), who may then investigate thecircumstances of the non-compliance and takethe necessary action against the trustees. TheOccupational Pension Schemes (Disclosure ofInformation) Regulations 1996 also impose stricttime limits within which the trustees mustdisclose various pieces of information tomembers and other interested parties. Theseinclude a requirement to make available theannual report within seven months of thescheme year end. OPRA is authorised to imposefines on trustees who fail to observe the timelimits, and may also impose suspension ordisqualification orders against defaulting trustees.

The Audited Accounts Regulations made it acriminal offence for trustees to fail to obtainaudited accounts within this seven month period.Under these regulations, imprisonment for up totwo years and fines of up to £5,000 could beimposed on individual trustees and £50,000 oncorporate trustees who fail to obtain auditedaccounts within this seven month period. From 3April 2000, this has become a civil offence.

Three specific areas of compliance with thereporting provisions of the Revised SORP areexamined in this study, the absence of which maycause the report to be qualified and/or lead tolegal default. These are:

(i) the content of pension scheme financialreports, which are required to contain anumber of specified reports (trustees’ andinvestment), statements by the actuary andthe auditors and financial statements

(ii) the presentation of the financial reports(the fund account, the net assetsstatement and relevant footnotes)

(iii) whether the detailed reports (issued bythe majority of pension schemes whoseaccounting periods ended on 31 March or5 April 1998) were made available withinthe required seven month time frame.

The regulations (and the Revised SORP) assumethat ‘formal’ financial reports as specified aboveare the major authoritative source ofinformation about the financial performance of


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the pension scheme for pension fund members.However, an increasing number of pensionschemes issue ‘plain English’ summary financialreports to their pension scheme members.Therefore in this study we also examine the levelof demand for ‘formal’ financial reports bymembers of pension schemes that choose toissue ‘summary’ financial reports.

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This chapter reports evidence on various aspectsof compliance with the Revised SORP. We firstdiscuss the procedures used to select the sampleof annual reports on which our evidence isbased. This is followed by details of the overalllevel of compliance with the form and contentrequirements of the Revised SORP. Otherfindings discussed in this chapter includecompliance with statutory time limits. Finally, wediscuss preliminary evidence on the demand forfull versus abbreviated or summary financialreports.

3.1 Sample selection and datacollection procedures

We randomly selected 500 UK pension fundswhose names, address details and financialcharacteristics are summarised in the annualprofessional publication Pension Funds and TheirAdvisers 1998. This publication listsapproximately 1200 UK based pension fundswith assets in excess of £10 million2.The request for the annual reports from each ofthe pension schemes in our sample wasstructured as follows.

(i) Letters were initially sent to thenominated secretaries of all 500 selectedfunds in August 1998, requesting copies ofboth ‘formal’ financial reports and any‘abbreviated’ financial reports sent tomembers during both the currentaccounting period and during the previous

two years. We also asked the secretary ofthose schemes issuing ‘abbreviated’financial reports to their members toindicate what percentage of pensionscheme members subsequently requestedcopies of the ‘formal’ financial reports.

(ii) Where pension schemes did not reply tothe original letters, were a follow-upletters, sent in October 1998 to thesecretaries of the schemes.

(iii) For respondent schemes whoseaccounting periods ended on 31 March1998 or 5 April 1998, reminder letterswere sent on 4 November 1998requesting the latest 1998 accounts assoon as possible (the 4 November waschosen because it was the date by whichschemes having a year end of 5 Aprilshould have made available annualaccounts to comply with statutoryrequirements in respect of the sevenmonth reporting deadline).

Responses were received from 299 (or 60%) ofthe 500 funds. Of these, 34 schemes indicatedthat they did not wish to participate in the studyfor various reasons and three provided annualreports of the sponsoring employer rather thanthe pension fund. Consequently, 262 (or 52.4%)of the funds included in the survey provided‘formal’ annual reports and/or ‘abbreviated’member reports.

3. Scheme accounts – compliancewith Revised SORP

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Formal and abbreviated financial reportsreceived from the respondent sample fundswere divided into three separate yearly studysample periods as follows.

(i) Annual reports received with year end nolater than 5 April 1996 were categorisedas the ‘early compliance’ sample (based onthe assumption that, at that time, trusteesmay have been aware of the existence ofthe Exposure Draft of the Revised SORP).

(ii) Annual reports received with year ends nolater than 5 April 1997 (but after 5 April1996) were categorised as the ‘pre SORPRevision compliance’ sample (the RevisedSORP being effective for accountingperiods ending on or after 6 April 1997).

(iii) Annual reports received with year endsafter 5 April 1997 (i.e. the first accountingperiod after the Revised SORP becameeffective) are categorised as the ‘postSORP Revision compliance’ sample.

Table 1, Panel A, reports the sample details forthe survey. The overall response rate was 60%,with 262 (52.4%) funds providing financialreports. This response rate is slightly higher thanthose by equivalent surveys of Australian pensionfund formal reports. Table 1, Panel B shows thatrespondents were distributed fairly evenly acrossgovernment, manufacturing and service sectorsand were distributed fairly evenly in terms ofboth fund size and number of employees.

3.2 Compliance with ‘content’requirements

To comply fully with the SORP, pension schemeswere required to include a list of trustees, thename of the scheme’s advisers, a trustees’ report,an investment report, statements by thescheme’s actuary, the auditor’s report and a copyof the full financial statements and relevantfootnotes. Trustees were also encouraged toinclude a table of contents and list the scheme’sregistration number prominently at the front ofthe report. The number of annual reportsanalysed for compliance for each of the threesample periods is as follows: 146 ‘earlycompliance’ reports, 213 ‘pre Revised SORPcompliance’ reports and 195 ‘post Revised SORPcompliance’ reports.

Table 2 shows, for each of the three sampleperiods, the number of respondent schemefinancial reports that complied with each of thecontent reporting provisions of the RevisedSORP. Only a few early compliance sampleschemes included a compliance statement and alarge number of schemes did not include a tableof contents or an investment report. Similarly, inthe ‘pre Revised SORP’ compliance sample, asizeable number of schemes did not includeeither a table of contents or an investmentreport. Only 13.6% of the schemes in the sampleincluded a compliance statement. In the ‘postRevised SORP’ compliance sample the only itemthat a significant number (75.9%) of schemes didnot include specifically as a separate report was


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Funds surveyed 500

Respondents:

– Fund report supplied 262

– Company annual report supplied 3

– Policy not to supply fund report 34

Sub-total 299

Non-respondents 201

Total 500

By size of fund in £ million:

< 10 1610-19 16

20-49 39

50-99 33

100-249 33

250-1000 75

> 1000 50

Total 262

Average (in £m) 233

By number of employees:

< 500 31

500-999 32

1000-1999 22

2000-4999 55

5000-9999 37

10000-24999 52

25000-99999 28

> 100000 5

Total 262

Average (no. of employees) 13317

Table 1: Sample details

Panel A: Survey respondents

By industry:

– Government 47

– Not for profit 20

– Financial services 22

– Professional 17

– Retail 18

– Utilities 9

– Communications, travel & leisure 20

– Aeronautic and shipping 6

– Manufacturing 31

– Timber, paper, packaging & distribution 7

– Extraction and chemical processing 10

– Medical and pharmaceutical 6

– Food, drink & tobacco 10

– Building, construction and property 6

– Computer manufacturing and services 9

– Other 24

Total 262

Panel B: Types of respondents

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Table 2: Revised SORP – compliance with content requirements

1996 1997 1998(Early adoption) (Pre-revised SORP ) (Post-revised SORP )

No. % No. % No. %

Specific contents1. Table of contents 104 71.2 155 72.8 159 81.5

2. List of trusteesand advisers 131 89.7 199 93.4 186 95.4

3. Trustees’ report 133 91.1 205 96.2 188 96.4

4. Investment report 105 71.9 163 76.5 170 87.2

5. Actuary’s report 133 91.1 194 91.1 186 95.4

6. Auditor’s report 136 93.2 202 94.8 184 94.4

7. Financial statements 145 99.3 210 98.6 193 99.0

8. Compliance statement 8 5.5 29 13.6 47 24.1

Aggregate contents

– Full compliance 5 3.4 21 9.9 37 19.0

– Partial compliance 62 42.5 97 45.5 107 54.8

– Non compliance 79 54.1 95 44.6 51 26.2

Total 146 100 213 100 195 100

the compliance statement. It is likely, however,that the statutory disclosures that the SORPsuggested should be included in the compliancestatement were included elsewhere in the annualreport.

Table 2 also reports the overall level ofcompliance with the content requirements, based

on the following scoring mechanism: fullcompliance is defined as when a pension schemediscloses all eight items listed in the table; partialcompliance is defined as when a schemediscloses seven out of the eight items, that is, itdoes not disclose one of the items; non-compliance is defined as the situation where thescheme does not disclose two or more items


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listed in the table. The overall level of non-complying funds decreased from 54.1% to 26.2%over the sample periods, while full compliancecorrespondingly increased from 3.4% to 19%. Ascan be discerned from the table the main reasonwhy pension schemes were not classified as fullcompliers was because they did not include acompliance statement. It is recognised, however,that the inclusion of a separate compliancestatement as part of the content of the annualreport was only a suggestion in the SORP andnot part of its recommendations.

3.3 Compliance with ‘presentation’requirements

The Revised SORP also contains detailedspecifications as to the recommended format ofthe two financial statements (the Fund Accountand Net Assets Statement) that are required tobe included in the Annual Report and listed thedisclosure of a number of possible notes to theaccounts. Appendices in the SORP includedillustrative examples of the format of the annualreport. These appendices, however, do not formpart of the formal guidelines constituting theRevised SORP.

For the purposes of analysing the financialstatements themselves, schemes were treated as‘full compliers’ if they adopted the exactformat as specified in the Revised SORP, and as‘partial compliers’ if the financial statementscontained most of, but not all the specified items.

In respect of the notes to the accounts, schemeswere treated as ‘full compliers’ if they included atleast 12 out of the 14 notes specified in theRevised SORP, and were treated as ‘partialcompliers’ if they included at least half thespecified notes.

Table 3 shows, for each of the three componentsof the financial statements and in aggregate, thelevel of compliance with the Revised SORPreporting formats. Whereas only a smallproportion of the sample schemes fully compliedwith the individual presentation requirements ofthe three categories in the early adoption period,the majority fully complied in the post RevisedSORP compliance period. In the post RevisedSORP period sample a large number of schemesstill did not comply fully with the formatrequirements in respect of the net assetsstatement. The main reason why pensionschemes were categorised as partial compliersrather than full compliers in this sample, inrespect of the net assets statement, was becausethey failed to adequately disaggregate theirinvestment portfolio asset composition in themanner suggested by the SORP.

The aggregated results, which are categorisedusing a similar set of rules as for the contentrequirements (see page 16), are also reported inTable 3. Nearly 50% of all schemes compliedfully with the format requirements during thepost Revised SORP compliance period. This is asignificantly higher level of compliance than forthe equivalent content requirements.

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Table 3: Revised SORP 1 – compliance with presentation guidelines

1996 1997 1998(Early adoption) (Pre-revised SORP ) (Post-revised SORP )

No. % No. % No. %

Fund account

– Full compliance 9 6.2 75 35.2 167 85.7


– Non compliance 98 67.1 87 40.8 18 9.2

Total 146 100 213 100 195 100

Net assets statement

– Full compliance 10 6.9 60 28.2 116 59.5


– Non compliance 30 20.5 37 17.4 11 5.6

Total 146 100 213 100 195 100

Footnotes

– Full compliance 33 22.6 104 48.9 153 78.5


– Non compliance 50 34.2 35 16.4 11 5.6

Total 146 100 213 100 195 100

Aggregate presentation

– Full compliance 13 8.9 66 31.0 97 49.7


– Non compliance 51 34.9 31 14.5 4 2.1

Total 146 100 213 100 195 100


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3.4 Other aspects of compliance

Over 70% of the sample pension schemes hadfinancial year ends of 31 March or 5 April 1998.Efforts were made to obtain copies of the latest1998 accounts for 88 of these pension schemes,which had still not provided the authors withthese documents, by way of follow up letterssent on 6 November 1998 and by furtherprocedures in 1999. Based on the assumptionthat these schemes had previously suppliedfinancial reports for previous year ends, theability or inability of these schemes to providethe 1998 accounts provides a weak test of theextent to which these schemes have compliedwith the seven month reporting deadline. As atthe date of this report a small number of theseschemes supplied reports where the auditors’report was dated after the seven month deadline.This appears to corroborate anecdotal evidencefrom industry sources that a large number of

schemes are missing the strict seven monthdeadline for obtaining audited accounts. Onereason suggested for this is because of difficultiesfaced by some insurers in providing theseschemes with information concerning members’additional voluntary contributions (AVCs)(Quick, 1998).

Further analysis of the formal scheme accountsrevealed that:

• an increasing number of funds voluntarilydisclosed AVC investments in their financialstatements over the study period

• a few funds contained auditor’s reports whichincluded audit qualifications

• the vast majority of pension funds included astatement by the scheme actuary.

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4. Summary reports – compliancewith SORP checklist

There are currently no requirements in UK lawfor trustees to prepare a summary report formembers, despite a recommendation from theGoode Committee encouraging pension fundtrustees to issue reports to members in ‘PlainEnglish’.3 The SORP (paragraph 3.43) contains adetailed checklist of items that might beconsidered for inclusion in a summary report tobe sent to members.

We address two empirical issues concerning theextent of consistency with the Revised SORP inrespect of summary reports by our sample ofUK pension funds. First, we document theextent to which pension scheme trustees furnishmembers with summary reports as opposed tothe detailed reports as regulated by the SORP.Second, we analyse the form and content of asample of summary reports and compare themwith the checklist of recommended disclosurescontained in the Revised SORP. The rest of thischapter briefly outlines the results of our analysisof each of these issues.

4.1 Propensity to issue summaryreports

A large proportion of respondent pensionschemes also provided the authors withsummary financial reports. This type of report ispresently not subject to any statutoryrequirements. Their purpose is defined in theSORP as being to provide

‘members with a simple document thatsupplements the information provided toindividual members by the annual benefitstatement with brief but accurate informationabout the position of the scheme as a whole’(SORP, Para. 3.40).

It is possible that a number of pension schememembers may request copies of the formalaccounts that are subject to the Revised SORPrequirements, even where their fund has chosento distribute only abridged financial information.A questionnaire was sent to all pension fundtrustees who were asked to participate in thesurvey requesting them to indicateapproximately how many members had asked forcopies of the formal accounts (where these werenot distributed).

Responses were received from 159 pensionscheme trustees (60% of the total respondents).Of these, 150 pension fund trustees (or 95%)indicated that very few members (fewer than1%) requested copies of the formal annualreport. A number of these respondent trusteesexplicitly noted that the demand rate was in factmuch lower than 1% (e.g.: ‘zero’ or ‘one or two’copies of the formal accounts being requested bymembers). Only one trustee reported thatmore than 5% of members requested copies ofthe formal report. These results are consistentwith those reported by equivalent surveys ofAustralian pension funds.

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The pension funds in the sample were requestedto supply copies of any summary reports for thereporting years 5 April 1996–1998 sent topension fund members, in addition to detailedfinancial statements prepared in accordance withthe SORP. Trustees of approximately 60% of thepension funds that participated in the studyprovided a total of 330 copies of summaryfinancial reports sent to their members. Thiscomprised 88 or 60% of all funds who suppliedreports for the 1996 reporting year, 138 or64.8% in 1997 and 104 or 53.3% in 1998. Theupward trend from 1996 to 1997 reflects theincreasing popularity of issuing summary reportsamong the participating pension fund trustees;the apparent fall in 1998 reflects the effect of thecut-off date for receipt of such reports.

The observed form and content of the sample ofsummary reports varied considerably, rangingfrom a few paragraphs contained within a moregeneral annual employee newsletter, through to athree or four page pocket-size leaflet, to asizeable colour brochure containing financialstatements and footnotes. For the purposes ofanalysis such documents were treated only assummary reports where they were either clearlydistinguishable from a formal set of annualaccounts separately supplied by the same trustee,or alternatively contained significantly fewerdisclosures than are required for compliancewith the full SORP and were apparently intendedfor distribution to members.

4.2 Construction of summary reportdisclosure index

A disclosure index was constructed to examinethe scope and diversity of disclosure practicescontained in the sample of summary reports.The index, constructed in accordance withguidance provided by Marston and Shrives (1991)categorised six major categories of informationdisclosure. Each category in turn comprisedspecific disclosure items that were either listedin the SORP checklist, or were otherwise itemsusually contained in ‘best practice’ summaryreports. These comprised: an introduction (9items), trustee report (six items), investmentreport (10 items), financial report (15 items),benefits report (five items) and otherinformation disclosures (14 items).

The SORP related items chosen in each categorywere either directly or indirectly taken from theSORP checklist (Paragraph 3.43). Other itemsnot specified by the SORP checklist but normallyfound in those summary reports adoptingindustry ‘best practice disclosure policies’include: a statement of objectives, a table ofcontents, the board description, the chairman’soverview, membership publications, workplacecontacts, a statement of contributions policy andsummary details of assets and liabilities.4

In order to provide an aggregate picture of thefull extent of disclosure, individual weights were


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assigned to each item of disclosure: a score of 2being awarded for the inclusion of a SORP itemand a score of 1 to a non-SORP item with theexception of financial report items which werescored in the same way as SORP items. In usingthis scoring system to evaluate the disclosurequality of each pension fund’s summary report,disclosed items that fully complied with theSORP scored a maximum possible score of 2 outof 2, those items partially complying with theSORP checklist scored 1 out of 2 and thosewhich did not contain any reference to that itemscored 0. This scoring system was used for allSORP related items. For the non-SORP items, ascore of 1 was awarded if the item was disclosedand 0 if it was not disclosed. This scoringprocedure ensured that SORP disclosure itemswere given greater weight than non-SORPdisclosures (with the exceptions, as previouslymentioned, of the financial report items) in aratio of approximately 2 to 1, and resulted in anoverall maximum possible score of 100 points.

4.3 Voluntary compliance with theSORP checklist

Table 4 reports for the sample of summaryreports the mean points score obtained for boththe Revised SORP checklist and non-SORPdisclosures for each of the three years.

Consistent with our expectations, Table 4 Panel

A shows that the average level of voluntarycompliance gradually increased for SORPchecklist items from 1996 to 1998. In the post-SORP sample the overall mean score achievedfor compliance with the SORP disclosures was32 out of a possible score of 64. This effectivelymeans that the mean sample fund’s summaryreport, based on the scoring system used,complied with only 50% of total possible SORP-recommended disclosure items. In the post-SORP sample the overall average level ofcompliance with the SORP checklist items byour sample of summary reports was the highestfor the category ‘financial report items’ (10 outof 12) and lowest for the categories ‘trusteereport’ and ‘disclosure of other information’. Bycontrast, as expected, table 4, panel B shows thatthe overall level of consistency with the list ofnon-SORP or ‘best practice’ items was generallymuch lower than that for SORP disclosures.Furthermore, the overall average achieved fellslightly over the three sample periods from 1996to 1998. This result may be driven bycorresponding pressures to reduce thedisclosure of non-SORP items as the RevisedSORP became effective. Overall, panel C of table4 shows that the average summary reportobtained a score considerably less than 50% ofthe maximum achievable after aggregating theweighting of both the Revised SORP and non-SORP items.

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Table 4: Compliance by summary reports with SORP checklist – overview

Mean Score (total points)Type of 1996 1997 1998information (Early adoption) (Pre-Revised SORP) (Post-Revised SORP)disclosure Weighting (n = 88) (n = 138) (n = 104)

Panel A: PRAG disclosures

1. Introduction 2 1.693 1.254 1.154

2. Trustee report 8 2.068 2.623 3.115

3. Investment report 20 8.386 8.717 8.853

4. Financial report 12 8.196 9.414 10.290

5. Benefits report 10 4.091 5.261 5.669

6. Other information 12 2.491 2.523 3.058

Grand totals 64 26.925 29.792 32.139

Panel B: Non-PRAG disclosures

1. Introduction 8 1.773 1.739 1.657

2. Trustee report 2 0.727 0.464 0.527

3. Investment report - - - -


5. Benefits report - - - -


Grand totals 36 8.815 8.789 8.674

Panel C: Total disclosures

1. Introduction 10 3.466 2.993 2.811

2. Trustee report 10 2.795 3.087 3.642

3. Investment report 20 8.386 8.717 8.853


5. Benefits report 10 4.091 5.261 5.669


Grand totals 100 35.740 38.581 40.813


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Table 5: Voluntary compliance by summary reports with SORP checklist% of summary reports that complied with SORP checklist

Type of 1996 1997 1998information (Early adoption: n = 88) (Pre-SORP: n = 138) (Post-SORP: n = 104)disclosed inreport Full-C Partial-C Non-C Full-C Partial-C Non-C Full-C Partial-C Non-C

Trustee:Purpose 72.4 2.3 25.3 55.8 13.8 30.4 51.0 13.5 35.5Board 15.9 0.0 84.1 27.5 6.6 65.9 44.2 1.9 53.9Voting 5.7 0.0 94.3 2.2 0.0 97.8 0.0 1.0 99.0Trustees 77.3 9.1 13.6 81.9 4.3 13.8 86.5 1.0 12.5Performance 0.0 0.0 100.0 13.0 2.2 84.8 21.2 3.8 75.0

Investments:Objectives 60.2 5.7 34.1 55.1 6.5 38.4 55.8 7.7 36.5Valuation 55.7 5.7 38.6 72.5 4.3 23.2 75.0 7.7 17.3Returns 76.1 1.2 22.7 76.8 2.9 20.3 77.9 1.9 20.2Allocation 94.3 0.0 5.7 86.2 2.2 11.6 75.0 7.7 17.3Managers 58.0 2.3 39.7 80.4 4.3 15.3 89.4 1.9 8.7Materiality 34.1 1.1 64.8 9.4 0.7 89.9 0.0 1.0 99.0Custody 4.7 2.4 92.9 7.2 0.7 92.1 15.4 1.9 82.7Delegation 15.9 1.1 83.0 25.4 2.9 71.7 37.5 5.8 56.7Self-investment 18.2 1.1 80.7 8.7 1.4 89.9 4.8 1.0 94.2

Financial:

Member cont. 69.3 28.4 2.3 61.3 32.8 5.9 58.7 32.7 8.6Employer cont. 64.7 8.0 27.3 60.1 24.6 15.3 60.6 31.7 7.7Income 76.1 11.4 12.5 81.2 9.4 9.4 74.0 13.5 12.5Benefits 93.2 3.4 3.4 93.5 2.2 4.3 90.4 2.9 6.7Movements 10.5 3.5 86.0 47.1 5.1 47.8 61.5 12.5 26.0Transfers 2.3 74.4 23.3 9.6 36.0 54.4 1.9 51.0 47.1

Benefits:Payments 22.1 2.3 75.6 26.8 12.3 60.9 30.8 26.0 43.2Growth 75.6 4.7 19.7 80.5 3.6 15.9 76.0 2.9 21.1

Audit Report 17.4 2.3 80.3 37.0 2.9 60.1 60.6 7.7 31.7

Actuary Report 10.5 0.0 89.5 23.2 1.4 75.4 28.8 3.8 67.4

Contacts 56.8 0.0 43.2 65.9 2.2 31.9 76.0 1.9 22.1

Report Approval 100 0.0 0.0 0.0 66.7 33.3 76.5 5.9 17.6

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Table 5 decomposes the aggregated resultsshown in table 4 by reporting, for each year from1996 to 1998, the extent of full, partial or non-compliance by the sample pension fund annualreports with individual Revised SORP checklistitems that were explicitly listed in paragraph 3.43of the Revised SORP.

These results indicate considerable cross-sectional variation in trends in the extent ofcompliance, both for individual items withincategories and more generally across categories.Within the trustee category, the extent of full

compliance slightly increased from 1996 to 1998for board composition, trustee details and in thecommentary on performance, but significantlydeclined for the two other items. Results werealso mixed for the various items comprising theinvestment and financial report category, withthe level of compliance increasing for only oneout of six items in the latter. By contrast, theextent of compliance gradually increased for allof the other five minor categories of itemscomprising the SORP checklist, particularly withreference to the audit and actuarial reports.


27

Our survey of current annual reporting practicesof UK pension schemes reveals a gradualincrease in the amount and level of financialinformation disclosed by our sample pensionfunds over the period 1996-1998. This isconsistent with our expectations because ofintroduction of the Revised SORP and associatedgovernment regulations mandating the form andcontent of pension scheme financial reportsbeing effectively backed by OPRA’s preparednessto enforce regulatory sanctions.

In this chapter we discuss the views of pensionscheme trustees and professional advisers on theimpact of the Revised SORP on reportingpractices, in order to identify any problemsarising from its implementation. The primaryobjective of this exercise was to establish theperceptions of various preparer and user groups(trustees, professional advisers, regulators andmembers) of the information in the pensionscheme accounts following the fullimplementation of the Revised SORP. Thepurpose of this was to establish whether anyproblems were encountered in the application ofthe SORP and where possible improvementscould be made to future revisions of the SORP.In order to achieve this research objective, weconsulted a wide variety of authoritative UKpension industry representatives from a numberof groups to elicit their attitudes towards theRevised SORP and obtain their views about theappropriate amount, usefulness and nature offinancial information that should be produced formembers.

Our research was conducted in two stages.Chapter 5.1 reports the results of a surveyquestionnaire concerning these issues, which wassent to the secretary of the board of trustees ofall participating pension funds. Chapter 5.2provides some detail on the interviewsconducted with a number of pension industryrepresentatives whose interests may be affectedby the implementation of the Revised SORP.Finally, chapter 5.3 discusses the issues raised byinterviewees during the interviews.

5.1 Survey questionnaire

Given their overall responsibility forimplementing the Revised SORP, pension fundtrustees are most likely to be in a strong positionto be able to provide informed perceptionsabout its perceived usefulness. In order toascertain information about the overall user-relevance of various form and content aspects ofthe financial reporting provisions of the RevisedSORP, we initially sent a brief surveyquestionnaire to the secretary of the board oftrustees of those pension schemes who hadoriginally sent us copies of annual reports.

While not intended as a primary objective of ourresearch into the usefulness of the Revised SORP,for a number of reasons we regarded this surveyas providing an important link between thesurvey of financial reporting practices and themore in-depth interviews conducted withindustry representatives. First, it gave us some

5. Industry views about the revisedSORP

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useful feedback as to whether those pensionfund trustees who provided us with annualreports and responded to the questionnaireperceived the Revised SORP positively ornegatively (at least relative to the original SORP).Second, it served to highlight particular problemsthat individual pension fund trusteesencountered in implementing the Revised SORP,such problems subsequently being taken up inthe in-depth interviews.

Appendix 2 contains a copy of the surveyquestionnaire that was sent to the secretary ofthe board of trustees of those 262 pensionschemes which provided us with annual reports.Trustees were asked: (1) whether the RevisedSORP significantly improved the quality offinancial reporting by UK pension schemes; (2)whether the Revised SORP significantly improvedthe perceived decision-usefulness of pensionscheme annual accounts for their readers; (3) tocomment on any perceived additional costsimposed from having to comply with the RevisedSORP; and (4) to comment on any areas wherethe Revised SORP could be improved. Answersto questions (1) and (2) were elicited using aLikert-type scale from 1 (much worse) to 11(much better); questions (3) and (4) were open-ended.

A total of 26 valid responses to thequestionnaire were received, which is roughly10% of the total sample of pension schemeswhich voluntarily supplied annual accounts.There are a number of possible reasons why theresponse rate to the questionnaire is relatively

low. First, the sample of pension schemes uponwhich the survey was based had alreadyvoluntarily supplied the authors with copies ofannual accounts. Thus, non-response mightreflect a general level of satisfaction by many ofthe respondents with the Revised SORP. Second,the survey required responses within a four-week reply deadline and was conducted during aperiod when many trustees were faced withmeeting end of financial year reporting deadlines.Finally, it is possible that a number of the trusteeswere not sufficiently familiar with the contents ofthe Revised SORP to provide a response.

The mean and standard deviation of theresponses to questions 1 and 2 of thequestionnaire are reported in Table 6. Of mostinterest is the primary result that the averageresponding trustee perceived that the RevisedSORP slightly improved the quality of financialreporting produced by UK pension schemes. Interms of specific aspects of the Revised SORP,the average responding trustee perceived thelisting in the SORP of a checklist of matters forinclusion in a summary report as being the mostsignificant area of improvement. Furthermore,respondents generally deemed that all majoraspects of the Revised SORP were animprovement, with principles of pension schemeaccounting being the least significant and withthe least consensus of opinion being for thetiming of the distribution of the report (whichwas reduced by legislation from 12 to 7 months).

In respect of the comments by trustees toquestion 3, the perceived additional compliance


29

costs associated with the implementation of theRevised SORP, there was some variation in theiropinions. Nineteen trustees provided either nocomment or stated that the impact of theRevised SORP was neutral or insignificant. Twotrustees mentioned that the need to producemore detailed investment information and theassociated detailed portfolio analysis was costlyin terms of time and effort. Another five trusteescomplained about the extra work that wasrequired to comply with the Revised SORP. Theyclaimed that this work was unnecessarilycomplex and that such information would be oflittle, if any, interest to members.

In respect of question 4, an open-ended questionrequesting suggestions about any areas wherethe Revised SORP could be improved, 17trustees did not provide any suggestions. Fivetrustees suggested there was a need to considersimplifying the reporting of investments. Anotherthree trustees suggested that AVCs should besegregated from main scheme assets. Onetrustee suggested that the compliance statementshould be removed.

5.2 Interviews held with industryrepresentatives

The results of the survey questionnaire reportedabove formed the basis of a set of questionsraised at a series of interviews held with UKpension industry representatives in June-July1999. Since the implementation of the RevisedSORP affects a wide range of professional

advisers and other user groups, interviews wereheld with individuals from a number of keystrategic industry associations and otherrepresentative interest groups.

The list of questions raised at the interviews isre-produced in Appendix 3. In the first twoquestions, interviewees were asked about theirperceptions of the costs and benefits of having tocomply with the Revised SORP. The third andfourth questions sought to elicit specificcomments on certain areas of the Revised SORPwhich the results of the questionnaire survey hadpreviously revealed as being contentious fortrustees. The fifth question provided anopportunity for interviewees to raise any otherissues concerning the Revised SORP which hadnot previously been covered under questions 1to 4. Finally, question 6 comprised othersupplementary questions, related to the RevisedSORP, which were tailored to suit the particularindustry group the interviewee represented.

In conducting our semi-structured interviews wewere very conscious that such a researchexercise is relatively costly and time-consumingto undertake. Furthermore, we decided not toseek the views of representatives of certainorganisations or associations. First, we did notconsult individual members of the auditingprofession, since it was assumed that they wouldhave previously had opportunities to activelyparticipate in the Revised SORP’s development,either directly or through their membership ofPRAG.5 Second, since our study does notexplicitly examine the implications of the Revised

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SORP for resolving potential disputes amongemployers and employees over ownership rightsto pension scheme surpluses, we also did notapproach any union representative. Third,because the interests of members orbeneficiaries of pension schemes are notrepresented by a single, well-organised andfocused interest group, we did not directly solicitviews on the implementation of the SORP fromconsumer or pension member groups. Finally, anumber of representatives of other groupswhose members are potentially affected by theimplementation of the Revised SORP declinedour invitation to be interviewed. Individuals orrepresentatives from the following groups wereapproached initially and asked if they would bewilling to participate in the research study byagreeing to be interviewed:

• two local government pension schemetrustees, one preferably a member of CIPFA

• three non-government and private sectorfund trustees

• two members of the Institute and Faculty ofActuaries

• one individual from The PensionsManagement Institute

• one individual from The National Associationof Pension Funds

• one member of the Association of PensionsLawyers (preferably actively practising in thepensions area)

• two representatives from the OccupationalPensions Regulatory Authority (‘OPRA’).

The representatives were chosen from thoselisted under the ‘industry association’ section ofthe professional publication Pension Funds andtheir Advisers 1998 edition. Each representativewas sent a letter requesting their availability forinterview together with the list of questions tobe raised and requesting permission for theinterview to be taped.

One local government pension fund trusteerepresentative subsequently declined to proceedwith the interview. Two private sector pensionfunds subsequently cancelled interviews.Similarly, one Actuarial Consulting firm partnerdeclined to be interviewed.

A total of eight interviews were conductedduring June-July 1999 with ten representatives ofseven industry associations. These included twopension fund trustee representatives, namely theLondon Pensions Fund Authority and USS Ltd, aconsulting actuary representing the Institute andFaculty of Actuaries, a member of the Associationof Pension Lawyers, two individuals connectedwith the Pensions Management Institute and tworepresentatives from OPRA, the AccountancyAdviser and the Regulatory Director. Finally, theNational Association of Pension Funds (NAPF)


31

sought the views of their members of theirLarger Schemes Forum before providing awritten response to each question.

5.3 Issues raised at interviews andtheir implications

Most interviewees did not view the RevisedSORP as imposing significant costs on, or givingmajor benefits to pension fund trustees. TheNAPF representatives noted that opinions variedamong their members on this issue but that theprimary additional costs incurred in complyingwith the Revised SORP arose from additionalstaff time required. However, both the PMIrepresentatives and one of the representativesfrom OPRA suggested that while the RevisedSORP provided some benefits to larger schemes,it imposed significantly greater costs ofregulation for a much larger number of relativelysmaller schemes. The PMI representativessuggested that a floor be imposed below which asmall scheme would not need to comply withthe Revised SORP (similar to equivalentexemptions already existing for smaller schemesin Australia). By contrast, the representative fromUSS noted that the Revised SORP conveyedsignificant perceived benefits in terms of moremeaningful reporting to members of largerschemes relative to the marginal incrementalincrease in information production costs. It isinteresting, however, that he also considered thatthe vast majority of members did not read thescheme accounts.

The representative from the London PensionsFund Authority noted that the Revised SORP didnot really apply to local government schemeaccounts. The current CIPFA rules require thatits members need only prepare financialstatements in accordance with the ‘mainrecommendations’ of the Revised SORP.Furthermore, the CIPFA Code of Practice on LocalGovernment Accounting – Statement ofRecommended Practice overrides the RevisedSORP in terms of the form and content offinancial statements. Both the representativesfrom NAPF and the Faculty and Institute ofActuaries noted that the Revised SORP imposedadditional costs on the large proportion ofpension funds that held investments in the formof insurance policies, since it was not clearwhether the value of such investments should bemeasured at face value or surrender value.Finally, one of the representatives from OPRAsuggested that auditor fees for many pensionschemes were generally higher immediately afterthe SORP’s implementation. It is, perhaps, likelythat this was due to the impact of the PensionsAct rather than the introduction of the SORP.Questions 3 and 4 asked interviewees tocomment on specific aspects of the RevisedSORP’s requirements or on particular areas ofdifficulty posed in implementing the RevisedSORP. The NAPF representatives noted that themajority of their members viewed other formsof communications to members (e.g. newsletters,benefit statements and bulletins) as being morevalued sources of information. One of therepresentatives from OPRA and the

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representative from the Faculty and Institute ofActuaries cited difficulties faced by insurancecompanies in arriving at the value of insurancepolicies related to AVC investments which hadcaused delays to the timely completion ofscheme accounts for a number of pensionschemes.

There was less consensus among intervieweesover various other items of concern. Therepresentative from USS claimed that the SORPchecklist of recommended items for inclusion insummary reports was insufficiently prescriptive.He suggested that auditors should be required toauthenticate financial figures reported in thesummary reports. In contrast, the NAPFrepresentatives noted that a number of pension

scheme trustees opposed further prescriptionsover the form and content of summary reports.

More generally, the PMI representativescomplained that the need to comply with theRevised SORP and associated regulationsincreased the amount of work required ofpension professionals, which would inevitablyfeed into the cost structures of pension schemes.Finally, the member of the Association of PensionLawyers observed that given the cost ofcomplying with the UK regulatory environmentmany multinational pension scheme trusteesmight consider locating the pension in a lesscostly regulatory environment (such as Ireland)or securing Pan-European pensionsarrangements.


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This paper reports the findings of an empiricalinvestigation of the level of compliance with theRevised SORP. The revision of the SORP wasnecessitated by changes in UK GAAP since theSORP was originally issued and from thesuggestions of the Goode Committee. Theanalysis focuses on the level of compliance withthe content and presentation requirements ofthe Revised SORP by a sample of 262 UKpension funds over the three years 1996–1998,both prior to and subsequent to itsimplementation.

The major findings are that the level ofcompliance with the Revised SORP significantlychanged after it was effectively mandated forreporting periods after 6 April 1997, when itreceived legislative backing in the form ofregulations issued pursuant to the Pensions Act1995, which significantly increased the regulationof the UK industry. In addition, the overall levelof compliance was significantly higher for theformat guidelines contained in the SORP than forits content requirements.

The findings that the majority of pensionschemes were effectively complying with theRevised SORP, even before it was mandated, arecontrary to those obtained by earlier Australiansurveys of compliance with pension schemeaccounting standards (Klumpes, 1994, Herbohn,1995). Given that our sample selectionprocedure and research design is largelyconsistent with these earlier studies, weinterpret this anomaly as being attributableprimarily to the fact that the UK SORP was

effectively developed by the UK pensionsindustry, whereas the Australian accountingstandard was opposed by the industry in thatcountry.

Our findings regarding the level of compliancewith the Revised SORP are tempered by ourother findings that the majority of our sample ofUK pension schemes issue informal orabbreviated financial reports to members, whichneed not comply with the SORP. Since the vastmajority of members of these schemes do notappear subsequently to request copies of theformal accounts, which are subject to the SORP,we question whether these formal reports arerelevant to this vast and diffuse group ofpotential users.

The results of the analysis concerning the extentof voluntary compliance by summary reportswith both the SORP checklist and other non-SORP best practice disclosures should be viewedcautiously, given the extent of subjectivediscretion involved in the construction of thedisclosure index, particularly in scoring theextent of compliance with each individual itemand in the weighting of items both within andacross categories. Nevertheless, despite theselimitations, our results, based on the UK pensionfunds’ summary reports supplied, indicate asignificantly lower level of voluntary compliancewith the recommended SORP checklist forsummary reports.

The mixed results obtained for the level ofcompliance with both SORP checklist and non-

6. Conclusion

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SORP best practice disclosures by the sample ofsummary reports perhaps reflect the fact that,unlike the vast bulk of the SORP guidelines thatapply to formal annual accounts, the disclosurechecklist for summary reports is indicative only.Using the scoring system adopted for analysingthe summary reports, it was found that the meansummary report obtained a score of 32.139 outof a possible 64.A number of issues associated with the RevisedSORP’s implementation arose from bothresponses by the sample of pension schemetrustees to the survey questionnaire and fromthe semi-structured interviews held withrepresentatives of various professionalassociations. Comments provided by the latterwere mostly positive. They confirmed that, inlarge part, the various disclosures recommendedby the Revised SORP were perceived as beingbeneficial to members relative to the additionalcompliance costs imposed. Certain problemsassociated with the SORP were also identified.These included general problems encountered inobtaining values of insurance policies for AVCinvestments, which subsequently resulted in thelate production of accounts. Individualinterviewees and pension scheme trustees alsoraised a range of more specific concerns that

bear upon both the form and substance of theRevised SORP.

Further research is needed to corroborate andextend these findings in a number of dimensions.First, a variety of factors that may drive observedcross-sectional variation in compliance with theSORP need to be examined, including the leveland type of funding method, the level of feescharged by the manager and expenses incurredby the fund, and investment strategy or liabilitystructure. Second, further interviews should beconducted across a wider spectrum of the UKpension industry to obtain more extensivecomments on problems associated with theRevised SORP’s implementation. Third, furtherresearch is needed to establish whetherparticular forms of accounting presentation aremore readily understood by readers of summaryreports, who appear to be much more likely toread such documents than the morecomprehensive general purpose financial reportsprepared in compliance with the Revised SORP.Finally, more research is needed to examine theimpact of the Revised SORP on financialreporting practices by smaller schemes,accumulation-type pension arrangements andlocal government schemes.


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1. The Pensions Act, 1995. Under theOccupational Pension Schemes (Requirement toobtain Audited Accounts and a Statement fromthe Auditor) Regulations, 1996, trustees arerequired to explain material departures fromthe Revised SORP.

2. The use of the publication Pension Funds andTheir Advisers as the primary source of oursample selection procedure results in ourfinal sample being biased in favour of largerpension funds. Pension funds that are listed inthis publication have relatively large fundsunder management, which is usuallyassociated with the existence of complexadministration functions and being subject tohigher levels of political visibility of theirdisclosures to relevant stakeholders.Consequently, we expect that the averagelevel of compliance with the SORP will berelatively higher for our sample than for theaverage UK pension fund.

3. This situation differs from that in otherBritish Commonwealth countries such asAustralia where summary reports are nowrequired to be prepared in accordance withgovernment regulation and include specified‘abbreviated financial statements’ of astandard format.

4. This is not meant to imply that the disclosureof larger amounts of information in summaryreports will lead to improved decision-makingby their intended readers. Klumpes andWalker (1999) provide empirical evidencewhich suggests that investors who arerequired to assimilate financial disclosurescombined with large amounts of other, non-financial information may suffer from‘information overload’.

5. The researchers did make efforts to conductinterviews with partners of certain audit firmswith large exposure to pension schemeclients, but unfortunately none were availablefor interview.

Notes

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References

Anderson, D. and Sharp, L. (1992) ‘Complianceand controversy: the AAS 25 reporting paradox’,Australian Accounting Review, Vol. 1, No. 4.

Herbohn, K. and Buchan,M. (1995) ‘Aninvestigation of AAS 25 – The responses ofsuperannuation plans and their members’,Accounting Research Journal, Vol. 8, No. 2.

Klumpes, P.J.M. (1994) ‘Voluntary compliance withAAS 25: Another look at the Reporting Paradox’,Australian Accounting Review, Vol. 4, No. 1.

Klumpes, P.J.M. and Walker,R.G. (1999)‘Disclosure effectiveness – evidence from thefield’, unpublished working paper, University ofWarwick.

Marston, P. and Shrives, P. (1991) ‘The use ofdisclosure indices in accounting research: Areview article’, British Accounting Review, Vol. 23,No. 3.

Pension Research Accounting Group, (1995) TheFinancial Statements of Pension Schemes – ExposureDraft, Accountancy Books, Milton Keynes.

Pension Research Accounting Group, (1996)Financial Reports of Pension Schemes: A Statementof Recommended Practice, Accountancy Books,Milton Keynes.

Quick, C. (1998) ‘Prudential shamed overpension account flaws’, Accountancy Age, 19November.

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Appendix 1Voluntary disclosure checklist – members’ summary reports

Fund Name:

Reference Number:

Year Ended:

NOTE: One point to be awarded for each of the items listed under the seven sections, else zero.Maximum points = 26 (qualitative / verbal) + 23 (quantitative) = 49List sub-totals for each of the seven sections.

Information disclosure category Qualitative /verbal

Quantitative/graphical

Weighting Total score

1. General background information

1.1. Pension fund descriptions

1.2. Report purpose

1.3. Specific characteristics of fund

1.4. Table of contents

1.5. Vision statement

1.6. Objectives of fund

1.7. Historical overview

1.8. Chairman’s overview

Total

2. Board composition

2.1. Trustee/board representation

2.2. Board composition (employer/employee rep.)

2.3. General manager/staff information

Total




3. Investment report

3.1. Investment objective and strategy

3.2. Investment valuation policy

3.3. Investment performance

3.4. Asset allocation

3.5. Investment managers

3.6. Financial instruments and options

3.7. Material investments

3.8. Earnings/rate of return information

3.9. Performance benchmarks (e.g. inflation)

Total

4. Financial summary

4.1. Contributions – members'

4.2. Contributions – employers'

4.3. Investment income

4.4. Other income

4.5. Benefit payments

4.6. Operating expenses

4.7. Cash flow information

4.8. Investment assets

4.9. Other assets

4.10. Liability for members’ benefits

4.11. Other liabilities

4.12. Actuarial report summary

4.13. Auditors’ report summary

Total


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5. Membership information

5.1. Benefit payment statistics

5.2. Membership growth trends

5.3. Pensioner/deferred pensioners

5.4. Pension benefit changes or transfer values

Total

6. Communications information

6.1. Other membership publications

6.2. Fund administrator details

6.3. Ethnic/minority/disability assistance

6.4. Retirement planning information

6.5. Workplace contact references

Total

7. Administration information

7.1. Employer’s contributions policy

7.2. Constitutional and legal status or changes

7.3. Taxation relief status

7.4. Availability of full accounts and reports

7.5. Employer’s self-investment assets

7.6. Related party transactions

7.7. Independent advisers and custodians

Total

TOTAL SCORE (Maximum 49)

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Appendix 2Questionnaire survey sent to pension scheme trustees

1. Relative to the original SORP, has the SORP revision significantly improved the quality of financial reporting producedby pension fund trustees (circle a number)?

Much worse About the same Much better

1 2 3 4 5 6 7 8 9 10 11

2. In your opinion, have the following specific aspects of the SORP revision significantly improved the perceived decisionusefulness of pension fund annual accounts to readers of pension scheme accounts (circle a number)?

a.. The form and content of pension scheme financial statements


1 2 3 4 5 6 7 8 9 10 11

b. Principles of pension scheme accounting


1 2 3 4 5 6 7 8 9 10 11

c. Pension scheme investments


1 2 3 4 5 6 7 8 9 10 11

d. Checklist of matters for inclusion in a summary report


1 2 3 4 5 6 7 8 9 10 11

e. Timing of distribution of report


1 2 3 4 5 6 7 8 9 10 11

f. Plain English presentation


1 2 3 4 5 6 7 8 9 10 11

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3. Please comment on the perceived additional costs imposed on pension fund trustees from having to comply with theRevised SORP, including any difficulties imposed with its implementation.____________________________________________________________________________________________________________________________________

________________________________________________________________________________________________

4. Please comment on any areas where the Revised SORP could be improved.

____________________________________________________________________________________________________________________________________


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Voluntary compliance with SORP ‘Financial Reports of Pension Schemes’by UK pension fund trustees

Questions to be raised at interviewsTotal planned time per interview: 45 minutes

0. Introduction and background of the research, a brief overview of the SORP revision process undertaken by PRAG,and a brief explanation of the purpose of the interview.

1. What are the major benefits to pension fund trustees to be derived from complying with the Revised SORP? Has itsignificantly improved the perceived decision-usefulness of the information contained in pension fund annual accountsto members and other potential users?

2. Please describe any perceived additional costs imposed on pension fund trustees from having to comply with theRevised SORP, including any difficulties associated with its implementation.

3. Please comment on the perceived usefulness or otherwise of the Revised SORP’s requirements regarding:

• the form and content of pension scheme financial statements

• principles of pension scheme accounting

• checklist of matters for inclusion in a summary report

• other areas covered by the SORP that are posing any problems.

4. Please comment on any areas where you believe the SORP’s scope could be extended, particularly concerningsummary reports to members, investment, auditor/actuarial reporting, money purchase and AVC arrangements,exposure to futures and options.

5. Are there any other aspects of the Revised SORP which you would like to discuss, for instance concerning theappropriate amount, usefulness and nature of financial information that should be produced for members?

6. Additional supplementary questions tailored to the individual being interviewed

Appendix 3 List of interview questions

Compliance with the Revised SORP Financial Reports of Pension ...

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