Special feature: Analysis to support accounting
We support government to meet its accounting requirements. In this Special Feature we consider the importance of accounting for public service pension schemes
Accounting is an essential part of the UK government’s financial management. It helps the government to manage its finances effectively, improve efficiency, and to provide transparency and accountability to the public.
GAD uses its expertise, including providing advice, analysis, and actuarial skills, to support specific areas of government to meet their accounting requirements. This ranges from supporting the introduction of a new accounting standard for insurance contracts, to considering climate change scenarios in public service pensions and calculating provisions for clinical negligence.
We also support HM Treasury (HMT) in aggregating pensions liabilities and drafting the narrative text that gives context to the figures disclosed in the Whole of Government Accounts (WGA). The WGA provides a combined picture of the financial position of the UK public sector by consolidating the accounts of more than 10,000 public sector organisations.
Accounting for public service pension schemes
In this special feature, we focus on the annual reporting requirements for public service pension schemes, where we have just completed a major project, supporting clients with their annual reporting requirements.
It was an exercise to aid the preparation of 2022 to 2023 resource accounts for over 20 UK public service pension schemes in compliance with International Financial Reporting Standards.
Pension promises made by the government, through public sector pension schemes, represent a significant long-term commitment. The value of the accounting liabilities to meet these promises is currently around £2 trillion. Disclosure of these pension commitments is thus a significant part of the information shown in the WGA.
The project recognised each scheme’s bespoke requirements. It also looked to achieve efficiencies by applying unified solutions, where possible. GAD has a process to deliver significant project aspects using a standardised approach. This process has been challenged and refined over the years.
Who is involved?
GAD collaborated with many stakeholders to deliver the project. We engaged with departments, administrators and audit bodies in the different nations over a 12-month period. Planning began back in November 2022. Results reports were delivered in the months following the 31 March 2023 year end.
GAD stood up a central project team to provider oversight, comprised of 3 actuaries in the Public Service Pension Schemes team working together with the Analytical Solutions team. They monitored progress and communicated with the various interested parties.
Our Analytical Solutions team led on calculations. They also populated draft reports with the advising actuary to each client acting as the final signatory.
Key project stages
The start is always to reflect on the end of the last cycle, using the project closure from the previous year to identify enhancements. We then incorporate these in our planning for the year ahead.
Cost projections for 2022 to 2023 (Supplementary Estimates) and 2023 to 2024 (Main Estimates)
GAD provides input to support departments on aspects of the Supply Estimates process. This is how the government seeks authority from Parliament for its expenditure each year.
The Main Estimates are the first step of GAD’s involvement in this process. This provides an initial forecast of departmental expenditure over the coming financial year. Presented by the government to Parliament near the beginning of the financial year to which the expenditure relates.
GAD provides an initial projection of some accounting items (such as the current service cost described below) which are included in the measurement of expenditure for the scheme and/or department.
The government may seek permission from Parliament to change the authorised limit, the level of departmental expenditure above which additional authorisation is required, through the Supplementary Estimates during the financial year. This represents an opportunity to submit an updated estimate. Presented before the end of the financial year to which the expenditure relates.
The Supplementary Estimates seek parliamentary authority for voted expenditure by government departments for the 2022 to 2023 financial year. The estimates seek parliamentary authority for resources, capital and cash, both for existing services and for any necessary new services.
Input from GAD is sought 3 or 4 months ahead of the presentation of Supply Estimates to Parliament. As part of the 2022 to 2023 accounts project, GAD input into revising the forecasted expenditure for the Supplementary Estimates at the end of 2022. Providing an initial forecast for the 2023 to 2024 Main Estimates in early 2023.
Accounting assumptions advice
Assumptions are required to derive values of the:
- pension promises built up to the accounting date for all members in each scheme (called the liabilities), in today’s terms
- benefits expecting to be built up each year in the future
These assumptions fall into 2 broad categories:
Prescribed by HMT: Those prescribed for accounting purposes across all schemes, such as the discount rate and CPI inflation.
Scheme-set: Those set individually for each scheme, based on advice received from GAD. This includes earnings growth, life expectancy, retirement ages and rates of leaving active service. Under the accounting standard, these assumptions should be set using best estimate principles which means being neither deliberately prudent nor optimistic.
Most scheme-set assumptions are set with reference to assumptions adopted in the most recent quadrennial actuarial valuation. This is an exercise carried out every 4 years to calculate updated employer contribution rates and test each scheme against the cost control mechanism.
Analysis undertaken to support draft assumption recommendations for the 2020 valuations was available for GAD to incorporate into our assumptions advice for the 2022 to 2023 resource accounts. This meant that many schemes updated their assumptions from the previous accounts. Previous assumptions selected were based on the 2016 valuation assumptions.
GAD calculated the value of the liabilities under the assumptions agreed. To do this we used scheme cash flow information from departments over 2022 to 2023. This included income, such as member and employer contributions, and expenditure, such as recurring pensions and lump sum payments over the year.
The value of the liabilities, alongside other accounts information, is incorporated into the WGA. These disclosures are provided in GAD’s results report.
Departments use GAD’s report to support the preparation of their resource accounts. These are then subject to approval from auditors. GAD liaises with the national audit bodies (and their external audit experts) throughout, to ensure that the accounting disclosures comply with the accounting requirements.
Next steps for pensions disclosures
Work for the 2022 to 2023 accounts is largely complete. Many schemes have been finalising their resource accounts over the second half of 2023. These accounts are typically made available publicly by departments online. Work for the next accounting cycle has already begun, as we have started the planning stage for 2023 to 2024. Again, we will look to iterate and improve.
Our experience in this area also has transferrable value beyond the resource accounts process and beyond our work in pensions. It’s worth noting the range of other areas of our work in the accounting field.
We are helping government to implement the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). HMT has announced plans to introduce this over the next 3 years.
GAD was also involved in the development of the application guidance for the new complex accounting standard IFRS17 (the International Financial Reporting Standards). It is for accounts within scope of the government financial reporting manual (FReM) from 1 April 2025.
We continue to reflect on how we can use our experience and expertise to support government in these areas and beyond.