STATEMENT OF RECOMMENDED PRACTICE

1 STATEMENT OF RECOMMENDED PRACTICE . FINANCIAL REPORTS. OF. PENSION SCHEMES. (Revised May 2007) Exposure Draft SUMMARY OF CONTENTS. PREFACE .. 3. 1. COMMENTARY .. 6. INTRODUCTION .. 6. THE ANNUAL REPORT .. 6. THE TRUSTEES' REPORT .. 8. THE INVESTMENT REPORT .. 9. COMPLIANCE STATEMENT .. 9. STATEMENTS BY THE ACTUARY AND AUDITORS .. 9. THE FINANCIAL STATEMENTS .. 11. OTHER DISCLOSURES IN THE ANNUAL 12. 2. RECOMMENDED ACCOUNTING 13. SCOPE AND EFFECTIVE DATE .. 13. TERMINOLOGY .. 14. RECOMMENDED FORM AND CONTENT OF PENSION SCHEME FINANCIAL STATEMENTS .. 14. FUND ACCOUNT .. 15. NET ASSETS STATEMENT .. 17. SCHEMES WITH MULTIPLE BENEFIT 19. FORMAT OF PENSION SCHEME FINANCIAL STATEMENTS.

2 20. PRINCIPLES OF PENSION SCHEME ACCOUNTING .. 21. VALUATION OF 29. RELATED PARTY TRANSACTIONS .. 47. OTHER DISCLOSURES .. 53. APPENDIX 1 - DEFINED BENEFIT SCHEME - ILLUSTRATIVE FORMAT OF ANNUAL. REPORT .. 59. APPENDIX 1A SCHEMES WITH MULTIPLE BENEFIT STRUCTURES ILLUSTRATIVE. FORMATS FOR FUND ACCOUNTS AND NET ASSETS 74. APPENDIX 2 - DEFINED CONTRIBUTION SCHEME - ILLUSTRATIVE FORMAT OF. ANNUAL REPORT .. 76. APPENDIX 3 - NOTE ON LEGAL REQUIREMENTS IN THE UNITED KINGDOM .. 86. APPENDIX 4 - NOTE ON REQUIREMENTS IN THE REPUBLIC OF 90. APPENDIX 5 - APPLICATION OF ACCOUNTING STANDARDS .. 94. INDEX .. 102. Financial Reports of Pension Schemes The additional commentary and guidance set out in section 1 of, and appendices 1 to 4 to, this document are not part of the formal guidelines constituting the STATEMENT of RECOMMENDED PRACTICE .

3 Those formal guidelines are set out in section 2 of, and appendix 5 to, the document. 2. STATEMENT of RECOMMENDED PRACTICE PREFACE. The STATEMENT of RECOMMENDED PRACTICE , Financial Reports of Pension Schemes ( the sorp ) was published in 1997 and was itself a major update and reassessment of the original sorp 1, Pension Scheme Accounts, which had been published in 1986. Under ASB guidelines, sorp making bodies are required to monitor and update the SORPs for which they have responsibility on a regular basis. PRAG therefore undertook a project to revisit the main provisions of the sorp in the light of new and revised accounting standards and developments in best PRACTICE since its publication in 1997.

4 This revised version of Financial Reports of Pension Schemes ( the revised sorp ') is the result of that recommendations in the revised sorp have beenFinancial Reports of Pension Schemes (revised November 2002) were arrived at after consideration of the Statements of Standard Accounting PRACTICE and Financial Reporting Standards and applicable laws and regulations in force in the United Kingdom and the Republic of Ireland at 30 September 2002. In developing the revised sorp , PRAG consulted with The Pensions Board of the Republic of Ireland in relation to the existing Irish statutory requirements. Certain additional material in respect of the Republic of Ireland is included in Appendix 4.

5 Regard must be paid to applicable accounting standards, laws and regulations, since SORPs cannot override these requirements. At this time particular attention was paid to two Financial Reporting Standards issued since 1997 and to their potential impact on the financial reports of pension schemes. These two are FRS 12: Provisions, contingent liabilities and contingent assets; and FRS 17: Retirement Benefits. The issue of these standards has re-opened the debate on the recognition of the long-term, actuarial liabilities of pension schemes in their financial statements. It should be noted that under current legislation in the UK and the Republic of Ireland, pension scheme accounts need not recognise the liabilities to pay pensions and other benefits which fall due after the end of the scheme year and, in PRACTICE , no pension scheme accounts recognise these liabilities.

6 It was agreed that such an important and substantial change in RECOMMENDED accounting PRACTICE could not be contained within the present revision of the sorp , and that significant further consultation and debate was necessary before such a recommendation could be made. The ASB has asked PRAG to lead this consultation process and to this end PRAG will publish a discussion paper setting out some of the key issues and considerations involved, particularly the potential impact on the current recommendations for the treatment of insurance policies. PRAG is committed to report back to the ASB by the middle of 2003. found the overwhelming view was that actuarial liabilities should continue to be excluded from the financial statements of pension schemes.

7 The regulatory and accounting standard regime is however changing. The United Kingdom is now moving towards convergence with international accounting standards. The Minimum Funding Requirement valuation is in the process of being replaced with scheme specific funding requirements and transitional rules will be in place until 2009, which will result in different valuation bases being adopted by schemes with some schemes producing these annually and other not. The EU. Directive for pension schemes which came into force in September 2005 states that accounts should show a true and fair view. Additionally, the FRC is currently in the process of agreeing changes to the audit opinion from true and fair' to presents fairly' in accordance with the relevant standards.

8 PRAG also recognises that IAS 26, 3. Financial Reports of Pension Schemes Accounting and Reporting by RetirmenetRetirement Benefit Plans is due for revision. The debate about whether to include actuarial liabilities in the financial statements therefore needs to take account of this changing environment. In October 2005 the Accounting Standards Board (ASB) announced a research project into accounting for pensions including for corporate accounts and pension scheme accounts, including the treatment of actuarial liabilities and we await the publication of their research. The recommendations in the revised sorp are also subject to the overriding requirement that the financial statements should present a true and fair view.

9 In developing the revised sorp , PRAG has consulted The Pensions Board of the Republic of Ireland in relation to the existing Irish statutory requirements. Certain additional material in respect of the Republic of Ireland is included in Appendix 4. The Financial Reports of Pension Schemes (Revised May 2007) has been updated to take account of the Financial Reporting Standards issued in respect of investments in particular the presentation requirements of FRS 25 (IAS 32): Financial instruments disclosure and presentation, parts of FRS 26 (IAS 39): Financial Instruments: recognition and measurement. Full adoption of these standards and of FRS 29: Financial Instrument: disclosure is not RECOMMENDED at this stage given the ASB's intention to delay implementation of these standards until 2009.

10 Further convergence is however expected following consultation in these areas. Appendix 5 summarises the application of the STATEMENT of Accounting PRACTICE and Financial Reporting Standards to pension schemes. Regard must be paid to applicable accounting standards, laws and regulations, since SORPs cannot override these requirements. The recommendations in the revised sorp are also subject to the overriding requirement that the financial statements should present a true and fair view. Neither PRAG nor the members of any working party or committee thereof can accept any responsibility or liability whatsoever (whether in respect of negligence or otherwise) to any pension scheme trustee or member or third party, wherever situated, as a result of anything contained in or omitted from the sorp nor for the consequences of reliance or otherwise on the provisions of the sorp .