PRAG chair, Shona Harvie, Crowe Clark Whitehill, looks back on 40 years of PRAG’s support to the pensions industry and forward to what the future holds

In a nutshell: 
  • PRAG was established in the summer of 1976 and celebrated its 40th anniversary at its annual general meeting on 23 November 2016
  • it was formed by a group of volunteers to provide much needed accounting guidance to the pensions industry
  • PRAG will continue to support its members by issuing guidance where it is needed and by commenting on topical issues, in particular Brexit and the changing nature of pension saving.

The Pensions Research Accountants Group (PRAG) was established in the summer of 1976, and celebrated its 40th anniversary at its annual general meeting on 23 November 2016. The celebratory event, which was held at the Royal College of Physicians in London, was very well attended by many key pensions industry figures and previous PRAG chairs. Shona Harvie, partner at Crowe Clark Whitehill and current chair of PRAG, reflected on the group’s achievements over the last 40 years and outlined what the future might look like for PRAG.

The keynote speaker, Sir David Tweedie, former chair of the Accounting Standards Board and the International Accounting Standards Board, entertained the audience by reflecting on how accounting has changed in the last 40 years. He highlighted the problems of past decades, when issues were not measured in accounts and therefore did not make it on to boardroom agendas, and also the continuing problems around having many different measures of actuarial liabilities.

Harvie presented Mike Young, PRAG’s president and founding member, with a crystal bowl in recognition of his contribution, enthusiasm and dedication to PRAG over four decades. This was followed by a celebratory champagne reception and formal lunch.

Speakers covered a wide range of topics, such as the updated pensions Statement of Recommended Practice (SORP) one year on, Brexit, data protection and cybersecurity, VAT, transaction costs and charges, overseas payments and the delivery of Chancellor Philip Hammond’s first Autumn Statement.

What is PRAG?

PRAG stands for Pensions Research Accountants Group, which was formed by a group of volunteers to provide much needed accounting guidance to the pensions industry. Forty years on, PRAG still publishes the SORP, setting out the accounting requirements for pension schemes. The group, which is not just for accountants, now also publishes guidance, and comments on many topical matters. PRAG receives no government funding and relies purely on the support of its members and the many unpaid volunteers.

Why was PRAG formed?

Back in the 1970s, there were concerns that pension scheme accounts would be adversely impacted by general company accounting requirements, which lacked a clear understanding of the long-term nature of pension schemes. In 1974, the Accounting Standards Committee, as it then was, decided to look at the reporting of pension costs in employers’ accounts. In response, PRAG was formed in 1976, with the objective of considering the accounting for schemes themselves. At the time, there were differing views on whether actuarial liabilities should form part of scheme accounts. These debates are still rumbling on today.

The oil crisis of the 1970s caused a stock market crash, high interest rates, high inflation and high unemployment. However, it was common practice to record scheme investments at cost; investment performance was not measured in the way it is today; there was actuarial smoothing; pension increases were absent; and there were tax breaks on investment dividends. As a consequence, the impact on schemes was not as evident as it would be today.

The Pensions Archive Trust displayed some of the first ever PRAG pension guidance at the annual general meeting. Surprisingly, today’s Fund Account and Statement of Net Assets appeared largely unchanged from 40 years ago.

How have pensions changed?

In the 1970s, the government encouraged companies to set up occupational pension schemes. Many company directors believed that it was their duty to look after employees’ long-term interests and therefore made membership of their defined benefit (DB) schemes compulsory.

Since then, most DB schemes have closed, as a result of the combined effects of pension increases being required, tax credits no longer being received on dividends and higher DB scheme actuarial liabilities, and because of the impact of low interest rates, low returns and increased longevity putting pressure on the employers that fund the benefits.

There are ongoing arguments about the measurement of actuarial liabilities, particularly with interest rates at historically low levels and uncertainty over longevity predictions. Investment strategies have become more complex and trustees look for higher returns and seek to match actuarial liabilities. Some schemes have entered into large scale buyin policies, asset backed contribution arrangements and longevity swaps to help bridge the funding gap.

As a result of the move away from DB schemes, we have seen the increasing importance of defined contribution (DC) arrangements and auto-enrolment, including the establishment of DC master trusts. The focus of trustees is now on default arrangements, where the majority of DC members invest.

The major political and economic event of June 2016, the UK’s decision to leave the European Union, is causing much uncertainty for investment, scheme funding and employers. An integrated approach to risk management, suggested by the Pensions Regulator, may assist trustees in considering these issues in the coming months and years.

How have scheme accounts changed?

Pension scheme reports and accounts are important stewardship documents and the disclosures cover many key aspects of a scheme’s arrangements. Some of these changes in the pensions environment over the last 40 years are now reflected in the increasing disclosures.

Information about the most recent formal actuarial valuation, including the assumptions on which it is based, are now disclosed in the report, although still not in the accounts. Legislation does not allow the inclusion of actuarial liabilities in pension scheme accounts; and there would be additional costs to be incurred and questions to be answered before the actuarial liabilities moved from disclosure in the report to inclusion in the audited accounts.

Schemes now include information about their investment strategies and their approach to investment risks. This information is new this year, following the implementation of the new SORP, and it is expected that, over time, these disclosures will develop. Nadia Dabbagh-Hobrow, secretary to the SORP working party and director at KPMG, highlighted that there may be more of a move to tabulate these risk disclosures and to align them with the strategy set out in the Statement of Investment Principles in order to make them more meaningful. There may be more focus on direct credit risk disclosures – that is, what are the protections for the scheme if the fund manager or custodian fails? Valuation hierarchy information highlighted the differing liquidity of investments and transparency of valuations. As well as investment risk disclosures, there are also disclosures on derivatives, asset-backed contributions and buyins.

Through the DC chair’s statement, information is disclosed about the default strategy and whether the arrangements represent value for money. For many schemes, transaction cost information is not yet available from their fund managers, while the industry considers how to bring transparency and consistency, without manipulation. Lynn Scott, investment director at Standard Life, highlighted that, ultimately, performance after costs is what counts most. Once this information is available, trustees will need to consider how they use it and how it will be considered in the context of performance.

What about the future?

With the new SORP now in place and most trustees having signed their first set of accounts under these new arrangements, PRAG is seeking feedback on the implementation of the requirements and how they could be developed in future. This consultation will consider the differing needs of both DB and DC schemes, schemes of different sizes, and trustees’ fiduciary duties to members. Given the significant volume of information now disclosed in pension scheme annual reports, consideration will also be given to whether or not the trustee reports could be developed to more clearly demonstrate good stewardship and scheme governance.

PRAG will continue to support its members. Pension schemes hold large volumes of personal data, so fraud and cybersecurity are a growing concern. An important consideration for trustees is what controls they and their service providers should have in place to mitigate the risk of a cyberattack or a data protection breach. Master trusts are an increasingly important aspect of the pension landscape. They face specific challenges anyway because of their size and volumes and, with more regulation expected, challenges undoubtedly lie ahead.

How can I join PRAG?

Anyone wishing to join PRAG and learn more about the group can find further information on the website:


Shona Harvie is chair of PRAG and a partner at Crowe Clark Whitehill.