LAAP BULLETIN 74 JUNE 2008

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					LAAP BULLETIN 74 JUNE 2008
ACCOUNTING FOR THE IMPACT OF HO CIRCULAR 11/2008 ON POLICE PENSIONS (ENGLAND AND WALES ONLY)

Please address any queries to CIPFA Technical Enquiry Service for CIPFA members and students 020 7543 5888 The Chartered Institute of Public Finance and Accountancy Registered with the Charity Commissioners of England and Wales Number 231060

Background 1 2 This Bulletin applies to police authorities in England and Wales only. Home Office Circular 11/20081, issued 30 May 2008, introduced new factors for calculating the lump sums payable to police officers. The impact is as follows: • The factors increase the lump sums payable to officers under the 1987 Police Pension Scheme (PPS) arising from the option to commute pensions, but • Reduce the additional pensions payable for exchanging lump sums under the New Police Pension Scheme 2006 (NPPS). The changes to the PPS factors are backdated to 1 October 2007 but the changes to the NPPS are effective from 1 July 2008. The purpose of this Bulletin is to clarify the accounting issues arising from these changes.

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Accounting considerations 5 Both changes should be considered in the light of the SORP’s requirements for accounting for events after the balance sheet date. The SORP requires the accounts to be adjusted in respect of events after the balance sheet date where they: (a) provide additional evidence about conditions that existed at the balance sheet date; and (b) are material to the statement of accounts. 6 Non-adjusting events are events which arise after the Balance Sheet date and concern conditions which did not exist at that time. The SORP requires that nonadjusting events after the balance sheet date should be detailed in notes to the core statements if they are of such materiality that their disclosure is required for the fair presentation of the financial statements. The changes to the PPS are potentially adjusting events after the balance sheet date because they are backdated to 1 October 2007. Whether they are adjusting events will depend on whether the increase in the lump sums payable is material to the police pension fund accounts. The changes to the NPPS are non-adjusting events because they concern conditions which did not exist at the balance sheet date in that they take effect from 1 July 2008. Disclosure will be required where the impact of the change is material to the police pension fund. Paragraph M8 of Module 4 of the SORP Guidance Notes 2007/08 contains an example disclosure for a non-adjusting event. The change in lump sums payable may impact on: • •
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the pension fund account and top up grant the FRS17 disclosures

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Accounting for adjusting events – Pension Fund accounts 10 Amendments to the accounts to reflect adjusting events are only required where the amounts are material. When considering the materiality of the lump sums, the following points need to be taken into account: • Are the additional lump sum payments material in respect of the income and expenditure on the Police Pension Fund Account? If so, the fund account will need to recognise the additional payments and the additional contribution from the Police Fund. As a consequence, the single entity police accounts will need to recognise the additional contribution to the Police Pension Fund and the increased Top-Up Grant receivable (or reduced amount payable to the Home Office). • If the amount is not material in relation to the Police Pension Fund Account, it is unlikely to be material in relation to the Police Income and Expenditure Account. 11 Additional lump sums will be payable under the PPS to officers who retired after 30 September 2007 and chose to take a lump sum. Where the increase in lump sums payable under the PPS is material to the police pension fund, the accounting would be to recognise the additional lump sum as a creditor in the police pension fund’s Fund Account, thus: Dr Benefits payable – commutation and lump sum retirement benefits Cr Creditors 12 This will also be reflected in an increase in the net amount payable through the Fund Account and thus will increase the deficit due from the police authority (or reduce the surplus payable to the police authority), which will be reflected in the police pension fund account, thus: Dr Amount owing from the Police Fund (this will be shown in the Net Assets Statement) Cr Additional contribution from the police authority (this will be shown in the Fund Account) 13 The increase in the deficit payment from the police authority to the police pension fund (or reduction in the surplus payable to the police authority) will be reflected in Statement of Movement on the General Fund Balance under the heading of Amounts not included in the I&E a/c but required to be included by statute when determining the Movement on the General Fund:

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Dr Additional contribution to the Pension Fund to balance the deficit / surplus on the Fund Account Cr Creditors 14 This will be matched by an increase in the top-up grant receivable (or reduction in the amount payable to the Home Office) which will be reflected in the I&E a/c after striking the Net Operating Expenditure total (i.e. along with precepts, general government grants etc.), thus Dr Grant debtors (in the police authority balance sheet) Cr Top-up grant receivable (or General government grants, if RSG and top-up grant are merged in the I&E presentation) or Contribution to Home Office 15 Backdating of ongoing pensions may also be required, for example where an officer has retired with less than 30 years service and has taken the maximum commutation allowed. Where the increase in pension is material to the police fund account, the impact on the police fund will need to be reflected in the same manner as in paragraphs 12 - 14 above. Where amounts are paid late, the Home Office advice is that interest should be paid. Authorities will need to decide whether these payments meet the criteria for late payment, and therefore whether interest is payable. Where they decide that interest is payable, this will be a charge to the Income and Expenditure Account. An adjustment to the to the Income and Expenditure Account will only be required where the interest payable is material to the accounts. The entries are: Dr Interest Expense (Income and Expenditure Account) Cr Creditors Accounting for adjusting events – FRS17 disclosures 17 The impact of the new commutation factors on the police pension scheme liability (or net surplus (deficit)) depends on the accounting policy for measuring the liability in respect of commuted lump sums due after the balance sheet date. The Government Actuary’s Department (GAD) has advised that authorities and their actuaries may have taken one of the following approaches: a) The liability in respect of commuted lump sums due after the balance sheet date was taken to be equal to the scheme liability in respect of the commuted portion of the pension, recognising that the commutation factors are subject to periodic review

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The liability in respect of commuted lumps sums due after the balance sheet date was based on the commutation factors in force prior to the issuance of Home Office Circular 11/2008, assuming that the commutation factors would never change

Authorities should seek the advice of their actuaries on which approach was taken. 18 In case 17 (a) above, GAD has advised that the new commutation factors will not have any impact on the scheme liability for active members as at 31 March 2008. Where the authority has adjusted the benefits payable in the pension fund account due to increased lump sums in line with paragraphs 12-14 above and also needs to reflect this increases in the analysis of movement of the pension scheme liability, the experience gains under FRS17 should be reduced (or experience losses increased) to balance the analysis in movement. Where the authority has adjusted the benefits payable in the pension fund account due to increased pensions in line with paragraph 15 above, GAD has advised that the situation is more complicated, because the higher ongoing pension payments will increase the scheme liability at 31 March 2008. However the increase in the liability may not be material for the authority’s accounts. Where the increase in the liabilities is not material, but the authority need to reflect the increase in benefits payable in the analysis of movement of the pension scheme liability, the experience gains under FRS17 should be reduced (or experience losses increased) to balance the analysis in movement. Where the increase in the liability is material, authorities should seek the advice of their actuaries. In case 17 (b) above, the new commutation factors will result in a significant increase in the police pension scheme liability. In the Police Authority single entity accounts, the impact of the increased lump sums will be recognised as a change in the actuarial assumptions. This will form part of the Statement of Total Recognised Gains and Losses. Authorities should seek the advice of their actuaries to quantify the increase in the liability and the changes that need to be made to the analysis of movement of the pension scheme liability.

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Description: LAAP BULLETIN 74 JUNE 2008