The cosy oligarchy of the Big Four accounting firms — PwC, Deloitte, EY and KPMG — is set to be shaken up in 2021 as mid-tier companies eye their bread-and-butter work of pension scheme auditing.
Comparatively modest auditing fees have previously deterred scheme sponsors and trustees from putting this annual task out to tender as the expense of a market review can outweigh potential cost savings.
This is set to change, however. Higher fees in 2021 are expected to be a catalyst to spur trustees to save every pound they can.
The expectation across audit is that fees will rise because of an increase in regulation and mandated changes to the audit profession
Andy Fern, Deloitte
“The expectation across audit is that fees will rise because of an increase in regulation and mandated changes to the audit profession,” notes Andy Fern, partner at Deloitte.
“Pension scheme audits are no different. We have heard of fees increasing on some pension schemes by 30-40 per cent. A more realistic increase, which we are seeing at Deloitte, is 10-20 per cent over a two-year period.”
Simon Lewis, client director at Punter Southall Governance, adds: “We expect base costs to increase in 2021 and have seen evidence of this due to [statement of recommended practice] requirements. The uncertainties are continuing into 2021 with issues like the further Lloyds ruling on GMP equalisation applying to all statutory transfer values and continued pressure on the wider economy.”
Andrew Sanford, a partner at business advisory firm Blick Rothenberg, points out that the effect of Covid-19 on investments and property valuations will mean considerably more work on fair value accounting, “which will be reflected in the ultimate cost to schemes”.
Accountancy firm Mazars expects “a marginal increase for some schemes”.
Meanwhile, smaller companies such as Glasgow-based Johnston Carmichael are making a land grab. Its audit director, Chris Wilkie, has seen more tender activity in the past 12 months, resulting in an increase in pension audit clients to 100 in January 2021 from 85 in January 2020.
Neil Cundale, principal at mid-tier audit company Hillier Hopkins, has also noticed “a marked increase in the number of pension schemes putting their annual audits out to tender or undertaking price benchmarking”, a trend he believes “will gather pace in 2021”.
RSM UK Audit has 350 pension schemes on its books and has received “a steady flow of appointments”, according to partner Philip Briggs.
Shop around
Savings can be substantial for those who shop around, notes Mr Lewis. “The spread of costs is significant — one auditor can charge double or more than another for the same audit,” he says.
However, exactly how much the savings can be is hard to gauge as accountants are coy about their fees. Just two of the eight accountancy firms responding to Pensions Expert’s queries gave details of costs.
Leicester-based Rowleys acts as auditor for 15 defined benefit schemes, all with less than £165m in assets. For a £165m scheme, depending on the size and complexity of the membership, managing partner Robert Radford quotes a typical fee of £12,000 to £14,000 plus value added tax.
Mr Wilkie says a typical £500m scheme audit fee would be around £15,000 to £20,000, while a £50m scheme could expect to pay £6,000 to £10,000.
Mr Lewis calls for auditors to use fixed fees for “a set number of years” and to determine a basis for any fee increase up front, with “agreed exceptions for unplanned significant events”.
Providers should also consider “a falling sliding scale of fees upon a new appointment”, Mr Lewis explains.
“Year one could be slightly higher, with an annual reduction in future years as efficiencies and captured knowledge of the scheme provide time savings for all those involved,” he says, adding that the use of “interim audits or check points” could improve efficiency while also managing uncertainty “so there are no nasty surprises”.
“Having an independent trustee on the board can be very helpful to provide guidance and benchmarking to the trustees, as they will have experience of working with different firms of auditors,” says Andrew Penketh, partner and head of pension funds at Crowe UK, which acts for 300 schemes.
He adds: “Sometimes changing an audit firm can be the right thing to do; in other circumstances, trustees will keep the same firm but rotation of the audit team can provide a fresh insight.”
Auditing services alone are no longer enough for some trustees. As the RSM chart shows, many pensions professionals are looking for more from their auditors: over half believe they could help more with governance, while others are seeking help on risk registers or cost analysis.
However, John Reeve, director at Cosan Consulting, warns that “trustees often baulk against aggressive on-selling of services”.
Reform needed
Many in the pensions sector feel that the time is right for reform in the audit sector.
“Audits seem to be conducted in much the same way now as when I came into the industry in the 1980s,” observes Michael Clark, professional pension trustee at CBC Pension Services.
“Valuations, admin, legal have all developed for different reasons but audits seem to be in a time warp.”
GMP ruling implementation will be ‘Herculean’ task for schemes
A ruling on guaranteed minimum pension equalisation will see trustees having to revisit 30 years of pension transfers, which will be a “Herculean” task for administration teams amid missing data and poorly kept records.
Some would like to see junior audit personnel required to complete the Pensions Regulator’s Trustee Toolkit. “Trustees get frustrated when they feel they are being charged for training those new to pensions,” says Mr Lewis.
Tara Wooton, audit director at Mazars, argues that pension scheme accounts should be submitted to TPR for review. “This process is already in place for other entities, which submit their filings to Companies House,” she says.
“By requiring this, the regulator would be demonstrating that it takes the area seriously.”
