XPS Pensions has called for cooperation between advisory firms and auditors to create a standardised online tool to improve efficiency after finding that the pension accounting gap has widened.

Its third annual accounting survey called for a new approach to the year-end accounting for pension processes to streamline operations.

In the report, XPS estimated that the accounting gap, which is the difference between the pension obligations reported in companies’ accounts and the long-term funding strategies that drive cash demands, could be over £500bn across all UK companies.

This is double the gap estimated in the firm’s 2019 accounting survey.

It noted that market volatility driven by Covid-19 had led to improvement in balance sheet positions for many schemes, although their cash funding position has worsened at the same time.

The report added that a widening gap risks pension actions that companies have to take in response to Covid-19 appearing contrary to stakeholders’ understanding of pension costs and risks.

Disclosing narratives was described as key in managing this risk.

To try and plug the gap, XPS recommended that firms work together to create a standardised online tool that sets out common audit data needs and a standard format for submitting data.

Furthermore, it stated that the tool should collate audit guidance on assumptions and emerging issues, such as inflation measure changes.

“Through a more joined-up process, we believe that companies can reduce the amount of management time spent on pensions reporting, getting to the right outcome more quickly,” the report stated.

XPS head of accounting for pensions, Simon Reddish, commented: “Too often I see clients frustrated with the steps required to complete their annual reporting for pensions exercise.

“While the increased auditor testing is welcome, and will increase the quality of reporting, lots of this process need not directly involve the client’s senior finance team.

“We believe that the industry should be working closely with auditors to create an agreed, centralised process that puts clients first and meets the FRC’s requirements - this is the real key to a seamless year-end.”

XPS’s report found greater variation in setting longevity assumptions as market and auditor views have continued to evolve.

It added that complexity in this area has continued to increase and could be affected by the Covid-19 crisis in the short to medium term.

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