Merton Council's Pensions Committee has been alerted to concerns regarding the valuation of complex Level 3 investments within the Merton Pension Fund, according to a recent external audit progress update from Ernst & Young (EY). The Merton Pension Fund's Level 3 investments include unquoted pooled investment vehicles such as private debt, infrastructure and property investments.

Level 3 investments, which are unquoted and lack publicly available prices, require valuation judgements from investment managers, and any errors could lead to material valuation inaccuracies. The report indicates that the pension funds disclosure of level 3 assets to be incomplete, as the movements in level 3 disclosure was not separately disclosed as required by the Code. The amount for change in unquoted investments is based on unquoted investments (i.e. Level 3) and this is calculated at £210m in the accounts. Therefore a 10% movement would be £21m and not £24m.

The EY report, presented to the committee on Tuesday 23 September 2025, highlighted the valuation of these complex investments as a significant risk area. While the audit work was substantially complete, EY noted that the quality and completeness of the draft financial statements required improvement. To address this, the council is planning a Detailed internal review to be conducted before publication of financial statements .

The audit also identified disclosure misstatements in several notes to the financial statements, though no uncorrected misstatements affecting the net asset statement and fund account were found.

The Merton Pension Fund Provisional Audit Results Report 24-25 summarised the status of the audit and contained findings related to areas of audit emphasis, views on accounting policies and judgements, and material internal control findings.

Other key risk areas identified in the report included:

  • Fraud risk - presumptive risk of management override of controls

    EY carried out procedures to address the fraud risk of management override of controls, including:

    • Identifying risks
    • Considering controls and their effectiveness
    • Testing journal entries
    • Testing estimates for evidence of management bias

  • Inherent Risk 1 - Valuation of Level 2 investments

    The valuation of non-quoted pooled investments is considered to be of a higher degree of inherent risk because of the extent of estimation uncertainty. Measures taken to mitigate this risk include:

    • Reconciling the valuation of the non-quoted assets provided by the custodian and fund manager
    • Verifying the fund manager unit valuation using externally available market information

  • Inherent Risk 2 - IAS26 Disclosure – Actuarial Present Value of Promised Retirement Benefits

EY's report included a table that summarised their views on the effectiveness of the council's arrangements to support external financial across a range of relevant measures. The timeliness of the draft financial statements and the delivery of working papers were rated as effective, but the quality and completeness of the draft financial statements was considered to require improvement.