Actuaries may face commercial challenges to their work from companies to adjust assumptions used for funding of defined benefit schemes to reduce contribution requirements, or to recommend investment strategies which rely on more complex or innovative products in the search for higher returns.
The warning comes from the Joint Forum on Actuarial Regulation (JFAR), which identified defined benefit (DB) pensions as one of its top areas of concern for 2018, underlying the current risks of this market.
The financial position of these schemes, with high deficits, the uncertain economic conditions and high numbers of pension transfers are the main risk areas for the actuary body, identified in its JFAR Risk Perspective: 2017 Update.
JFAR also said that as a result of the volatile landscape for defined benefit pension schemes there is a “risk that actuaries provide poor quality advice, such that trustees are unable to respond effectively to the challenges facing DB pension schemes, resulting in poor outcomes for members.”
The government’s forthcoming white paper on this pension sector is a further source of uncertainty, JFAR argued.
The Department of Work & Pensions (DWP) has been working on its white paper on DB schemes, which was first expected to be published in 2017, and then delayed to February 2018, and is now expected in the spring.
The paper, which follows a consultation launched in February into what needed to be done to ensure confidence and secure the future of these schemes, will consider the need to adapt the regulatory regime.
The actuary body argued that the several final salary schemes have reported increasing deficits, and “are facing higher deficit recovery contributions and/or over a longer recovery period”.
Due to this, actuaries may pressure from scheme sponsors to make the figures more favourable, or to back higher risk investments in the hope for better returns, it said.
Defined benefit pension schemes have been thrown into the spotlight over the past year, with the retirement funds of BHS, Tata Steel, and Carillion all suffering from underfunding by the employers supposed to be supporting them, as the companies suffered their own financial problems.
The uncertain economic conditions, including Brexit, “may also make it more difficult to assess employer covenant and the assumptions used in the valuation to allow for it”.
On pension transfers, JFAR noted the increase of option to access savings since the introduction of pension freedoms, alongside the current low interest rate environment, let to historically high levels of transfers.
The volume of these transfers has been soaring, as savers seek to take advantage of sky-high transfer values and to move their nest eggs into defined contribution (DC) schemes in order to access their cash.
HM Revenue & Customs data showed more than £14bn has been unlocked from defined contribution pensions since pension freedoms came into effect.
The actuary body argued that a “transfer is potentially attractive to some members for whom the greater flexibility in the DC environment outweighs the potential loss of certainty”.
It said: “Transfer values paid from DB schemes require assumptions for discount rates, inflation rates and demography for many years into the future, and any difference between these assumptions and actual outturn will impact the value to the transferee.
“The actuary setting transfer values faces a challenge to balance practical requirements against the needs of fairness – for the ongoing scheme as well as the transferees.”
Another level of challenge for actuaries is that they “could also face pressure to quote transfer values which encourage transfers reducing the long-term liabilities for the sponsor”.
maria.espadinha@ft.com
