Calls for actuaries to offer strategic advice as schemes target endgame

Aiming to establish a “new paradigm” focused on member outcomes for running off the £2tn of UK corporate sector defined benefit liabilities, the working party, set up by the Institute and Faculty of Actuaries, published a report with a series of recommendations for the actuarial profession and the Pensions Regulator to take forward.

Costas Yiasoumi, senior director at Willis Towers Watson, and chair of the working party, said: “Development of a robust target end state and its delivery, whether that’s low dependency, buyout or transfer to a superfund, is one of the greatest challenges facing trustees of DB schemes. Success in this area can only mean better outcomes for members.”   

Among the many recommendations made in the report, the authors said that the role of actuaries should be broadened to include strategic advice, marking a change from the current model of technical specialist.

Move away from triennial valuation

The working party proposes a new methodology focused on securing the best member outcomes, which requires a move away from the triennial valuation as the mechanism to set and review journey plans, whether they culminate in insurance buyouts, superfunds, becoming a scheme without a substantive sponsor, or some other end state.

The new methodology “requires an adviser with broad cross-disciplinary knowledge and understanding who can work with subject matter experts across different disciplines”, the report stated. This role is described elsewhere as an “expert generalist”, with actuaries being “ideally placed to step into these roles”.

Jane Kola, partner at Arc Pensions Law and one of the report’s co-authors, told Pensions Expert that the newly defined role will not be to fulfil all advisory functions, but rather will see actuaries tell schemes and trustees when professional advice is needed, what kind of advice, and from whom it should be sought.

“The role of the actuary is evolving so that the actuary is put in a position where he or she is far more able to say to trustees, ‘I’m sorry, that’s an issue that requires legal advice’, or ‘this is an issue where the administrator needs to invest in the administration team, and they need to do some more work on this’,” she said. 

“It’s about them ensuring that the advisers who need to be involved are involved, and therefore the right solution is delivered.”

Ms Kola hailed the report as a “seminal marker, a shift-change paper, that sets the basis of actuarial practice going forward”.

Trustees have ‘underinvested’ in administration

In part, the change to the actuary role is required, since for decades there has been a lack of investment in administration by trustees, she said.

This was the result of a number of legislative, regulatory and financial trends, not least the Maxwell scandals, which centralised the role of actuaries. Combined with the need to cut costs, many schemes and trustees ended up relying on their actuary when they should have been approaching other specialist advisers, Ms Kola noted.

“We now need to unpick the damage done by 20 or 30 years of not necessarily having the right people involved, and trustees in particular underinvesting in administration.”

The result can be mistakes and bad practice, especially around data, which adversely impacts member outcomes, she added.

Actuaries should look at variable discount rates

The working party also recommended that actuaries should sponsor research into the use of dynamic discount rates for the technical provisions of schemes.

“This will help remove funding volatility that is artificial in nature, and will become increasingly relevant for schemes with low-dependency [targeted end states] that adopt asset strategies that more closely address matching of assets and cash flow liabilities,” the report stated. 

Kevin Wesbroom, professional trustee at Capital Cranfield and one of the authors of the report, explained that “there’s nothing wrong with gilts plus as long as you’re prepared to vary the plus”.

“Why are you going to stick with the old method of gilts plus some fixed number? Why don’t you look at what your investments are telling you about what the plus ought to be, rather than the number you used last time?

“Align your actuarial valuation method much more closely with your underlying investment philosophy,” he advised.