Defining the role of the scheme actuary

A few years ago, I attended an Association of Pension Lawyers (APL) conference.

At this particular conference, I attended a talk given by Charles Magoffin, a partner at Freshfields and a senior member of the APL. Within his talk, he explored the role of the scheme actuary and, particularly, the actuary’s decision-making powers within a pension scheme and, particularly, its rules.

Could it be argued, he asked APL delegates, that the actuary’s role is akin to that of a trustee? Could the actuary be regarded as a quasi-trustee?

Magoffin made his audience think about these questions – an important quality in a presenter and one to be applauded. He drew from his knowledge of scheme rules and observed that in many occupational pension schemes, the scheme actuary typically had a role which involved them giving an opinion about matters that affected the benefits payable and the scheme’s ability to pay them.

The actuary’s advice was crucial in setting contribution rates and, related to this, in determining whether the scheme had enough money to pay benefits. The actuary also set or advised on factors that heavily influenced the payment of scheme benefits. They advised on how benefits should be reduced if paid earlier or increased if paid late. If the scheme was in deficit, it was mainly the actuary’s duty to advise the trustees on how to reduce that deficit.

Although it was possible for trustees to reject the advice, it was not common for trustees to risk the consequences of ignoring their scheme actuary.

Evidently, the rules of a pension scheme dictate the scheme actuary’s role and rules can vary, but most defined benefit (DB) schemes – at least those advised by Freshfields at the time of Magoffin’s talk – include provisions making it clear that trustees cannot do certain fundamental things (such as pay benefits early or decide on employer contributions) without input from the scheme actuary. There are schemes for which employer contribution rates are specified as being “as determined by the scheme actuary”.

Case study: The Railways Pension Scheme

The Railways Pension Scheme (RPS) and, particularly, the Atos section of the RPS (Atos section) provides a helpful and up-to-date illustration.

The RPS is a ‘shared cost’ DB scheme, meaning that when the scheme actuary assesses how much money is needed for the scheme to meet its funding obligations, that amount is divided between the participating employers and contributing members. This in turn means that member contributions are not fixed.

In February this year, the UK Court of Appeal gave judgment in relation to Railways Pension Trustee Co Ltd – Atos IT Services UK Ltd [2024], a claim brought by two participating employers in the Atos section.

The appeal came following a decision in the High Court, which allowed the scheme actuary to set contributions for active members at a level that was not likely to eliminate a funding shortfall in the Atos section.

The background to the case is that some active members of the Atos section had protected status due to their membership of the British Rail Pension Scheme before privatisation. That status required employers to give protected persons certain protected rights to retirement benefits. A 1994 protection order requires any RPS section with protected persons in it to be funded to a level that ensures these people receive benefits equal to their pension rights.

The Atos section rules provided that if an actuarial valuation showed a shortfall and the participating employer and the trustee were not able to resolve how to make good the shortfall within six months, that shortfall “shall be made good” in ways set out under the rules – unless the actuary considered the shortfall to be “trivial”.

The rules went on to state that member and employer contributions should be increased subject to a cap of 130% and that it was the actuary’s job to determine the rate and period of increase. Where a shortfall remained, then member benefits should be reduced and, where the employer and trustee were unable to agree how to do this within nine months, the actuary should determine the basis of the reduction.

A valuation carried out by the scheme’s actuary showed the Atos section to have a shortfall, meaning that it needed additional funding to comply with the protection order. The scheme actuary set member contributions at a rate which, the employers argued, fell short of the requirement to eliminate the shortfall.

The High Court, finding in favour of the Atos section trustees, held that the Atos section rules did not constitute an “exhaustive and comprehensive” regime for eliminating a shortfall and that the actuary had a “discretion” to fix contribution rates from members, taking into account factors including affordability, value for money and collectability – even if this meant contributions would not eliminate the shortfall. The employers appealed.

Court of Appeal judgement

In rejecting the appeal, the Court of Appeal provided guidance that could conceivably have followed on from Charles Magoffin’s talk at the APL conference.

While the court agreed with the judge at first instance that the rules of the Atos section were not exhaustive and did not dictate precisely how the scheme actuary should eliminate a shortfall, it was misleading to suggest that the terms “determine” and “as determined by” gave the actuary a discretion which, in turn, might suggest that their role was in some way fiduciary or akin to that of a fiduciary.

Rather, the scheme actuary’s role was governed by the contractual terms on which they were appointed.

For the avoidance of any doubt, it is not the case that the thought-provoking talk given by Charles Magoffin argued that a scheme actuary is a trustee or is the same as one. It also seems to be going too far to suggest that the actuary’s role within a pension scheme means that they have anything other than a professional duty to make decisions.

Factors such as affordability apply to any actuary’s assessment when determining member and employer contributions. It follows that the above view, expressed by Lady Justice Asplin in the Court of Appeal, has to be correct. To suggest that a scheme actuary’s role goes further than that of a professional adviser could create unintended, not to say unhelpful, consequences for pension schemes and the actuarial profession.

A problem may arise, however, where the rules of a scheme are prescriptive (for example, employer contributions are “determined by the scheme actuary” and not the trustee having considered actuarial advice) and the terms of the actuary’s appointment are drawn widely enough to cause pension lawyers everywhere to argue that the actuary’s role is analogous to that of a trustee and that their duty is fiduciary.

Paul Carney is a partner at Shoosmiths.