An advisory group to the government review of the Financial Reporting Council is to explore the extent to which actuaries should be subject to formal regulation in response to the pensions-related nature of recent corporate failures.
The group, which is led by Legal & General chairman Sir John Kingman and includes state pension expert and former CBI head John Cridland, is conducting a review for the government into the role and powers of the audit regulator.
It comes after collapses such as that of Carillion, which saw around 28,000 defined benefit pension members fall into the Pension Protection Fund, raised questions about the practices of large accounting firms and their oversight by the FRC.
Actuaries were involved in providing advice, and you can see a scenario where someone starts to point the finger at them
Bob Scott, LCP
However, minutes from an advisory group meeting in July reveal the review is also considering the role of actuaries and the regulatory framework surrounding them.
“On actuarial work, it was important to understand the extent to which prudential regulation of pensions and insurance does or does not require regulation of the profession. This would be explored further with [the Pensions Regulator and [the Prudential Regulation Authority],” the minute read.
Profession already regulated
Actuaries are currently governed by a system of self-regulation, carried out by the Institute and Faculty of Actuaries with independent oversight from the FRC, which since 2005 has also set technical standards and enforced a disciplinary regime.
The FRC can currently step in and set standards if the IFoA is seen to be failing to do so.
But while the audit regulator is yet to exercise this power, it has highlighted “room for improvement” in the way DB schemes are presented on balance sheets in the wake of recent high-profile corporate collapses.
Just under half of the audits studied by the FRC for a July report contained unsatisfactory elements related to the testing of pensions disclosures.
Whether the Kingman review will call for tighter regulation of actuaries, or merely the auditors checking their work, remains to be seen.
In a submission to the review, the IFoA said the current framework “remains the most appropriate” for maintaining actuarial standards.
Actuaries hope for proportionate response
For the review to recommend tighter regulation of the profession, it would likely have to find that actuarial work contributed to the corporate failures that led to its creation.
“There hasn’t been any suggestion to date that failures such as BHS and Carillion were attributable to pensions,” said Bob Scott, senior partner at actuarial consultancy LCP and immediate past chair of the Association of Consulting Actuaries.
“Actuaries were involved in providing advice, and you can see a scenario where someone starts to point the finger at them,” Scott added. “From the perspective of a practicing actuary and the ACA, I very much hope the Kingman review doesn’t spill over into actuarial regulation.”
However, others suspect that this is more than likely to happen. Joel Eytle, legal director in the pensions practice at law firm DLA Piper, said that whether actuaries were at fault or not, the impact of insolvencies on pensioners means this is “the way the wind is blowing”.
He said scrutinising bodies such as select committees might swoop on any optimistic assumptions found in large companies’ accounts, or even suggest that the market for actuarial work is concentrated.
“It’s no surprise that as a result of these collapses, everyone is looking at what more could have been done to prevent those collapses or minimise the impact,” he said.
Who should regulate actuaries?
Meanwhile, a spokesperson for the Pensions Regulator stressed that it is not directly responsible for the regulation of actuaries.
“However, we are a member of the Joint Forum on Actuarial Regulation (JFAR) along with FRC, IFoA, PRA and FCA. JFAR is a collaboration between regulators to co-ordinate, within the context of its members’ objectives, the identification and analysis of public interest risks to which actuarial work is relevant,” the spokesperson said
“Where TPR sees the standard of actuarial work (as part of our day to day work) that falls short of expectations we will liaise with the IFoA to make them aware,” the spokesperson added.
But Eytle said the Pensions Regulator would still be the likely target body to implement any improved actuarial regulatory framework: “If not them, then who?”
