On the go: Global pandemics and the threat of a climate catastrophe present dire risks to the quality of actuarial work, according to a new report by the Joint Forum on Actuarial Regulation.
JFAR, established by the Financial Reporting Council, identified the coronavirus pandemic as a “systemic risk” due to its impact on the scenarios normally used in actuarial models.
Climate-related risk, meanwhile, was defined as the “top hotspot” and potentially “the defining risk of our times”, with the report setting out how actuaries can assist in mitigating the most serious consequences of climate change.
Commenting on the report, Vassos Vassou, a professional trustee at Dalriada, said: “It is evident that the risk climate change poses to future investment returns should be at the top of the industry’s agenda.”
Given that actuaries tend to look at historical performance in constructing their models, their analysis may fail to account for emerging realities, he argued, with potential implications for scheme trustees.
“If actuaries say nothing about the possible impact of climate change on the assumptions they propose trustees use, then trustees could find the schemes they look after also being blown off course,” Mr Vassou said.
Of Covid-19, the report stated that the recent outbreak “highlights that the world remains exposed to the risk of further pandemics”.
“A severe pandemic has the potential to cause a rebasing of all assumptions,” it stated, highlighting how wide-ranging the impact of the virus is likely to be, whether by altering life expectancy, changing trade relations with China, harming employer covenants, or making the day-to-day handling of actuarial claims more difficult owing to absences and remote working by claims handlers.
FRC chief executive Jon Thompson said: “The coronavirus pandemic highlights the importance of identifying and managing risk.
“Actuaries, employers and users of actuarial work are encouraged to collaborate effectively to understand and mitigate the risks to high-quality actuarial work and to explore opportunities in the public interest.”
Highlighting the vital role actuaries play in pension schemes’ financial planning and the crafting of investment strategies, Sarah Tune, head of actuaries at the Pensions Regulator, welcomed the report.
“[The report] highlights the most pressing and emerging risks, which could threaten retirement savings if not properly tackled,” she said.
“We are alive to the areas flagged in the report, and continue to work closely with the industry to ensure savers remain protected.”
