Archive for July 2009

Sean Browes

I came into work earlier this week and was struck by the state of the desks. Each workstation resembled one of those fake rooms you see in Ikea or MFI except the computers were not made of cardboard – there was not a scrap of paper to be seen.

Why so? It wasn’t so I could write a blog with a particularly corny title but as a result of our clear desk policy, which has been in force for some time. The whole issue of data security is at the fore again as a result of HSBC getting heavily fined by the FSA for breaches in data security. Read more »

Brian Spence

The Actuarial Profession has published detailed results in relation to the defeated merger proposals but crucially omit to show the breakdown in the vote between Scotland and the rest of the UK.  In particular we still don’t know whether the required two-thirds majority of Faculty members who voted for the proposals depended on the support of members based outside Scotland.

Otherwise the figures show fairly similar levels of support from UK actuaries and actuaries based elsewhere.

Neil Copeland

I see from an article in the Financial Times that something called the Marathon Club is quoted as being critical of the International Accounting Standard 19 (IAS19). The Club suggests IAS19 is responsible for the closure of Final Salary pension schemes as a result of its impact on Company accounts.

Being a child of the 70’s, and not the athletic type, the Club’s name initially conjured up images of people meeting in a darkened room, to indulge a slightly sinister craving for that chocolate and nut based snack bar better known to younger generations as Snickers. I guess they are trying to convey the message that pensions are about the long run, a bit obvious as names go, but better than a pretend word that sounds a bit like something worthy with a few extra letters thrown in – you know who you are Entegria/Xafinity/Dyspepsia.

Anyway, I agree that linking pension liabilities to AA corporate bond yields doesn’t make a lot of sense, per se, but then they go off in completely the wrong direction.

According to FT.com, “The Marathon Club is calling for accounting measures that allow assets to be measured at “fair” long-term values and liabilities to be calculated as the net present value of future benefit commitments and other outgoings discounted at a rate “consistent” with the valuation of the assets.”

The Marathon Club appears to be suggesting that your pension liabilities are somehow linked to how you invest your scheme assets, a view that I thought had long been recognised as fatally flawed. Trustees and employers faced with funding pension scheme liabilities won’t see their real liabilities, or the real cost to the employer, magically reduce because the employer puts a smaller number in its accounts.

Let’s be honest, the actual numbers in pension disclosures in a company’s accounts don’t really matter when it comes to the real world and actually funding pension schemes – apart from to Aon and its procession of “biggest one day increase/fall (delete as applicable) in pension deficits” press releases.

I actually think the Pensions Regulator, in its recent statement on scheme funding, re-emphasises that we have a flexible funding framework within which to work when valuing pension scheme liabilities. The statement encourages trustees and employers to recognise and measure their pension liabilities on a prudent basis but allows flexibility, including the ability to make allowance for the schemes investment strategy, when assessing the contributions required to fund any deficit.

I don’t think employers should be more or less prudent than trustees when recognising their pension liabilities. Nonetheless there is an argument, in accounting terms, for something that FRS17/IAS19 delivered, in however flawed a fashion, which is consistency of reporting. Allowing employers to set their own assumptions for accounting purposes, and potentially fudge the position, is a retrograde step. So, inevitably, the flexibility available when considering funding needs to be curtailed. I do think there is scope for a debate about how and where such liabilities are disclosed in an employer’s accounts, rather than just what the number should be. There is big challenge here for the IASB to deliver a reformed accounting standard.

Finally, FRS17 (and therefore IAS19) should be thanked for one, unintended, consequence. It had the effect, in its early days, of forcing employers and trustees to recognise, in many cases for the first time, the real nature and extent of their pension liabilities and the associated risk and uncertainty. It is this aspect of the FRS17 story, people finally beginning to wake up to the true nature and extent of their pension liabilities, rather than a set of unpalatable numbers in their accounts, that has caused many employers to close their final salary pension schemes. As I have commented previously there is no point in persevering with an unsustainable pension framework and we need a meaningful debate about how UK plc meets the challenge of providing adequate income for its citizens in retirement.

Brian Spence

I explained in an earlier post why I, as a Fellow of the Faculty of Actuaries in Scotland, did not support the proposals put forward by the leadership of the Actuarial Profession for a merger with the Institute of Actuaries.

I was among many actuaries who were surprised to learn that the Faculty of Actuaries voted, by a small margin over the two-thirds majority required, to support the merger whereas the Institute of Actuaries did not vote for the proposals, falling short by a small margin below the three-quarters majority required under its constitution (the differences in voting majority required being historic parts of the respective constitutions of the two organisations).

The vote raises some important questions:

  • Was it appropriate for the Actuarial Profession’s leadership to take forward proposals to the stage of a vote when they clearly had not achieved consensus in relation to their proposals?
  • Why did the membership of the Institute of Actuaries not support the merger?  One of the most vociferous opponents of the merger proposals Patrick Lee draws attention in his blog 21st century actuary’s blog to a poll he has set up within the Actuarial Profession’s discussion board (open to members of the Institute and Faculty).  It remains to be seen whether useful information will be derived from this poll and in the meantime we can only speculate.

Possible reasons for individual members of the Institute voting against the Profession’s proposals are:

  • The terms being seen as too generous to the proposed Scottish constituency with no specific provision for other constituencies
  • They did not think the merger process as managed by the Actuarial Profession’s leadership was an appropriate way of determining whether or not there should be a national professional body for actuaries based in Scotland   (The Actuarial Profession should release detailed figures as to how the proportions of members supporting the vote varied between actuaries based in Scotland and those based outside Scotland – it should, of course, be a matter for actuaries based in Scotland as to whether they have their own national professional actuarial body.)
  • Dislike of the proposed name – The Chartered Actuarial Profession and/or the designatory initials FCAP that would have gone with it
  • Feeling that there was inadequate consultation on the detail of the proposed new charter
  • Feeling that the Profession’s leadership had not proved their case for merger

The Actuarial Profession’s leadership clearly has some thinking to do but the comments made by the President of the Insitute of Actuaries Nigel Masters are encouraging in some ways.

“We didn’t quite make the high threshold but it’s clear that the majority of our members did support change. We have to consider why our proposals didn’t command enough support and so the Institute Council will consult with members and look at which elements of the proposal need further improvement.”

The problem is that there is an outside world out there that probably doesnt much care about whether the Institute and Faculty merger.  There are many more pressing issues for the Actuarial Profession to address.

Ian Campbell

Three letter acronyms abound in pensions and now it seems they may be rhyming.
The Board for Actuarial Standards (BAS) issued a consultation paper last month on a proposed pensions-based Technical Actuarial Standard (TAS). The objective of this specific TAS is to build on three generic TAS’s already issued by BAS on data, modelling and reporting. The TAS regime gives guidance to actuaries; they are principles based and replace more prescriptive ‘Guidance Notes’ previously issued by the UK actuarial profession and adopted by BAS on an interim basis. Read more »

David Davison

The Pensions Regulator’s powers have increased significantly in order to maintain the security of member benefits following the introduction of the material detriment test.
The material detriment test was introduced as a result of concerns over the reduced security provided by sponsoring companies and is being welcomed as a positive step to protect member pension benefits.
The Pensions Regulator has now increased powers to issue contribution notices should the employer make corporate decisions (actions or failures to act) that would have a “materially detrimental” effect on the probability of members receiving their benefits in full. Read more »

David Davison

The long awaited commutation regulations have finally been issued despite HMRC announcing in March that they would not come out until autumn.

Under current regulations members between 60 and 75 are able to take a lump sum rather than a very small pension if the values of all benefits they have under all registered pension schemes when totalled are below 1% of the lifetime allowance. A quarter of this lump sum is tax free with the remainder being taxed as income. Read more »

Laura Cumming

The Press has recently been full of reports about the working population having the freedom to work past 65 with a removal of compulsory retirement ages in the workplace. Strangely, everyone I speak to in their 40s and 50s is afraid that such a move will see them coerced into continuing to work “just for a few years more” Read more »

Neil Copeland

It was George Bernard Shaw, another great Irishman, who said “The power of accurate observation is commonly called cynicism by those who haven’t got it.” I’m often accused of being too cynical by colleagues. But what other response can you possibly adopt when confronted by a front page advert in a major magazine from one of those awfully nice pension consultancy firms offering advice with no fees and suggesting that you ring a number to see if you qualify. Read more »

Ian Campbell

Interesting to read in the Financial Times this week that the Pensions Regulator has decided to intervene in the setting of the funding plan for the current ongoing actuarial valuation of the BT pension scheme and that it has appointed a firm of actuaries to advise it. The discussions will be mainly centred around the choice of the discount rate used to calculate the actuarial value of the accrued benefits (aka the ‘technical provisions’). Comparing this with the market value of the assets gives the funding shortfall or deficit. The higher the discount rate, the better the funding position and the lower the level of contributions BT will have to pay. Read more »

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