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.
One specific proposal in the draft pensions TAS says – ‘in any Scheme Funding exercises, any prudent estimate of scheme liabilities that is presented should be accompanied by a best estimate. The change in the level of prudence from that in the previous Scheme Funding exercise should be explained to users.’
The new pensions funding regime which began in September 2005 (SFO – another three letter acronym standing for Statutory Funding Objective) requires trustees to agree ‘prudent’ assumptions with the sponsoring company although the term is not defined or quantified in much detail in legislation or in the accompaning guidance from the Pensions Regulator.
Other actuarial modelling requires the use of ‘best estimates’ e.g. for accounting disclosures (lots of acronyms there – FRS, IAS, FAS) or for transfer value calculations.
To take one example of prudent v best estimate – a prudent investment return may ignore or only take limited account of any potential outperformance in excess of guaranteed bond returns whereas a best estimate investment return may take account of actual investment strategy and the likely outperformance from corporate bonds, equities and property etc in the portfolio.
In my view, calculating a best estimate funding level and company contribution level alongside the statutory prudent approach would help both the sponsoring company and trustees assess in a quantitative way what prudence means. It would also let the company see what the future long term cost of the scheme is likely to look like if experience is in line with the best estimate assumptions in comparison to the higher cost using a more cautious approach.
Spence & Partners have been advising companies and trustees for many years in setting both prudent and best estimate funding plans so I would warmly endorse this proposal from BAS.