Once upon a time, there was a Scheme Actuary. He was very proud of his profession and his reputation as a prudent man of business. Trustees all across the land admired and respected him and queued up to follow his advice, for they all understood how clever and learned he was. Besides, the wise old King passed a law requiring them to appoint a Scheme Actuary so they had to have one anyway… One day the actuary was counting out the gold coins in a pension scheme and a tiny fragment chipped off one and flew straight into his eye. From that day on, he could only see pensions through a gilt lens and his peripheral vision vanished altogether. However, nobody in the Kingdom knew about this incident, and everyone still trusted the Grand Vizier (surely “actuary”?) when he demanded a mountain of gold from every farmer, so he could look after all their cows should they go bankrupt… which many promptly did, since they didn’t all have a spare mountain of gold lying around. Of course this is just a fairy tale and couldn’t happen in real life. Or could it? In fact, a similar story happens every day in pensions – albeit not as extreme or (hopefully) amusing. Scheme Actuaries do like their safety margins and they have been known to be overly cautious at times. Obviously there is nothing wrong with a prudent or even extremely prudent funding target, as long as Trustees (and Sponsoring Employers) agree it knowingly. The problem is that the adjustment of 0.1% on the discount rate, a slightly more prudent assumption for inflation and retaining last year’s mortality projections adds margins on top of margins and can easily increase the calculated value of liabilities by 3 – 5%. That might not seem like a lot, except if your scheme is really 95% funded and an overly cautious approach doubles your deficit overnight. Added to potentially exaggerated deficits, some actuaries are now advising Trustees that the deficits must be paid off within 10 years, as recommended by the recent Select Committee report. Again, a shorter recovery period is better for the scheme but this time limit is a red herring. The Pensions Regulator understands that the length of the Recovery Plan is only one factor for trustees to consider and the Select Committee’s views have no legal force whatsoever, yet and quite possibly ever. Actuaries and Trustees need to consider the wider circumstances of each pension scheme. For example, an employer with a strong balance sheet might need some breathing space to deal with revenue/profit challenges. Quoting a more realistic (but still prudent) deficit and spreading payments over 15 years might keep the company afloat instead of triggering a fire sale and killing the goose that laid the golden egg. Either way, actuaries need to plan for the vague possibility that we’re not always right and advise on a Plan B in case Plan A doesn’t work out. We then need to engage with our clients to explain the level of prudence in our figures and the range of alternatives available. The good news is that if trustees, employers, and their actuaries maintain open lines of communication, and invest in ongoing reporting and monitoring, this will substantially increase your chance of getting your happily ever after.
Pensions Dashboard Ready Administration– a Utopia, or can it actually happen?Blog
by Colin Wheeler •