Pensions Conference 2011. Review of Workshop B4: Risk management and pensions - measuring pensions obligations

Think before assessing pensions obligations

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What is the point?  What are actuaries trying to achieve?  Does satisfying the regulations and regulatory guidance necessarily enlighten trustees and employers?  How are actuaries communicating the results and what decisions will be made on the basis of your reports that affect the future of the scheme and the members?  Could the decisions be incorrect because actuaries report liabilities without adequate explanation of their financial relevance and risks?

The presenters encouraged actuaries not to follow typical practice of condensing pensions obligation information into single liability figures, certainly not without understanding and explaining the risk information that has been 'lost' in the process.

They also emphasised that measurement and management of risks must be considered together.  Risk should be at the centre of reporting on an actuarial analysis, as part of the cycle of agreeing objectives, risk identification, risk analysis, mitigation and monitoring.

Consideration was given to ensuring that trustees understand the dual role of investment returns and sponsor covenant in achieving self sufficiency for the scheme.

Funding targets should be placed in context, demonstrating the application of "prudence" in actual financial terms, consistent with TAS principles.

In my view this involves a comparison of funding plans on a “best estimate” and prudent basis (with explanation of degree of “prudence” in terms of risk-free and best estimate discounting).  It requires care to ensure that a range of relevant funding bases are reported with clear explanation of their purpose so that sponsors/trustees make properly informed decisions.