8 December 2020
Pensions actuaries calculating transfer values and commutation rates should prioritise sound rationale and clear communication when advising scheme trustees. This is one of the key recommendations in the ‘Thematic Review Report: Actuarial factors used to calculate benefits in UK pensions schemes’ published today by the Institute and Faculty of Actuaries (IFoA). For the first time, the IFoA has been able to review independently and in a regulatory context, the standard of work being carried out in practice by scheme actuaries. The review was undertaken as part of the Actuarial Monitoring Scheme (AMS), launched in September 2019.
The comprehensive thematic review scrutinised a range of advice provided voluntarily by 63 individual scheme actuaries from 19 pensions firms across the UK. The review focused on the setting of transfer values and commutation rates, a key area where the role of the actuary is crucial in influencing outcomes for pension scheme members.
The report highlights that, when advising trustees, actuaries should focus on explaining the range of factors affecting calculations for transfer values and commutation rates and the reasons for the difference between the two.
Neil Buckley, IFoA Regulation Board Chair, said: “This report represents a significant milestone for the Actuarial Monitoring Scheme and it is heartening to hear that the overall standard of advice was high. However, the IFoA’s key regulatory role is to protect the public interest and we are concerned that the quality of actuarial advice in some instances may be contributing to commutation rates being well below transfer values, which may lead to poor value to members.
“There is a variety of reasons for the difference in transfer values and commutation rates including the role of trustee and sponsors, and the impact on funding. In this environment, sound rationale and clear communication by scheme actuaries is critical and needs to follow all existing standards, in particular to explain why these actuarial factors differ and the implications of this difference for scheme members.”
Standards of advice were generally high but the report recommends that actuaries work to continually improve the quality of their advice and provides specifics on how to achieve this. In addition, the review points out that the Office for National Statistics is due to cease publishing information on market-wide commutation rates and recommends that a central pensions industry body needs to take on that collation to provide an authoritative source of benchmarking. Finally, the IFoA is calling for further research to be conducted on the way commutation rates are set.
David Gordon, IFoA Senior Review Actuary, said: “The difference between transfer values and commutation rates is not new but this review shines a spotlight on how wide the gap can be. The recommendations directly address this difference and are designed to inform the work of scheme actuaries and their employers. They will also be used by the IFoA to improve and where necessary, adapt the AMS, to ensure effective monitoring.
“I would like to thank all the scheme actuaries and organisations who readily took part in this review. Their openness and willingness to discuss their work demonstrated to us that there is widespread support to improve further the quality and clarity of work in this key area. It is through their cooperation and input that we have been able to deliver this thought provoking report.”
The next Thematic Review will be focussed on the work of actuaries in general insurance and is due to be published in first quarter of 2021.
~ENDS~
Contact
Sonia Sequeira, Media Relations Manager, IFoA
Tel: 07525 592 198
Email: sonia.sequeira@actuaries.org.uk
Notes to Editor
- ‘Thematic Review Report: Actuarial factors used to calculate benefits in UK pensions schemes’. Institute and Faculty of Actuaries. November 2020.
- Pension scheme members who have not yet retired have the option to take a transfer value in place of all future benefits that would otherwise be payable from the scheme. Legislation from 2008 sets out the requirement for trustees to determine the assumptions used in transfer value calculations. The Pensions Regulator also provides guidance to trustees to assist with regulatory requirements.
- At retirement, a pension scheme member may choose to receive an immediate tax free lump sum in exchange for part of their pension. In a defined benefit pension scheme, a commutation rate is applied to convert a pension amount into a cash sum. Each pension scheme has its own rules to set out the way a commutation rate is determind.
About the Institute and Faculty of Actuaries
The Institute and Faculty of Actuaries (IFoA) is a royal chartered, not-for-profit, professional body.
Research undertaken by the IFoA is not commercial. As a learned society, research helps us to fulfil our royal charter requirements to further actuarial science and serve the public interest.
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