IFoA responds to Financial Times letter

The Financial Times published a letter to the editor titled ‘Actuaries not looking at the road ahead’ by Mark Tennant on 13 February which criticised the funding models used for defined benefit pension plans.

There were two rebuttal letters published by the newspaper in response, one by an IFoA member, which pointed out that the methods used are due to legislation and regulation.  IFoA members may wish to know that the IFoA also issued the following letter to the editor, however it was not published in the end:

Dear Sir

Mark Tennant’s letter, “Actuaries are not looking at the road ahead”, presents a simplified view of the pensions world.  Mr Tennant has summarised why the provision of UK Defined Benefit (DB) pensions has reached this point in the journey, but a forward look does require a brief survey of current road conditions.  Actuaries must not only look to the past, but also the future and sideways.

Actuaries are required to undertake a number of valuations prescribed by legislation.  Almost all the liability calculations for these valuations are on a “mark-to-market” basis; therefore, capital values will remain paramount.  Despite the regulatory requirement to value liabilities based on current market conditions to be consistent with the value of the assets, actuaries must understand and advise how future cash flow requirements impact the sound management of pension schemes.  This is very much about looking at and assessing the road ahead.

A number of DB schemes have taken the decision not to allow members to build up further benefits and employers have been looking to remove pension liabilities from their balance sheets.  Consequently, many schemes have implemented plans to achieve the future transfer of liabilities to insurers.  Given that insurers typically hold lower risk assets such as bonds to back annuities, trustees will have considered matching their pension liabilities with a portfolio of bonds, both index-linked and fixed coupon, and indeed will have taken steps to implement such strategies possibly over a number of years.

For the schemes that continue to allow members to build up benefits, such considerations may not always apply, but the attraction of investing in bonds to manage risk remains.

Yours faithfully

Nick Salter
President, Institute and Faculty of Actuaries