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Pensions Thematic Review update

 

David GortonDavid Gordon, Senior Review Actuary, provides an update on the Pensions Thematic Review.

The actuarial monitoring team and I were delighted that over 300 people joined us on our interactive webinar covering the recently-published Thematic Review on Actuarial Factors used in UK Pension Schemes.

Nearly two-thirds of those who took part in the webinar were either scheme actuaries or other actuaries advising on pension scheme matters. We also had actuarial students, trustees, academics and regulators. The recording of the webinar and slides are available with no charge on the Virtual Learning Environment (VLE).

As you might expect there were lots of comments during the session and naturally I was only able to address some of them during the hour.

My report called for actuaries to certify commutation rates to be reasonable when required to do so under the scheme rules. No-one disagreed with that recommendation, although we received comments during the webinar about what should be considered to be “reasonable”, including calls for there to be guidance or legal input on this. Based on the advice examples we reviewed we saw little discussion on what actuaries actually consider to be “reasonable” in practice. However, what examples we did see based it around “best estimate”, adjusted in various ways. One of our other key recommendations was that actuaries should better explain material differences between transfer values and commutation factors in their advice. In improving this element of communication actuaries could consider setting out how they have interpreted the concept of reasonableness in that context. Ultimately it’s not within the IFoA’s regulatory remit to set technical guidance; that is for the Financial Reporting Council (FRC) or other regulators/Government. Perhaps the FRC’s forthcoming review of the Technical Actuarial Standards (TASs) might be an opportune time for actuaries to call for this?

We heard contrasting comments around whether commutation rates should be seen more as part of the benefit design, rather than being directly comparable with transfer values. One said: “People use commutation rates for retirement planning. Not helpful for rates to vary. And, other retirees may say it’s unfair if rates suddenly spike just because yields dip”. This was echoed by another who said “CFs provide cash that individuals want to use - and with very different utility values than a discount rate or average longevity picture. TVs provide an investment when that initial investment may be in low or high yield situations. We need to be careful to remember the end recipient.” On the other hand, “As actuaries, we need to remember that most scheme members get advice on TVs, but not on commutation rates (and whether to take cash or not), therefore I think it is more important to ensure commutation rates are fair value-for-money i.e. we have public responsibility on this.” and “As a professional trustee who is also an actuary I am keen to understand what is fair for members.” All of these statements justify our recommendations that actuaries need to follow the TASs, in particular to explain the rationale for the assumptions used for different factors, and the member impact.

One area that everyone who took park seemed to agree on was that the trustees should not take the tax-free nature of the resulting lump sum into account in setting commutation rates – “I can't think of any justification why commutation factors should be reduced to take into account the member receives it free of tax”.

I also covered benchmarking during the webinar. In a delegate poll, 73% agreed with our recommendation that industry-wide benchmarking should be established. The remainder were split fairly evenly with 15% saying that “firms should continue to use their own”, and 12% who agreed that “benchmarking has no place in factors advice”. We received a number of contributors cautioning that any benchmarking should be “like-for-like”. The simple benchmarking we quoted had some drawbacks as it was based on firms’ latest statistics, but we did ask for the figures to be based on standardised pension increases, retirement ages etc. This is perhaps something that can be refined by the industry group that takes this on.

Finally I asked what actions delegates are taking on this report. It was encouraging that 61% said they are reading the report, 54% are taking part in group discussions and 47% are making changing to templates / internal guidance. I believe that if the report’s recommendations are the heart of these changes, the overall quality of actuarial advice will be further improve in this key area of public interest.

You can watch the webinar by logging on to the IFoA VLE. If you have any further comments or observations about the webinar or the review generally, please contact the Review Team mailbox at reviews@actuaries.org.uk.