The IFoA is carrying out regular Thematic Reviews looking at particular topics, roles and/or areas of work relevant to actuaries. This involves reviews of how work is carried out in practice by actuaries, including review of the work itself.
Outputs of the Thematic Review Programme explain and present the scope of the reviews as well as providing analysis, findings and recommendations.
Our first Thematic Review Report is - Pensions: actuarial factors used to calculate benefits in UK pension schemes
Pensions: actuarial factors used to calculate benefits in UK pension schemes
The actuarial factors used to calculate scheme benefits are one of the ways in which the work of the actuary affects the benefit amounts received by scheme members, rather than simply how they are financed. This review looked at current practices adopted by actuaries in this area, including how factors such as commutation at retirement are determined for schemes, and how frequently these factors are reviewed.
In March 2020 we commenced our review by asking scheme actuaries to submit examples of actuarial advice on two key actuarial factors: transfer values and commutation rates.
We wish to thank the 63 individual scheme actuaries from 19 organisations who agreed to have their work scrutinised as part of this review.
The overall standard of advice was very high. However, the review found that commutation rates are often well below transfer values, which may lead to poor value for members. There is a variety of reasons for these differences, including the role of trustees and sponsors, and the impact on funding.
The review recommendations, which have been endorsed by the IFoA Regulation Board, are for actuaries to improve the quality of their advice by following existing actuarial standards fully, in particular:
- Explaining why transfer values and commutation rates differ
- Certifying commutation rates where required
- Reviewing commutation rates regularly
- Improving how they communicate assumptions and results.
The review also called on actuarial standards to be clarified and for further research to be carried out, including the compilation of industry-wide benchmarking.
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. Setting these factors is an area where actuaries directly influence member benefits. Although the ultimate decision often rests with the trustees, the advice provided by the actuary is critical. The recommendations in this review directly address this difference and are designed to inform the work of scheme actuaries. We hope that Members will use our findings to further improve the quality and clarity of their work.
“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.”
Treatment of potential conflicts of interest
A number of members of the IFoA Regulation Board and the actuarial review team have disclosed that they have benefits in defined benefit (DB) pension schemes and therefore have the option to take a transfer value or to commute some of their pension at retirement for a lump sum. There is a potential conflict of interest if the outcome of this review leads to these individuals receiving higher pension benefits. The Board considers that this does not represent a material conflict of interest as:
- The Board’s endorsement of the review was reached collectively and the Board membership also includes individuals with no DB pension benefits
- The nature of the Review recommendations means there would be no direct link to future pension benefits.
In addition, the Board has no information on the particular pension schemes that were covered as part of the review.
Thematic Review Programme webinar
The IFoA held a webinar in early 2021 to provide an opportunity for Members to learn more about the Review findings. A recording of the webinar is available for members on the IFoA's Virtual Learning Environment (VLE). You can read Senior Review Actuary David Gordon’s responses to questions raised during the webinar in this News Article on the IFoA website.
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