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The Actuary The magazine of the Institute & Faculty of Actuaries
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Pensions: Debt regulation changes

Actuaries should be aware that the Occupational Pension Schemes (Employer Debt) Regulations 2005 (Statutory Instrument No. 678) have been substantially amended in relation to debt events on or after 6 April 2008.

An actuary’s functions under the amended regulations — called ‘the new regulations’ in this article — significantly differ from the previous guidelines. The new functions are narrower in some areas but in others add to the actuary’s responsibilities.

The new regulations clarify many problematic areas — there is now a clear definition of ‘employment-cessation event’, for example. In addition, there are specific rules for members who have moved between employers in a multi-employer scheme, and the wording of the specimen actuarial certificates in the schedule to the regulations is much improved. This includes references to the calculations being ’approximate’, which has added a degree of flexibility.

The actuary’s new role
Under the pre-6 April 2008 regulations — the ‘old regulations’ — actuaries had a very central role and were expected to ascertain, as well as value, both the scheme liabilities and the scheme assets.

Under the new regulations, however, the trustees (not the actuary) are responsible for valuing the assets. It is the trustees who will “determine” the liabilities, while the role of the actuary is to calculate and verify the liabilities. In this latter respect, the wording in the new regulations follows the old — the calculation and verification is to be done assuming the liabilities are to be discharged by the purchase of annuities and “for this purpose the actuary must estimate the cost of purchasing the annuities” (Regulation 5(11)).

An addition to the new regulations comes in the way of guidance on how actuaries can approach this task. They must estimate the cost on terms “consistent with those in the available market” and, if this is “not practicable”, then the estimate is to be made “in such manner as the actuary considers appropriate in the circumstances of the case” (Regulation 5(12)).

The wording “consistent with those in the available market” is presumably intended to be helpful. From a legal perspective, however, the words are imprecise. What constitutes the available market at any particular point in time may be legally difficult, if not impossible, to determine and therefore the wording may pose a trap.

The leading insurers in the present buy-out market are in intense competition with one another, and immediate annuity costs swiftly change, at present in a downward direction. It would seem that the current annuity cost for buying out certain pensions in payment may be less than a scheme’s funding reserve, depending on the scheme’s chosen funding assumptions.

The new funding test
Under the new regulations, actuaries not only have to provide a prescribed certificate setting out the amount of the debt, but they also have a much wider role to play. Scheme apportionment arrangements and withdrawal arrangements can take place only if the “funding test” is satisfied (Regulations 6A, 6B and 7).

Although it is the trustees who must be reasonably satisfied that the arrangements meet the funding test, the actuary has a central role in advising the trustees on any effect the apportionment or withdrawal arrangements may have on the scheme’s technical provisions (Regulation 2(4A)(a)). A scheme apportionment arrangement will meet the funding test only if the additional test under Regulation 2(4A)(b) is satisfied, namely that the trustees are reasonably satisfied that “the effect of the arrangement will not be to adversely affect the security of members’ benefits as a result of any:

(i) Material change in legal, demographic or economic circumstances, as described in Regulation 5(4)(d) of the Scheme Funding Regulations, that would justify a change to the method or assumptions used on the last occasion on which the scheme’s technical provisions were calculated

(ii) Material revision to any existing recovery plan made in accordance with Section 226 of the 2004 Act”.

The trustees will turn to the actuary for advice on most elements of the above test, and the actuary will have to decide what the expression “security” of members’ benefits means — the regulations offer no guidance, nor does the Board of Actuarial Standards (BAS).

Updated actuarial certificates
The new regulations also introduce another concept, termed the ‘updated actuarial assessment’. The regulations require trustees to take into account the member liabilities described in Regulation 5(8). In the case of an employment-cessation event, however, an updated actuarial assessment may be prepared by the actuary if the trustees “after consulting the actuary and the cessation employer, so decide”.

Updated actuarial assessment is defined in Regulation 2 as the actuary’s estimate of scheme solvency in the latest Section 224 actuarial valuation “adjusted to the applicable time to reflect the actuary’s assessment of changes between the effective date of that valuation and the applicable time in the value of the scheme’s assets and of the matters set out in” certain parts of the Scheme Funding Regulations.

Is the actuary under a legal obligation to bring to the trustees’ attention the pros and cons of an updated actuarial assessment, especially if the effect of an updated actuarial assessment would be to increase the Section 75 debt? Trustees may expect the actuary to be pro-active in this area. The actuary may owe a duty of care to trustees to be pro-active.

Updated asset assessment
The bedfellow of the updated actuarial assessment is the ‘updated asset assessment’. In the case of an employment-cessation event, the trustees can use either the asset value in the latest accounts or the updated asset assessment. The latter means, according to Regulation 2, an update (whether or not audited) of the most recent accounts that:
(a) Is prepared by the trustees
(b) Estimates, where they consider appropriate, any alteration in the value of the assets between the date of the accounts and the date of the cessation employer’s exit from the scheme.

Given the likely volatility in value of scheme assets, there may be a large difference between the valuation at the date of the accounts and the updated value. However, is it possible to adopt an updated actuarial assessment without an updated asset assessment, or vice versa? Apparently not. Regulation 5(3) states that the assets of the scheme shall be valued and the amount of the liabilities shall be determined and verified by reference to “the same date”.

Good communication between the trustees, the auditor and the actuary will be essential in operating these provisions.

Actuaries will be helped in their many duties and discretions under the new regulations by professional guidance from BAS. Regulation 5(17) helpfully directs actuaries in forming an opinion of the amount of a liability or in preparing an updated actuarial assessment to apply “any relevant BAS standards”. However, the BAS letter of 1 April 2008 to the Profession states that BAS does not propose at the moment to issue any standards whatsoever in relation to this matter.

The political reasons for this approach may seem reasonable from the viewpoint of BAS but, for individual actuaries, mandatory standards would provide some legal protection as actuaries begin to fulfil responsibilities under the new regulations. The possibility of legal claims becomes all the more real because, as quoted in the BAS letter in the context of updated actuarial assessments, “there is no objective measure of what techniques might be ‘accepted’ in practice in different situations”. So why are actuaries being left in this precarious legal state?

Challenging Section 75
The difficulties of a challenge to the actuary’s Section 75 certificate by, for example, a disgruntled employer, were demonstrated in the High Court decision in the case of Cornwell v Newhaven in 2005, where the court upheld the actuarial certificate. Nonetheless, the novel features of the new regulations and the absence of BAS standards underlines the need for actuaries to ensure their terms of engagement are up to date. Before providing Section 75 certificates under the new regulations, actuaries should ensure their liability is appropriately restricted so far as the law allows.


Clive Weber is head of the pensions team at Wedlake Bell Solicitors. This article is for general information only and is not intended as legal advice. Specific advice should always be sought for individual cases.