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The Actuary The magazine of the Institute & Faculty of Actuaries
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Pensions Regulator calls for prudence

The Pensions Regulator (TPR) has been reviewing a range of recently submitted recovery plans and questions from actuaries and trustees about forthcoming valuations. This exercise has identified that, in some cases, concerns about the affordability of pensions is leading to a weakening in the prudence of assumptions.

Following discussions with the Financial Reporting Council (FRC) and the Actuarial Profession, TPR has issued a range of guidance material that can be used to ensure that understandable pressures caused by the economic downturn does not lead to weakened governance or professionalism in the process of determining assumptions.

Ensuring assumptions are prudent
The Regulator’s Code on Funding Defined Benefits sets out that technical provisions should represent a prudent reserve to hold against a scheme’s future liabilities. The Board for Actuarial Standards published its exposure draft on modelling on 28 May. This stresses the importance of highlighting the difference between best estimate and prudence when setting assumptions. Users of actuarial information in particular will need to be clear on the extent that assumptions provided by their actuary are prudent.

The different bodies have discussed the confusion that can be caused by the different measures of pension liabilities and their different purposes. FRS17/IAS19 is for accounting purposes. Depending on the spread between gilts and AA corporate bonds, there may be a similarity, on average, to technical provisions. This is not currently the case, and trustees and employers should focus on technical provisions, not FRS17/IAS19, for funding discussions.

Employer covenant
The Regulator’s guidance highlights that trustees can assume lower technical provisions (through a higher discount rate) if the employer is strong enough to make up any shortfall if investments do not perform as expected. For most sponsors, economic conditions will have deteriorated significantly between the first and second valuations. Trustees and advisers will need to clearly justify why, if the employer covenant has weakened, technical provisions have not risen from one valuation to the next.

Pressure on advisers
In December 2008, the FRC highlighted the challenges for users of actuarial information caused by the current market conditions. In the progress report to the Actuarial Profession published (June) the Professional Oversight Board of the FRC stated:

“The present economic climate may tempt some businesses to stretch assumptions... and may increase pressure to make or accept inappropriately aggressive judgments and take or support inappropriate decisions.” The Actuarial Profession has proposed as one of its core principles the importance of “standing up to undue pressure and influence which might undermine actuaries’ objectivity”. The FRC’s Actuarial Quality Framework identifies that “Actuaries exhibit objectivity and are robust in identifying and resisting pressures to act against the legitimate interests of users or potential users of their work”.

Actuaries who face undue pressure have a range of sources from which to seek advice and support, from services provided by the Actuarial Profession to support them within their firms or, ultimately, to whistleblow if trustees are making inappropriate choices. There is much good practice being shown under testing circumstances; however, the Regulator’s aim is to ensure that this is shown in all cases.