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The Actuary The magazine of the Institute & Faculty of Actuaries
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Pensions: Power to the actuary

Political parties crave power but so do many others — for example, office management, over-zealous traffic wardens and the owners of football clubs. Actuaries, however, can be rather less keen. For reasons that are arguably anachronistic, some pension schemes provide actuaries with a special contribution-setting power. When it introduced the new scheme funding regime under the Pensions Act 2004, the government took steps to preserve such powers — or at least some aspects of them. The result is an increasingly perilous minefield for the Actuarial Profession.

Mark Atkinson gave a legal perspective on this subject at a networking evening for pensions actuaries last year, and then led a similar session at the ACA Conference in February. The comments below are almost entirely based on the notes that he kindly made available. Of course, readers of this article must not regard the views expressed in the following as legal advice on which they can rely.

What are the special requirements?
There are two, slightly different, requirements. The first applies where rates of employer contributions are determined “by or in accordance with the advice of a person other than the trustees or managers, and without the employer’s agreement”. In this case, the trustees must take account of the ‘recommendations’ of the actuary when determining the technical provisions or preparing a recovery plan. (This requirement is found in Regulations 5 and 8 of the Scheme Funding Regulations.)

The second applies to “a scheme under which the rates of contributions payable by the employer are determined by the actuary without the agreement of the employer”. In this case, the actuary must confirm that “the rates shown in the schedule of contributions are not lower than the rates they would have provided for if they, rather than the trustees or managers of the scheme, had the responsibility of preparing or revising the schedule, the statement of funding principles and any recovery plan”. (This requirement is found in Paragraph 9 of Schedule 2 to the Scheme Funding Regulations.)

For which schemes do the special requirements apply?
This can be tricky to assess and legal advice will normally be required, specific to the scheme in question. A recent High Court case (Allied Domecq) has provided some guidance, although the decision is to be appealed. The judge identified that the critical point is whether or not the employer has a veto in the determination process; in the case in question, the rules only gave the employer a role in apportioning contributions, rather than in determining the overall level, and so the special requirements were judged to apply.

Which actuary is the legislation referring to?
The legislation refers to the appointed scheme actuary, but the scheme rules may give the role of setting contributions to an unidentified ‘actuary’. Nevertheless, although it is not clear from the legislation, it seems unlikely that the courts would draw this distinction.

I only get the power to set contributions in certain circumstances. Do I still need to consider these issues?
Yes. The legislation specifically confirms that where the power to determine funding rates is subject to conditions, the power survives in circumstances where those conditions are satisfied. That becomes interesting where the power exists only where the employer and trustees have not agreed on funding, as the actuary’s special certifying role under the legislation only arises once there is an agreement to certify. In addition, if there is no such agreement, the case will normally have gone straight to the Pensions Regulator under the 2004 Act.

Are the rules overridden?
One of the areas of legal controversy at present concerns the relationship between scheme rules and the Pensions Act 2004. The British Vita case gives us the views of the court on a narrow point. The High Court judge decided that, as there was no conflict with the new legislation, the scheme rules were not overridden. However, the decision related only to circumstances where the first new regime schedule of contributions had not yet been put into place — there was no need in this case for the judge to rule on the position after the first such schedule. Although appealed, the case was settled before that appeal was heard.

What am I certifying? What tests should I apply?
Under Regulations 5 and 8, there is no certification requirement and the actuary provides ‘recommendations’ to be followed by the trustees. Recommendations is not defined and can be interpreted broadly. These recommendations should be on the basis of the legislation and Codes of Practice relating to Part 3 of the Pensions Act 2004. The actuary’s certification under the Paragraph 9 requirement should also be considered on a scheme-specific funding basis. However, the question here is more pointed than for the recommendations above, and the actuary must decide how they would act if they were the principal rather than an adviser.

Is that principal one with a unilateral power to set the employer contribution rate, or one standing in the shoes of the trustees in the normal Pensions Act 2004 position of having to agree the key funding building blocks with the employer?
This is not clear, although even in a scheme where the trustee had unilateral power to set the rate, the Funding Regulations would require consultation with the employer, which would be a sensible step to take in any event.

If I am ‘in the shoes of a trustee’, is that a lay trustee?
Qualification as an actuary does not provide any specialist knowledge as to legal matters, nor as to the assessment of company accounts or covenant more generally. From a risk management point of view, it is very important to make this clear to all who will be affected by the recommendations and certification. The courts are most likely to require the actuary to exercise the skill and knowledge of an ordinary person of business except in actuarial matters, where the fact that the role has specifically been given to an actuary means that the skill and care of an ordinary competent actuary will be required.

Should I obtain my own advice?
In relation to legal matters — such as the interpretation of any particular tests under the scheme rules — and covenant issues, the actuary will need to have advice that they can rely upon. In situations where the special actuarial certification applies, it will be important to raise this issue at the outset of the engagement of forensic accountants and lawyers. Otherwise, problems can arise after those paying for the advice have lost any commercial negotiating position.

Accounting advice separate to that obtained by the trustees would only be necessary in the most extreme of circumstances — for example, where there was a question over the instructions given or a reason to doubt the balance of the firm providing that advice.

To whom do I have a duty?
From a contractual point of view, this will depend on the breadth of the retainer agreed. Even though the actuary may have been appointed by the trustees under the Pensions Act 1995, it does not mean that duties in such situations as this are owed exclusively to the trustees.

The ‘recommendations’ under Regulations 5 and 8 would appear most naturally to be provided to the trustees, as there is no requirement for them to be jointly addressed. However, the position on certification of the schedule of contributions under Paragraph 9 is less clear; the certificate will affect the employers as well as the trustees and there is no specific requirement for it to be provided to either party. This is an area where risk mitigation procedures, such as agreeing in advance the basis on which the actuary will proceed, will be very important.

Are ‘recommendations’ more than advice?
Advice can legitimately identify a range of outcomes rather than a single point. Clients often ask for recommendations of a single point, but it is difficult to see that a recommendation in the form of a range (for example, “we would recommend a funding rate in the range £10m to £12m a year”) could be said to be obviously deficient.

In practice, this is usually likely to be superseded by the discussions over the certification of the schedule, because it is clear that the actuary must settle upon a single point (or a series of points), so that they can identify whether the terms of the schedule of contributions satisfy the test. Nevertheless, the actuary might still determine that there are several acceptable ways of putting together a schedule of contributions, with differing patterns of contributions over the period in question.

How should I manage the process?
Managing this process has the potential to be very difficult for an actuary. Trustees are likely to see them as owing primary duties to them (emotionally, if not legally in this particular instance); but employers are likely to want to apply pressure for their interests to be taken into account.

The best approach will depend on the circumstances and relationships for each client. However, actuaries may be well advised to set out a procedure at the outset that gives a clear structure for each party to make its points before any decision is made, for points of clarification to be taken and for openness between the parties. It will be particularly difficult for the actuary to make a decision if they have information from one party that one of the other parties does not have. Such a situation should generally be avoided.

What happens if I cannot or will not sign the certificate?
This is not a breach of the legislation by the actuary. Responsibility for obtaining a compliant schedule of contributions lies with the trustees. The failure to obtain a compliant schedule triggers the Pensions Regulator’s familiar powers under Section 231 of the Pensions Act 2004, including the power to impose a recovery plan or schedule of contributions. Although the Regulator is required to take into account the actuary’s recommendations under Regulations 5 and 8, it is not required to obtain a Paragraph 9 certificate for the schedule.

Any other thoughts?
There is nothing under the legislation to prevent the trustees and employer changing the rules. Whether a change is appropriate in the circumstances of a particular scheme would be a matter for another day.