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The Actuary The magazine of the Institute & Faculty of Actuaries

From the world of pensions

OECD invites public comment on funding and benefit security of pensions

The OECD is inviting public comment on draft guidelines to help governments and regulators improve the way certain types of pension funds are run in order to make workers’ pensions more secure. They build on analysis from a series of policy papers that are being released with the guidelines and are part of a broader OECD effort to restore public confidence in pensions.

The draft guidelines contain a series of recommendations on how the funding of occupational pension plans, and in particular defined benefit pension schemes, should be regulated. Such schemes are common in Canada, Japan, Netherlands, United Kingdom and the United States, though many are now closed to new employees.

Issues covered by the guidelines include the funding and valuation of pension plans and how the money paid by employees into their company pension scheme should be protected if their employer or the company that finances their pension plan goes bankrupt.

The deadline for comments is 15 September 2006.

Pension reform in Chile

Chilean president Marie Bachelet received the final report of the Presidential Advisory Council on Pension Reform last month, which proposed a number of ways to ensure that all Chileans receive more equal benefits out of the pension system, including equal treatment for those who work for companies and those who are self-employed, and state support for mothers who take time off to have children, ceasing their contributions to their retirement funds.

During her speech, the president emphasised that ‘I want Chilean women to remain calm: I am not going to make any decisions that could make things more difficult for people when they retire’, in response to one aspect of the report that proposed raising the minimum retirement age for female workers from 60 to 65.

Pension accounting principles revisited

The UK’s Accounting Standards Board says it is undergoing a project to ‘reconsider the fundamental principles of pensions accounting’. The board provided on 30 June an update on its research project into accounting for pensions, outlining the questions that will be addressed.

These will include:

  • How is the relationship between an employer and a pension scheme best reflected in the employer’s financial statements?
  • How should the employer’s liability in respect of pensions be quantified (actuarial method, liability/ future salary increases, discount rate)?
  • What is ‘the expected return on assets’?
  • What is the impact on financial reporting of the PPF levy?
  • Are the disclosures required by current standards appropriate?

‘The research will also cover the financial reports of pension schemes, including consideration of whether requirements for the accounts of pension schemes secure adequate reporting of liabilities to pay pensions’, the ASB said.

The project was launched in October last year and comes as significant regulatory and legal have changed the environment for the FRS17 standard.The ASB has formed a pensions advisory panel chaired by its technical director Andrew Lennard and including among its members actuary Robert Hails. It is expected that the research will be published in the course of 2006.

Taking a long view of pensions reform

Government actuary Chris Daykin has used a comparative study of global pensions systems to emphasise the importance of long-term planning when implementing pension reforms.

Speaking at the launch of his study ‘The challenge of ageing: pension reform, international trends and future imperatives’, Mr Daykin highlighted the ageing nature of society and argued societies could not afford to pay pensioners for longer periods of retirement financed out of an ever-shortening working life.

The study examined recent reforms in Sweden, Finland, Germany, Denmark, and the UK and is published by UK think-tank Politeia. (www.politeia.co.uk).

Retirement saving worse

The 2006 Scottish Widows Pensions Report (www.scottishwidows.co.uk/ukpensionsreport.htm) surprisingly showed a continuing deterioration in saving for retirement. In response, Jenny Watson, chair of the Equal Opportunities Commission, said: ‘This report shines a new and welcome light on the risk of poverty in retirement faced by carers and those who spend periods outside full-time employment. It also highlights the dangers of depending on a spouse or partner’s pension – a situation faced by far more women than men.

Women fare particularly badly under the current pensions system, which takes little account of people’s different abilities to save: those unable to save for themselves need to be fully covered by the state pension system, and private savings schemes need to be simple and flexible, so that when women take time out of the workforce their savings plans do not suffer permanently. The recent government white paper on pensions is welcome because of its recognition of the special needs of parents and carers . We look forward to seeing the detailed of future proposals to ensure that these guarantee women the ability to save for anadequate income in retirement.’