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The Actuary The magazine of the Institute & Faculty of Actuaries

Differing actuaries

Three top UK life insurers were accused recently of making over-optimistic predictions about the performance of shares in their underfunded staff pension plans, leaving pensioners potentially short-changed. Accounts show that Lloyds TSB, Aviva, which owns Norwich Union, and HBOS, which comprises Halifax and Bank of Scotland, adopted pension-fund growth rate assumptions of more than 8% for 2004.

But the assumed equity returns for policies available to their customers were all about one percentage point lower, according to leading analyst Ned Cazalet. He said: ‘The growth rates for their staff pensions seem very different to the projections they’re making for their life businesses. A rate of 8% or more also seems rather high, especially when dealing costs are taken into account.’

HBOS, Lloyds TSB, and Aviva have staff pension fund deficits of more than £5bn between them. Higher growth rate assumptions for their pension funds could make their deficits appear smaller, leading to fears that firms may be using over-optimistic predictions to avoid increasing their contributions. Mike Warburton of Grant Thornton, an accountant, said: ‘It is in the companies’ interests to make optimistic predictions. The actuarial calculation made using the assumptions can make their liabilities seem smaller and so soften the impact an underfunded pension scheme has on their balance sheets.’

But the insurers argue that this is not why their growth assumptions vary. Kirsty Clay of Lloyds TSB said: ‘The growth-rate assumptions for our staff pension scheme are not set by the same actuary as those for our life business. This is because they are managed by different entities – the staff scheme must be kept separate.’