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The Actuary The magazine of the Institute & Faculty of Actuaries


When I read John Pearson’s article on FRS17, the first thing that jarred was the implication that no equity analysts had trained as actuaries, but I also feel that the article was unduly shallow for a readership which is expected to take valuation seriously.

Mr Pearson’s comment implies a surprising ignorance of the (analyst) profession: I have met dozens of equity analysts who started off as actuarial students and, prior to its absorption into the global AIMR, 20% of the fellows of the IIMR (the renamed Society of Investment Analysts) were also FIAs, AIAs, or FFAs. There are plenty more actuaries engaged in investment who have not chosen/bothered to qualify as FSIPs. For instance, Shyam Mehta occasionally writes articles for The Actuary and Bob Yerbury has been nominated for the title of ‘greatest actuary’, so I might have hoped anyone writing for The Actuary would notice their existence. Also, any decent analyst should remember that the seminal UK book on investment analysis was written by Dennis Weaver, an actuary.

It is strange that Mr Pearson has never met an analyst who has moved over from actuarial science. In the dozen years that I was an investment analyst or fund manager/analyst covering the capital goods sectors, most of my colleagues and many of my competitors were also actuaries or ex-actuarial trainees, and one of the leaders in capital goods research was notable for having as many actuaries as accountants as partners.

Mr Pearson says that FRS17 has ‘started’ a debate about pension (fund) valuation – in fact, although public discussion may have climaxed after the publication of FRS17, that was the culmination not the beginning of the debate. Thirty years ago I was unsuccessfully arguing for something fairly similar to FRS17; its introduction shows that others with more influence have eventually won the argument.

I should have liked the article to have pointed out the significant differences between estimating a funding rate and carrying out a valuation for a pension scheme. Using a corporate bond rate for FRS17 does not preclude the actuary from using a rate based upon expected returns from equities and property when determining the optimum funding rate – most public comments seem to overlook the difference. However, Mr Pearson seems to imply that the calculations made by ‘pragmatists’ to estimate a funding rate to meet the deficit thrown up by a fall in the price of scheme assets are an alternative valuation method.

His reference to the scope for profit manipulation by US companies is misleading as the US standard does not correlate to FRS17.

I regret that Mr Pearson parrots the damaging falsehood that FRS17 will cause a shift from defined benefit (DB) to defined contribution (DC) schemes. It does not require a Redington or a Pegler to see that a properly managed DB scheme, decreasing contributions when equity markets are high relatively to gilt-edged and FRS17 reveals a significant surplus, and increasing them when they are relatively low, will generate higher pensions per pound of investment than a DC scheme making uniform annual payments.

A third concern is that Mr Pearson is not a member of AIMR, which is now the relevant professional body for UK as well as US investment analysts. I am disappointed that you are soliciting articles from someone who has chosen not to sign up to the code of ethics for investment professionals.