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The Actuary The magazine of the Institute & Faculty of Actuaries

Finance, Investment & Risk Management (FIRM) Board news

Issues to be considered when dealing with structured credit assets

In the wake of the recent turmoil in the credit markets, a briefing note on structured credit assets is being produced which will appear on the Finance, Investment & Risk Management practice area of the profession’s website. This may be of help to actuaries not involved directly in the market, for example, in understanding the issues associated with their use in portfolios when encountering them in the course of their work. Specifically the note will describe what a basic structured credit asset is, where the return comes from, and what the key risks are.

Details of the URL to access for the briefing paper E-Bulletin.

‘Where did risk management of DB pension schemes fail?’

The podcast of Risk Management Special Interest Group’s networking event on 25 July 2007 is available on the profession’s website at:www.actuaries.org.uk/files/finance_invest/networking20070725.mp3

Networking evening – 25 July 2007

On 25 July, there was a full house at Staple Inn for a Risk Management Special Interest Group networking evening aimed particularly at pensions practitioners. Donald Duval gave a personal view and a lively debate ensued under the chairmanship of Robert Hails.If we had 30% inflation for the next three years, would this be good or bad for pension schemes?

This was the question posed at the end of the discussion on risk management of DB pension schemes. One impact of such inflation would be to reduce the real value of pension fund liabilities by 25%pa – greatly increasing the likelihood that funds will be able to pay the promised benefits. Another impact would be to reduce the real value of the pensioners’ incomes by 25%pa, greatly increasing the likelihood that the pensioners will not have enough to live on. Which impact should pension fund trustees be most concerned about?

In the 1970s and 1980s the second impact was regarded as far the most important – pension funds were there to give pensioners enough to live on in retirement, and this was the key risk that needed to be managed. Now, the first impact is regarded as the more important pension funds are financial institutions and their job is to deliver the amount that has been legally promised – irrespective of whether that amount meets the needs of the member.

This one question encapsulates the difficulty that has occurred with risk management of DB schemes, and why the current position can only really be understood historically. Much historic risk management was carried out against risk objectives which are no longer regarded as important.

The evening opened with a historical survey of UK DB schemes over the last 60 years, which was followed by a lively and wide ranging discussion, in which a large number of valid and important points were made. There was widespread agreement that the present position is not satisfactory – we wouldn’t have wished to end up where we have. Perhaps the key message for actuaries was the importance of measuring the risks borne by stakeholders, and particularly of measuring changes in those risks imposed by legislation or other action.

There was also fairly widespread agreement that the correct framework now for measuring such risks was against the specifically promised pension benefit – in other words that pensions should unequivocally be regarded as financial institutions. The logical conclusion of this approach, not drawn in the discussion, would be that the solvency and risk management standards for DB pension funds should, over time, be harmonised with life insurance companies and banks.

Agency risks – 12 September 2007

The Risk Management Special Interest Group’s next networking evening is a panel discussion and poses the questions:

Is everything that we do as actuaries (or that our employers/clients do) always in the interests of those we serve? How do situations arise where this might not be the case? The wrong incentives, the wrong measures of success, poor controls, unhelpful regulatory constraints could all come up for debate. And what risks do we see when different stakeholders have different interests – shareholders and policyholders, employers, and trustees?

The format of the evening will be as follows:

Chairman of the discussion panel: Steve Nuttall
  • Debate: Problems we have lived through
    • Life TCF issues – Icki Iqbal – eg past mis-selling
    • GI issues – John Charles – eg governance
    • Pensions – Deborah Cooper – eg managing change
  • Possible future problems (same panel members)
    • Governance – eg managing ‘black box’ calculations
    • Life – eg churning of business
    • GI – eg governance including regulation and red-lining
    • Pensions – eg aligning trustee and employer interests

    Lessons from other industries

    Should you be interested in joining us on Wednesday 12 September 2007 at 5.45pm for 6pm (breaking for drinks and refreshments at 7.30pm) at Staple Inn, please return the form atwww.actuaries.org.uk/files/pdf/finance_invest/networking20070912.pdf or book online http://wam.actuaries.org.uk/wam/ConfBooking.exe