Actuaries play a key part in the operation of pension funds in most western European countries, advising plan sponsors and pension fund trustees on the valuation of pension scheme assets and liabilities and the funding of benefit promises.
Usually pension actuaries will act for both the sponsoring employer and the trustees of an occupational pension scheme. In normal times, the sponsoring employer and the trustees will have a common interest – to provide pension benefits for the employees of the firm or organisation.
However, the fall in pension funding levels over the past three years has put this mutuality of interest under strain. In particular, negotiations between the sponsoring employer and the trustees about the funding level are likely to create conflicts of interest.
Should an actuary continue to advise an employer in this situation? Can one actuary serve two masters?
Some pension actuaries believe the only answer to these questions is for employers and trustees to take separate advice, so that, in future, different actuaries act for employers and trustees in their discussions about funding rates. Some object that this would double the cost of actuarial advice and would be uneconomic for all but the largest schemes.
In the UK, the Morris Review of the actuarial profession has published an interim assessment that proposes a number of options, including separating the role of advising the pension scheme sponsor and the scheme trustees.
Actuaries themselves may want to resolve these conflicts of interest to avoid the risk of claims against them. For example, if benefits are scaled back on the winding up of a scheme, the pension plan trustees and pension plan members will want to know who is to blame – and who to sue.
We wanted your views on the predicament of pension funds and their actuaries. The topic is perhaps rather too complex to be dealt with in a binary ‘yes’ or ‘no’ questionnaire, but the pension fund managers and administrators who responded to our questions – as usual – did their best.
We asked where the loyalties of pension scheme actuaries should lie. Who should pension actuaries be primarily accountable to – the people who pension scheme trustees or board of management, or the pension plan sponsor?
A clear majority of our respondents suggests pension actuaries are primarily accountable to the scheme trustees. However, some point out that where accountability lies will depend on who awards the mandate – the trustees or the employer.
We then asked whether there is likely to be a conflict of interest if a pension actuary gives advice to both the pension scheme trustees and the scheme sponsor: two-thirds of respondents agreed there is likely to be a conflict of interests.
Of those who agree, a substantial majority thinks that this is likely to compromise the quality of advice an actuary gives.
Yet there is also a feeling that the risk of conflict is more potential than actual. “There is a risk and the actuary needs to be clear which he or she is advising, on which subject, at which time, in order to mitigate the risk, especially if the actuary advises a company representative who is also a pension fund trustee.”
This potential for conflict has been created largely by the funding problems of pension schemes. Most respondents agree with the suggestion that that the deterioration in pension scheme funding in Europe has created friction between pension scheme sponsors and pension scheme members – for example, over the contributions paid by employers and employees.
One pension fund manager suggests: “It needs careful communication to get a resolution that balances the interest of sponsors and pension scheme members.”
Greater transparency generally seems a good idea. Laurens Roodbol, board member of the Dutch Actuarial Association, said recently that actuaries’ opinions on the financial health of pension funds should be made available to pension participants.
Most of our respondents agree that members of the pension plan should be able to see actuaries’ opinions on the financial health of their pension plan. One UK pension fund manager adds, in a swipe at actuarial jargon, “provided they are translated into plain English”.
Employers and pension fund trustees already have the discretion to open the books to members, as one manager points out: “The employer and the trustees have the responsibility to decide whether to do this.”
And impenetrable jargon is no excuse for not making actuarial opinions available to pension plan members, he adds. “The actuary has the responsibility to make the opinion in terms that can be understood by members as well as the client.”
One solution to the problem of potential conflicts of interest is to insist that pension plan trustees and pension plan sponsors should get separate actuarial advice from different actuaries. This wins support from a clear majority of our respondents – three out of five – although some suggest that this will not always be necessary. “Separate actuaries are necessary where there is the potential for conflict, but not essential for routine or non-controversial areas,” says one pension fund manager.
Of those who disagree with using two actuaries, some feel that there are definite advantages to having a single actuary: “There can be efficiencies in getting opinions from the same actuary,” says one.
The main objection to having two actuaries is that it would double the cost of actuarial advice. The cost would put this procedure beyond the reach of all but the largest pension plans. Opinion is evenly divided here, with just over half of our respondents suggesting that the costs would not be too high. Some think that actuaries would keep the costs down – “both actuaries have a duty to manage the fees” – while others think that the plans sponsor should pay for the additional costs.
“If the company needs separate actuarial advice it should not be the pension scheme that pays any extra costs, as it would not be part of the running costs of the pension scheme,” one manager insists.
A less expensive option is that trustees should have the right to ask for an independent review of the actuarial advice given to the employer if they believe this to be necessary. This gains overwhelming support from our respondents.
There are one or two caveats, however. “Trustees need to exercise the right with caution, especially for a defined contribution plan where professional fees might result in lower investment returns for the members,” one manager warns.
Pension funds in some European countries, such as Italy, do not feel the need to employ a pension actuary at all. So perhaps one solution to actuarial conflicts of interest is to dispense with the service of the pensions actuary altogether.
We asked whether the job of the pensions fund actuary could be done just as well by other professionals such as lawyers, accountants and pensions experts. This suggestion gains little support. Three in five say that actuaries alone should be responsible for actuarial duties. “Anything else would fudge the issue of who takes responsibility for what,” one manager observes.
Should an actuary resign as pension scheme actuary if the employer gives him or her information they cannot disclose to the pension scheme trustees? Here opinion is fairly evenly divided, with a slight majority in favour of resignation.
Some feel that resignation is not the only option. “The actuary should ventilate this fact to the board and have that mentioned in the official minutes,” is one view. Another is that the situation should not arise in the first place. “The employer should be aware – and warned – that he cannot put an actuary in this position.”
Some feel actuaries have a wider duty to ‘whistle blow’; that is, to report problems they find in a pension scheme to the financial supervisory authority. “If it is material to the security of members’ benefits there should be a whistle blow requirement,” a pension fund manager suggests.
Actuaries may need some professional and regulatory encouragement to do the right thing, however. “Both the regulatory system and actuarial training needs to motivate the correct behaviour,” one respondent says.
A majority – four out of five – believe there should be a statutory duty for actuaries to whistle blow. Again, there are provisos: “It depends on what the problem is,” one manager points out. “If they are legal problems and they are not corrected then they should blow the whistle. Otherwise not.”
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