UK - Elements of "self delusion" within the actuarial profession have contributed to plummeting scheme solvency levels, a damning report to the Institute of Actuaries claims.
The paper - written by three senior actuaries at Mercer Human Resource Consulting and Hewitt Associates - criticised the profession for advising schemes to adopt riskier investment strategies, with higher liability discount rates, so they could reduce contributions.
It said this approach was in direct conflict with the insurance side of the actuarial profession where riskier strategies would require higher reserves to provide the same level of security.
The report said: “There is a danger that all parties, including the advising actuary himself, can conclude that a pension scheme is being funded strongly and that its investment policy does not constitute a significant risk, when the reality is the opposite.”
It added that current methodologies of valuation resulted in schemes being described as 100% funded even when they did not hold anywhere near sufficient assets to secure benefits in full. This, it said, was ‘misleading’ members about the security of their pensions.
The paper - Funding Defined Benefit Pension Schemes - urged the profession to adopt stringent valuation methods that reflected the solvency of a scheme. It said actuaries should also push sponsoring employers to address deficits within a short space of time.
“The actuarial profession has wandered from its traditional path. Long-standing notions of prudence, risk management and solvency, that had previously stood the profession in good stead, have been downgrade over the past decade and a half. Now would be a good time to correct this.”
The paper comes ahead of the interim report by former Competition Commission chairman Sir Derek Morris, expected within four to eight weeks.
The full report, which was commissioned by the government, is due in the spring.
This week's top stories included Cardano announcing plans to acquire Now Pensions from a Dutch pension fund later this year.
Royal Bank of Scotland (RBS) faces a £102m impact on liabilities as a result of equalising guaranteed minimum pensions (GMPs), according to its annual results.
Malcolm Mclean says getting the channels of communication right and engaging more openly is a good starting point