Actuaries must prioritise rationale and clear comms when calculating pension transfers - IFoA

Pension actuaries who are calculating transfer values and commutation rates should prioritise rationale and clear communication when advising scheme trustees, according to the Institute and Faculty of Actuaries (IFoA).

The recommendation was made as part of the IFoA’s Thematic Review Report: Actuarial factors used to calculate benefits in UK pension schemes, which has this year, for the first time, been carried out independently and in a regulatory context.

The report was undertaken as part of the Actuarial Monitoring Scheme (AMS), launched in September 2019, and scrutinised a range of advice provided voluntarily by 63 scheme actuaries from 19 UK pension firms.

It focused on the setting of transfer values and commutation rates, highlighting this as a key area where the role of the actuary is crucial in influencing outcomes for pension scheme members.

IFoA regulation board chair, Neil Buckley, highlighted the report as a "significant milestone" for the AMS, stating that it is "heartening" to hear that the overall standard of advice was high.

However, he emphasised that the IFoA’s key regulatory role is to protect the public interest, warning that there are concerns that the quality of actuarial advice in some instances may be contributing to commutation rates being well below transfer values, which may lead to poor value to members.

He continued: “There is a variety of reasons for the difference in transfer values and commutation rates including the role of trustee and sponsors, and the impact on funding.

“In this environment, sound rationale and clear communication by scheme actuaries is critical and needs to follow all existing standards, in particular to explain why these actuarial factors differ and the implications of this difference for scheme members.”

Indeed, the report revealed that whilst the overall standard of advice was “very high”, with advice on transfer values in line with regulations, advice on commutation, which is subject to less regulation, was more variable, with “clear evidence” of more reliance on scheme actuary judgement.

It recommended that, when advising trustees, actuaries should focus on explaining the range of factors affecting calculations for transfer values and commutation rates and the reasons for the difference between the two.

It also suggested that actuaries review commutation rates regularly, noting that three years should be seen as the ‘maximum’ time between review, rather than the default, as well as recommending that actuaries certify commutation rates where required.

In addition to this, the IFoA noted that the Office for National Statistics is due to cease publishing information on market-wide commutation rates and suggested that a central pension industry body take on that collation to provide an authoritative source of benchmarking.

It has also called for further research to be undertaken on the way commutation rates are set, and specifically on the appropriate adjustments to make for selection risk, market volatility and other common criteria used to set rates.

Commenting on the report, IFoA senior review actuary, David Gordon, added: “The difference between transfer values and commutation rates is not new but this review shines a spotlight on how wide the gap can be.

“The recommendations directly address this difference and are designed to inform the work of scheme actuaries and their employers. They will also be used by the IFoA to improve and where necessary, adapt the AMS, to ensure effective monitoring
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“I would like to thank all the scheme actuaries and organisations who readily took part in this review.

“Their openness and willingness to discuss their work demonstrated to us that there is widespread support to improve further the quality and clarity of work in this key area. It is through their cooperation and input that we have been able to deliver this thought provoking report.”

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