The fast-changing pensions market has been highlighted as an increasing source of risk for actuaries as they adjust to new regulations and adapt their training, according to a consultation from the Joint Forum on Actuarial Regulation (JFAR) through the Financial Reporting Council (FRC).
The discussion paper stated that the regulators were particularly interested to see how firms would adjust to serve the consumer in the context of the pension reforms, and how the changes could produce risks for actuarial work.
The work of actuaries is widely used by insurers and pension schemes to understand risks and returns relating to their activities. It informs many business decisions including pricing, financial management, and investment strategies, so accuracy is key.
Adrian Murphy, partner at Glasgow-based Murphy Wealth, said, “There certainly is a public interest in actuarial work. If you change the market, as the government has with pensions, it changes the calculations completely, which increases risk.”
Public interest risk from pension reforms is explained in the report to be a lack of understanding from consumers when they purchase new pension products. It is the responsibility of actuaries to analyse these risks and develop plans to best mitigate them.
The report emphasises the danger that liability and risk management actions of pension schemes could result in some members being disadvantaged or taking on excessive risk.
Pension scheme funding decisions need to be supported by actuaries and employers, along with adequate investment, in order to ensure the needs of various stakeholders are met and scheme members are treated fairly. Thus, the actuarial advice is considered in conjunction with other strands of advice to support decision making.
Actuarial techniques such as stress testing and scenario analysis could be used in a wider range of sectors, according to the FRC paper, to quantify and understand risks. Some financial institutions and pensions schemes have limited capability to quantify risk, leading to under-informed investors and trustees in their response to those risks.
There is also a risk that long-term assumptions could be inconsistent or inappropriate. For example, in pension scheme asset and liability work, actuaries must ensure that assumptions used in models are consistent and take appropriate account of the sponsoring employer’s credit risk and risk appetite.
Actuaries also specify long-term expectations concerning investment returns when looking at risk in insurance and pensions. The impact of changes to environmental conditions and economic outlook must be considered when making these predictions, as well as monitoring and stress testing exposures which support pricing of catastrophe-exposed risks.
The discussion paper, titled ‘Joint Forum on Actuarial Regulation: A risk perspective’, focuses on risks relating to the changing pensions and insurance landscape, risks to investment capital from environmental factors and the structured financial markets, and how regulators might support practitioners and users of actuarial work in responding to these risks.
The report asserts that high quality actuarial work promotes well-informed decision-making and reduces risks to users and the public, while poor actuarial work can result in decisions that could be detrimental to the public interest.
Feedback from actuaries, their clients and employers, and other professionals on the paper can be submitted by 20 February 2015 and will be published during the first half of 2015.
julia.faurschou@ft.com
