Actuaries are nonchalant but ignore it at your peril

Technical Actuarial Standard 300 version 2 with its “must do” bulk transfer v run-on requirement has been in effect for a year.  The first question was, would actuaries comply or deflect?  That downgraded rapidly to, would they read it?  Then the suspicion arose that they had not heard of it.  As for most chairs of DB scheme trustees. They are far too important these days to read source documents and so will not know they can ask for the actuaries’ evidence.  And the lawyers will cover it off with a few well-chosen sentences knowing FRC has little authority. And anyway lawyers go easy on the numbers.

Poor old TAS.  Like most things emanating from the Financial Reporting Council, it's rather good quality but largely ignored.  Three major reports (Penrose; Morris; Kingman) identified actuarial standards as a big problem.  Scrutiny was needed.  Little happened.  But the LDI crisis and the unmonitored, unregulated, explosive growth of the risk transfer market and remarkable indifference to conflicts of interest of actuarial bodies showed they were right.

Ignoring TAS300 is a shame really.  Particularly if the first time you do read TAS300V2 it's in a legal bundle some years hence.

Dear Actuary : re your endgame plan.
It's about the risk-benefit analysis.  Are you sure you did not need numbers to compare bulk transfers with the Credible Alternative of not doing it under TAS 300V2? How did you calculate the downside risk? Seeking discretionary payments for members. Did you value that?

Dear Trustee : re the sell out
I was a member. It's about the risk-benefit analysis.  Did you ask relevant questions of actuaries in accordance with your fiduciary duty to act in the best financial interest of the beneficiaries?  Where's the file they provided and your notes?

So just in case there were to be some interest, here is a link Technical Actuarial Standard 300: Pensions.  For anyone merrily heading on an endgame journey (or who have been involved in risk transfers recently) it is worth noting the highlights set out below.

And with Government rules changing on surplus use and making discretion exercises easier, what was the risk over the last year that made a risk transfer so urgent?  Best interests of members must surely include all relevant information so why not wait for it?  Did these points make the glossy risk transfer sales brochures of consultants or feature in the endless endgame conferences?  No. One way traffic. Odd that.

But Penrose, Morris and Kingman have been heard.  There is a chance that ARGA will radiate authority when turned on later this year. FRC could undertake a Thematic Review of the risk transfer industry reporting standards, covering both its audit and actuarial remits.  It could start now or make it a launch project for ARGA.  NatWest Group’s well-hidden £10 billion asset transfer to a foreign controlled entity, at a £2.4 billion book loss to the Group funded out of scheme surpluses, would make an excellent case study.


Technical Actuarial Standard 300: Pensions Version 2 (TAS300V2): Key Extracts:

Purpose 
1.1. Technical Actuarial Standard 300: Pensions (TAS 300) promotes high quality technical actuarial work in relation to pensions, supporting the reliability objective: To allow the intended user to place a high degree of reliance on actuarial information, practitioners must ensure the actuarial information, including the communication of any inherent uncertainty, is relevant, based on transparent assumptions, complete and comprehensible.

Scope and Compliance
1.7. Actuarial information that is material must include a statement by the practitioner confirming compliance with TAS 100 and TAS 300. Any material caveat, qualification or limitation in that statement must be justified to the intended user. The evidence demonstrating compliance must be available to the intended user, if requested.

5  Bulk Transfers
P5.1.  Practitioners providing advice to a governing body or an employer which is considering a bulk transfer must consider the following: 
a. credible alternatives to the potential transaction for the long-term provision of members’ benefits. Practitioners must consider whether the following alternatives are credible: a bulk transfer to a superfund or an insurer and retaining the liabilities within the existing pension scheme potentially with additional funding and/or security;

P5.2  Practitioners providing advice to a governing body or an employer which is considering a bulk transfer must use as much relevant information as is sufficient and must make use of support from third parties where they judge it necessary in order to obtain sufficient relevant information. Practitioners who have relied on input from a third party should understand how the input affects the output of their technical actuarial work.  

P5.4  Practitioners providing advice to a governing body or an employer which is considering a bulk transfer to a superfund must ensure that models used are calibrated appropriately to reflect the time horizon of projections.

Communications
P5.5. Practitioners’ communications must include sufficient actuarial information to enable the governing body or other decision-making entity to understand the range of options available for the long-term provision of members’ benefits, and how different classes of members might be affected by a bulk transfer. The information provided must include the items listed in P5.1 where material. 
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P5.6. Practitioners’ communications should state any third-party assumptions, data or methodology on which they have relied.


Glossary of Defined Terms

TAS300V2 has applied since April 2024.  An update will be in force later in 2025, integrating DWP's requirements for a Funding and Investment Strategy and covering the use of surpluses – recently out for consultation.  All reinforce the need for a basic risk-benefit analysis backed by a financial model.

Links:

Technical Actuarial Standard 300: Pensions Version 2

Technical Actuarial Standard 300: Pensions Version 2.1 Exposure Draft
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It’s not as if the actuarial standards problem was unidentified

December 2000 Equitable Life closed after 238 years.  It triggered the first ever review of the actuarial profession.  The 817 pages of Lord Penrose’s inquiry concluded the actuarial profession lacked comprehensive and specific professional standards; gave insufficient guidance in specific areas and was not willing to challenge fellow professionals.

The Government commissioned the Derek Morris Review. Published in 2005 it concluded:

• Professional standards have been weak, ambiguous or too limited in range and perceived as influenced by commercial interests.
• An absence of proactive monitoring of members’ compliance with professional standards.
• The Pensions Regulator should develop information and case study material to help pension plan trustees to challenge their actuarial advice.
• FRC should establish an Actuarial Standards Board with responsibility for compliance with standards.
• Public interest would be best served by actuaries’ compliance with high-quality professional standards.
• The profession could continue to run its own Code of Conduct unless there were concerns about what it was doing.

In December 2018 the “Independent Review of the Financial Reporting Council” by John Kingman, Chair of Legal and General, was published.  In its 93 pages it gives FRC’s actuarial role minimal coverage.  It suggests the FRC should give responsibility to PRA, as it has 80 actuaries rather than 4.  It notes that over 12 years after Morris, actuarial standards were only just being invented.

It does conclude “the regulation of actuarial work, as opposed to the profession, is likely to have considerable more impact than regulation of the profession ever can”.  It notes that there is “real risk that stakeholders may be assuming that FRC’s current oversight of the actuarial profession is a great deal more thorough and effective than, in the absence of credible powers, it actually is or can be.”  Independent oversight is needed and “suitable legal powers must be put in place to make it possible.”

The IFoA response to Kingman was sadly nonchalant:
“We believe that there is no evidence to suggest that the current arrangements are not serving the public interest and the introduction of a system of statutory regulation where there is no identifiable need to do so seems disproportionate.”

The LDI crisis; the unmonitored, unregulated, explosive growth of the Risk Transfer industry; the continuing disdain amongst practitioners for FRC Technical Actuarial Standards like TAS300V2; and blatant conflicts of interest around longevity risk transfer at CMI.  The evidence is ample of an identifiable need.

Penrose; Morris; Kingman.  The diagnosis was right.  Scrutiny is much needed.  The Audit Reporting and Governance Authority should not mess about.

And FRC could say now that it will work with fellow regulators (PRA / FCA / TPR / PPF / CMA) on a Thematic Review of audit and actuarial practices behind Risk Transfer transactions.  With such scrutiny, the behaviour or actuaries and their friends will improve dramatically even before ARGA finally arrives with a Statutory recipe and radiates authority.


The lack of scrutiny of actuarial work has long been recognised as a problem.  The boom in Pension Risk Transfers has made it a big one.  But remedial action creates new opportunities as ARGA warms up.

Comply rigorously with Technical Actuarial Standard Version 2.1 with a Risk-Benefit Analysis.  The maths required and the governance issues raised will be eye opening and work terrifically well in all stakeholders’ interests.  The new information generated will align with DWP’s requirements for new scheme Funding and Investment Strategies.  Relevant questions arise that trustees must ask.

It’s a straightforward, available, opportunity Government should take to reinforce its growth strategy.

Read Technical Actuarial Standard 300 Version 2: At One.  Actuaries are nonchalant but ignore it at your peril.

Introduction
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Pension Risk Transfers (PRT) are a £50 billion a year business segment, with assets being handed over to life insurers by DB pension schemes in exchange for taking on risks as assessed.  Credible “run-on” Alternatives to PRT have to be considered by trustees ahead of PRT’s under Technical Actuarial Standard 300 Version 2 in place from April 2024.  DWP’s new Funding and Investment Strategy (FIS) requirements were introduced in September 2024 requiring a reset.  In addition, Government is making access to surpluses by members and sponsors more straightforward.

Disclosures

Current disclosures and the approach adopted by professionals can result in relevant standards being exploited or sidelined.

A raised level of disclosures is needed to ensure that all stakeholders can see deals are fair and reasonable.
This note proposes that disclosure levels should match those required by other corporate activities under the Listing Rules.  

Disclosures proposed are:

• Material contract terms: Parties and key clauses covering residual obligations, restrictive covenants arising with an on-sale and with reinsurance.
• Profit / loss price paid to life insurer and comparison with actuarial and accounting valuations.
• Scheme track record:  Assets, liabilities and cash contributions over not less than 5 years.
• OCI: Items taken through Other Comprehensive Income over last 5 years.
• “Background to and reasons for the transaction” section.

Member and sponsor access to share of surpluses on an ongoing basis and on the wind up of the scheme can be part of a wider assessment.

The following is a recent case study on NatWest’s buy-ins.  All parties to risk transfer deals and related consultants may suggest that they are not under a specific requirement to be more transparent.  That is why an urgent review is needed of what information needs to be disclosed involving FRC (ARGA); FCA (Listing Authority); IFoA and IASB.  “Disclosure” is a sensible follow up subject to its excellent reports on defined benefit pension schemes by the Work and Pensions Select Committee.  HM Treasury and DWP can reasonably reflect on whether the massive risk transfer industry is really operating in the way they want.

NatWest Example:  Buy-in Transactions 2023 / 2024:  Case Study

The need for clarification of disclosure is seen from the recent NatWest sale of around a third of its pension liabilities to – it is understood - Rothesay.  

Of note is:

• The deal was agreed in September 2024:  No disclosure.
• The deal was referenced in NatWest’s third quarter figures in its Interim Management Statement (IMS) announced on Friday 25th October:

What has now emerged as an £11bn risk transfer deal, agreed in September, is referenced in a short note on page 30 of the Group’s 3rd Quarter Results announced on Friday 25th October.

The Interim Management Statement:

Page 30:  Pension Risk:
In September 2024, the Trustee of the NatWest Group Pension Fund entered into a further buy-in transaction with a third party insurer for some of the liabilities of the Main section. Around a third of the Main section is now covered by insurance policies that give protection against demographic and investment risks, improving security of the member benefits. The transaction does not affect the 2024 statement of comprehensive income because the net pension asset is limited to zero due to the impact of the asset ceiling.
​
This is correct because there is a £7.4bn buffer created by the accounting standard IFRIC14 which means surplus is not being booked because “the trustees may have control of the surplus”.  This is set out in the 2023 accounts.  The question for trustees and the Board should be to explain what the plan is.​

The wording of the IMS is vague and provides no meaningful context.  That a third of the scheme’s liabilities, nearly £10bn, is not referenced.  What the cost of the deal is to be covered out of a surplus of £7bn – which in any case will be lost below the line taken to Other Comprehensive Income – is not explained. 

No reference is made to the exercise which must have been carried out by the actuaries to comply with Technical Actuarial Standard 300 V2.  Why the transaction is better for members or why the parties have not found a more positive use for the major accounting surplus receives no comment.

Trustees – given their control over a surplus – are well placed to seek improved terms for members.  NatWest could be looking to a surplus to help fund / improve current pension provision.

The deal has a precedent and with comparably limited disclosure.  In 2023 NatWest had undertaken a buy-in of one section of the scheme – which may have already had buy-in features.  The cost of the deal against book values is not explained in the accounts.  The OCI is used as a way to mix up numbers to provide a hash total and ensure the cost of the deal is not revealed.

(i) Media Coverage of Buy-in
​
The Group provided some clarification when on Tuesday 5th November Sky News reported that a transaction had taken place.  Rothesay declined to comment and NatWest did not confirm the counter party was Rothesay.  That is 10 days after the transaction was referenced in the third quarter figures.

NatWest Group, the high street banking group, has struck what is thought to be the UK's biggest-ever deal to outsource pension payments to a specialist insurance company.

Sky News has learnt that pension trustees at NatWest, which is on track to become wholly owned by private sector investors after more than 15 years in partial taxpayer ownership, have offloaded a roughly £11bn chunk of its corporate pension scheme to Rothesay, the England cricket team's Test match sponsor.

The deal is a landmark in the accelerating trend for companies to insure their pension risks, with NatWest ranking among the UK's biggest pension scheme sponsors.

Its group retirement scheme has about £33.6bn in assets, while it had roughly 190,000 members at the end of September.

The latest deal was disclosed - without reference to Rothesay - in NatWest's third-quarter results statement published last month, but has not been publicly reported.

"In September 2024, the Trustee of the NatWest Group Pension Fund entered into a further buy-in transaction with a third-party insurer for some of the liabilities of the Main Section," the statement said.

Several people familiar with the transactions said the counterparty was Rothesay, which declined to comment on Tuesday.

In a statement issued to Sky News, a spokesperson for the NatWest Group pension fund confirmed the deal, saying: "As part of its long-term strategy, the Trustee of the NatWest Group Pension Fund has recently insured around one-third of the Main Section with buy-in policies.

"The buy-in policies are Fund investments that further improve the security of member benefits by increasing protection against demographic and investment risks.
​
"As with other investment decisions there is no change to member benefits and members will continue to receive their benefits directly from the Fund."
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The trade press dutifully then referenced the transaction.

​(ii) The Precedent in the 2023 Annual Report and Accounts

The cost of fixing out permanently certain scheme liabilities through a buy-in in 2023 is referenced in Note 5 on page 322 of the 2023 Annual Report and Accounts.  The actual number is not provided.  It is netted against other items reflecting market movements and changes in measurement shown below the line as part of Other Comprehensive Income.  This is reported on page 299 (extract follows).

Investment Strategy (page 322, note 5 Pensions)
During 2023, the Trustee completed a buy-in transaction for the AA section of the Group Pension Fund, passing all material longevity and investment risk for the section to an insurer. At 31 December 2023, the assets of this section comprised mainly of the buy-in asset (a bulk annuity policy valued at £546 million under IAS 19, covering 99% of the defined benefit obligation attributable to this section), together with residual assets of c. £145 million. In exchange for an upfront premium paid to the insurer, the buy-in asset provides a stream of cashflows to the Trustee replicating payments due to members. 
​
The premium was determined by the insurer using its pricing basis. Under IAS 19, the value placed on this asset mirrors the valuation of the defined benefit obligations covered, incorporating an assessment of credit risk. Since the insurer’s pricing basis is more conservative than the best-estimate valuation under IAS 19, an asset loss arises at the outset, which is recognised through OCI along with the impact of other movements in asset values over the year. In future, the buy-in asset value will move in line with movements in the defined benefit obligations covered, meaning that the scheme is protected against longevity and market risk

Consolidated Statement of Comprehensive Income (Page 299) 

(iii) Extracts from the 2024 Report and Accounts

​Pension Risk – page 265 : Reference to “buy-in” : 
The first reference by NatWest or the trustees to the scale of the deal is on page 265 of the 2024 Report and Accounts of NatWest Group.  It refers to a “third party insurer”.  There are 17 references – primarily as part of notes on risk management – to buy-in in over 400 pages with no reference to any particular insurer.

“During 2024, the Trustee of NatWest Group’s largest scheme (the Main section of the NatWest Group Pension Fund) completed buy-in transactions with a third party insurer (buy-in asset valued at £8.0 billion under IAS 19, covering around a third of the defined benefit obligation attributable to the Main section). Under the buy-in insurance contracts, the insurer makes payments to the scheme to cover pension benefits paid to members. As a result, the insured portion of the scheme is protected against all material longevity and investment risks.”

Consolidated Statement of Comprehensive Income (Page 294) 
As in the 2023 Report and Accounts, there is a line item in OCI referring to the pension schemes but how this number is reached is not explained.  What is included in the £166m is unclear and un-noted.

Conclusions
​
The conclusions from recent deals like that of NatWest and other examples like Michelin Tyres is that disclosures are insufficient.  That allows actuarial and accounting standards to be exploited or sidelined.  Evidence of compliance with TAS300V2 is yet to emerge.  OCI is a dumping ground for awkward numbers.  ARGA when it is turned on needs to radiate authority to the risk transfer industry.

Questions arising from the buy-in:

• The surplus is not recorded given the ceiling imposed by IFRIC14.  The consequence of that is the company cannot use surpluses without trustee agreement.  What is the rule which imposed that constraint and when was it introduced?
• In making contributions in recent years did the sponsor and trustees consider the risk of a trapped surplus?  £12.7bn has been contributed since 2014.
• With Government consulting on use of surpluses, why was a deal in September 2024 appropriate?
• Why has the counterparty not been announced?  Should it be Rothesay, did the ownership by a Singapore wealth fund and an American Mutual factor?  Was Rothesay’s purchase of Scottish Widows Pensions a consideration in relation to concentration risks?
• The scheme has a large accounts surplus but limited exposure to UK productive assets (quoted equity levels are tiny).  Is that appropriate?
• Was a TAS300V2 exercise carried out given the SIP now endorses buy-ins as a technique?  Did the company and trustees request papers on Credible Alternatives?
• Overall, do the parties think that the way the buy-in transaction has been handled can be considered appropriate for a major public company or for such a major pension scheme?

The conclusions from recent deals like that of NatWest and other examples (like Michelin Tyres) and looking at how TAS300V2 is being implemented shows that disclosures are insufficient.  That allows actuarial and accounting standards to be exploited or sidelined.  Evidence of compliance with TAS300V2 is yet to emerge.  OCI is a dumping ground for awkward numbers.  Audit Reporting and Governance Authority “ARGA” when it is turned on needs to radiate authority to the risk transfer industry.

DB pension schemes have available now the capability to boost economic growth and improve pension provision.  Straightforward and effective initiatives can bring major benefits starting in 2025.

Objective:

• £1.2 trillion in investments held in DB scheme to have higher UK productive asset and sustained UK gilt allocations under stable investment strategies.  
• Schemes to run-on longer term and where practical recycle surplus funds into better pension provision for past and present employees and into higher UK capex.  

Steps needed:

Focussed, Impactful Regulations:
Risk-Benefit Analyses of financial best interests of beneficiaries and sponsors are a clear requirement on DB schemes and their advisors.  N.B. TAS300V2.1 and wider regulatory frameworks are sound. 

​With greater scrutiny by Financial Reporting Council (to be ARGA) and DWP of the Risk-Benefit Analyses, sector behaviours will reset when they know the maths they are using can be scrutinised.  

Concrete Growth Proposals:
Government can underpin DB scheme Risk-Benefit Analyses.  Where a scheme holds a minimum %’s of assets in designated UK productive and UK gilt categories Government incentives are provided:

• Improved (but not total) PPF cover should the sponsor fail.  End of “haircuts”
• Surpluses of up to an annual maximum % of assets can be used from DB schemes (funded to sustainable low dependency) to pay DC contributions, improved pension payments and fund scheme running costs and UK capex.  TPR to raise accepted level of returns for mature schemes.

Key Impacts:

• Bounce back from excessive derisking will be achieved to benefit all stakeholders.  Benefits of investment will be seen in economic activity.    
• New balance of buyers and sellers in UK capital markets create more liquid, vibrant markets.  
• Mindset change achieved in pension sector led by trustees rethinking their fiduciary duty to members to look for better outcomes.  
• Higher tax take for HMT.  N.B. Tax incentives provided have limited or no costs to HMT.  PPF funding position is good and is funded by members.  Little income from tax on surplus repayments at present.  Higher pension payments to members will be taxable.  Reduced tax allowable cash contributions to schemes.

Targets:

• Add 10% to UK productive assets => £120 billion
• Add 10% to UK pensions on a discretionary basis => £5 billion
• Add over £5 billion to DC contributions and UK capex