Why Cash Fund Your Actuary’s Prudence?

Ever more prudent actuaries want more and more cash from companies.  Are there other options?  Certainly. 

From July 1st, Technical Actuarial Standard 300: Pensions came into force.  Under it, an actuarial valuation has to spell out how much is added to the liabilities for prudence – discount rates; risks to investment returns; demography; and corporate credit.  Only time will tell how much prudence was actually needed but meanwhile the sponsor is paying hard cash to fund prudence under a recovery plan.

Actuarial clarity, however, provides the opportunity for finance directors to rethink.  They should consider providing payment guarantees from banks and insurers for contributions the company may, or may not, have to make at the end of a recovery plan.  These can be provided economically and protect the capital base of the business.

The Pensions Regulator has asked trustees, advisers and sponsors to collaborate more.  Deferring cash contributions for prudence frees up money for investment and better pension provision for current employees and should be high on their agenda.

“I have seen more prudence creep into actuarial assumptions over the last decade.  TAS 300 provides the chance to get back to a core base set of assumptions with appropriate levels of caution added." Roger Higgins, Partner, C-Suite Pension Strategies

“Regulatory pressures and adviser led drives to self-sufficiency will continue to increase cash costs unless companies provide a reasoned alternative which third party backed guarantees provide.  Now is the time for finance directors to engage and shine a light in on actuarial magic.”  William McGrath, Founder C-Suite Pension Strategies

Notes:
Technical Actuarial Standard 300: Pensions was issued in December 2016 by the Financial Reporting Council.  It applies to technical actuarial work after 1st July 2017.

Read our TAS300: Pensions - Key Numbers Checklist

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Technical Actuarial Standard 300: Pensions

Scheme Funding and Financing Assumptions
6.    Communications shall include sufficient information to enable the user to understand the level of prudence in the assumptions and the resulting actuarial information.

7.    Communications shall include an explanation of, and reason for, any material change in the level of prudence from the previous exercise.

8.    Communications shall explain how the discount rates used, or proposed for use, compare with the return that can be expected from assets invested according to any stated investment strategy, including any anticipated changes in that strategy.

9.    Communications shall explain how the return on assets assumed in a recovery plan compares with the return that can be expected from assets invested according to any stated investment strategy, including any anticipated changes in that strategy.

10.    Where relevant, communications shall state if and how the assumptions used, or proposed for use, take account of employer covenant.

(Extract)