The UK government will take over estimation of transfer values for people leaving occupational defined benefit (DB) pension schemes from the UK's actuarial profession following a series of arguments over the proposals.
The move was at the request of the recently formed Board for Actuarial Standards (BAS), set up to address perceived weaknesses in UK actuarial practice, after the profession's attempt to provide a more equitable framework for the calculation of transfer values resulted in a series of disputes among industry players over the direction of reform.
The dispute centres on how to correctly value the pension plans of scheme members when they exit a DB scheme. Currently members are given the full cash equivalent which is less than the actual cost of buying the same rights on the open market.
Nigel Bankhead, BAS director, said that for members of a scheme with a shortfall, the existing system "just crystallised their loss, with no hope of getting it back. Essentially there is a funded benefit and an unfunded benefit and those transferring out only get the former."
Attempts by the board to reform the process by moving from the present GN 11 scheme, which bases values on the cost of the scheme, to one based on market-consistent valuations met with stiff opposition from industry groups and the government's Department for Work and Pensions (DWP).
A spokesperson for the National Association of Pension Funds said that with any such approach, "there is a danger that the proposals will have the effect of introducing a minimum funding requirement by the back door."
For the government, the issue is a sensitive one, heightened by charges recently made by UK parliamentary ombudsman Ann Abraham that the government failed to protect the benefits of occupational scheme members prior to the enactment of the 2004 Pensions Act. The pre-2004 minimum funding requirement, which was supposed to keep pension schemes solvent, has been discredited in the wake of market-consistent valuation.
Had members of schemes sponsored by troubled UK companies been given full disclosure on the status of their scheme, they might have been able to transfer out in time to save their retirement benefits. The advent of market-based liability valuation has made the funding status far more apparent than in the past.
The 2004 Pensions Act partially recognised this situation by establishing the Pension Protection Fund (PPF) and the new Pensions Regulator. But the Pensions Act failed to resolve the discrepancy between the market-based liabilities that companies disclose in aggregate, and the far smaller liability payable to individuals who transfer out.
The actuarial profession sought to eliminate the discrepancy by increasing transfer values, but was unprepared for the firestorm of protest that followed. It was against this backdrop that the BAS requested the government to take over the decision-making process and Bankhead is confident that this was the correct way forward.
"Deciding on the process for transfer values is a question of public policy and therefore one for government; it clearly isn't a measuring question. Once the framework is in place, how you measure it and what needs to be measured are actuarial issues," he said.
Bankhead said that the government could still decide to throw the whole issue back to the actuarial profession to decide all the issues relating to transfer values. But he thought that this was "unlikely", and doing so would change the nature of the board.
"You set the measure to ensure a policy issue - or at least you can't do this and remain independent," he said.
The DWP has said little about its plans other than that it may consult with interested parties over the principles that should be incorporated in transfer valuation, prior to the introduction of new legislation. A key issue for the government will be how to balance the freedom of individuals to make their own retirement decisions against the collective interests of all scheme members whose benefits are guaranteed by the PPF.
The week on Risk.net, February 10-16, 2018Receive this by email