Actuaries take on piloting role
For French companies, the financial year 2005 is the first year of compulsory use of the new international accounting rule IAS 19. In the meantime, the European directive on Institutions for Retirement Provision leads to more actuarial services, pension actuaries are concerned in some specifically French benefits such as as Compte Epargne Temps (time saving account) or PERCO (save as you earn plan for pension annuities). The demand for ALM and pension-oriented asset management grows. The role of actuaries follows these reforms and evolutions.
Valuation of pension liabilities
French multinational companies have to evaluate their pension liabilities. These valuations have to be calculated by actuaries. The firms have a choice between an internal or an external solution: the actuaries in charge can be either employees or consulting actuaries. Besides companies generally distinguish between a global actuary and local actuaries.
The global actuary is in charge of ensuring the consistency of the consolidation of pension liabilities and assets. He writes notes to the accounts on benefits. He decides and checks the conformity of assumptions and methods used by local actuaries. As local actuaries may not be accustomed to IAS 19, as in the US, the global actuary asks for adapted reports and pilots the adjustments especially in case of plan amendment, asset ceiling mechanism, settlement of liabilities, curtailment, business combination (for instance, merger or divestiture). He provides a second view or review on the calculations made by the local actuary, who sometimes has conducted the same valuation for many years. He detects errors or failures in the respect of the valuation process and leads to upstream corrections, which are less expensive than corrections at the auditor level. He provides advice and runs simulations in case of mergers or acquisitions, changes in existing plans, implementation of new plans. He analyses with the company the possible long-term evolution of the sensitivity of liabilities to external factors such as market interest rate. He evaluates stocks options under IFRS2.
In France, the global actuary participates to the accounting process but is not responsible for finalising the accounts. This power of setting the accounts belongs to the board of directors and the responsibility to approve the accounts is that of the auditors.
The consulting actuary has to sign a formal agreement with his client with no ambiguity on the range of his responsibility. This is a strict requirement of the French Institut des Actuaires, which in this respect strictly enforces the new laws, decrees and international norms. To demonstrate its attachment to the role of actuaries in applying these new standards, the International Actuarial Association has selected ‘New international accounting standards’ as a major theme for the 28th World Congress in May this year in Paris.
Not only major listed companies are concerned by the implementation on new accounting standards. The new rules have an important impact on French Gaap for local companies. The Conseil National de la Comptabilité adopted in April 2003 a recommendation to follow IAS 19, stating that a company should at least give the detailed information on benefits in the accounting notes. The Fillon Law provides that all pension funds (Institutions de Retraite complémentaire) should be transformed or fully funded before 2008.
Creation and optimisation of pension systems
The actuary is directly involved in solving the classical contradiction existing between the prudential point of view (solvency margin, prudent accounts, market value…) and the long term optimisation of a pension system.
Moreover, the capability of a pension fund to transfer purchasing power over a long period of time is in conflict with the quasi-exclusive use of non-indexed bonds to ‘immunise’ the balance sheet on a purely nominal basis. Actuaries are developing stochastic models for ALM and long-term optimisation in order to obtain an acceptable compromise between immediate prudential indicators and long term control and command of the pension plan.
Theory and practice
French actuaries must have at least a master degree in mathematics (plus three years of practice in order to be fully qualified). They have to be specialists in modelling but a large part of their working time is dedicated to improve the reliability of data on employees and retirees.
On the financial side, the consulting actuaries work more and more on asset allocation and even on organising tenders for their clients to select insurers or fund managers for pension plans.
Most of the so-called ‘pay as you go’ Caisses de Retraites are indeed partly funded. There is not such a strong opposition in France between defined benefits and defined contributions. The pension environment permits a large degree of co-existence of different types of systems. A new plan is in most of the case a differential plan: actuaries have to take into account these different levels to design the best plan, for instance a defined contribution PERCO or PERE. The French government sector has begun to reform its own pension system. Last year, a new funded plan was created on a fully funded basis for the bonuses of civil servants.
Risk management and stochastic optimisation are the main challenges for French actuaries. They have to resist the short-term pressure of the ‘precaution principle’ and help pilot pensions plans on a long-term prospective view. They unify the local specificities with the global actuarial techniques and professional principles with an old orientation on prospective and asset and liability management.
Dominique Piermay is chairperson of Milliman Global and chair of Fixage Employee Benefits
Michel Piermay is chairman of Fixage and of the Scientific Committee of the 28th International Association of Actuaries Congress Paris 2006