AG tells actuaries to mark-to-market - now
Actuaries assessing the financial position of pension funds and insurers should already be doing so based on the actual market rate, instead of the fixed accounting rate of 4%, the Actuarial Society (AG) has told its 750 members.
The new financial assessment framework, or FTK, prescribes a mark-to-market approach. The FTK for pension funds will not come into force until 1 January 2007, but the pensions regulator DNB has encouraged schemes to start applying the rules earlier. The FTK for insurers has however been further delayed.
“The accounting rate of 4% is higher than the market rate, and is in many cases no longer prudent,” the AG said in a so-called audit alert. “At the end of 2005, the market rate for all durations had decreased to under 4%.
“Although the regulator DNB gives the impression that a 4% rate is still allowed for the 2005 accounts, actuaries at pension funds and insurers should stay below it,” the AG added.
According to the AG, a deviation from this policy is only permissible if the other parameters are clearly sound.
“It’s mainly the smaller pension funds which might fall short of the actuarial principles,” says AG chairman Roland van den Brink. “Of course, 4% is an easy number for accounting, but it’s important to get it right. The difference between the 4% and the actual market rate of 3.7% means a 5% difference in the coverage ratio for the scheme.”
“We have sent the audit alert to remind members of our guidelines, and to support their position,” van den Brink added. “Actuaries who ignore the professional code could get reprimanded, or even expelled from the AG.”
According to van den Brink, who is also director of the PME scheme covering the metalworking industry, actuaries can only deviate from the guidelines for sound reasons, such as if a pension fund ceases to exist, or if it is being transferred to an insurer.