A question of mindset?

As a junior actuarial student in 1991, I recall watching a role-play of an actuary and a lawyer in court. The lawyer was cross-examining the actuary, focusing on the fact that the actuary was advising both the trustees and the employer, without apparently drawing any distinction between the two.
Fifteen years later, the issue is no less controversial. A key question today is what is an appropriate way of dealing with trustee and company advice, and can both sides be advised by one firm.
While the largest pension schemes and employers have often had separate firms of advisers, for most pension schemes in the UK actuaries and consultants have typically held a dual role advising both parties.
In the heady days of surplus funds and stable life expectancy, this was relatively easy to deal with. And in the occasional situations where there was a difference of opinion, the single adviser was often in a position to understand the views of both parties and propose a compromise that he or she felt to be acceptable to both.
With hindsight, perhaps those compromises sometimes favoured one party more than the other. Would separate advice have resulted in significantly different results? Almost certainly the answer is “yes, sometimes”, but in most cases these are questions that will never be asked, or answered.
Through a combination of more difficult circumstances for pension schemes, and legislative change, the industry has moved on and it has become more appropriate to have separate advisers in certain situations. But does that necessarily mean that trustees and employers cannot be advised by the same firm? In my view it does not, although there are caveats to that view, and important issues that need to be dealt with.
A common reaction to conflict issues amongst professional firms is to talk of Chinese walls, where those advising one party operate separately from those advising the other. For this to be fully effective there needs to be a combination of physical separation (not having access to each others’ papers) and electronic separation (no access to shared client directories). But most important is the mindset of those involved.
An interesting question is whether an adviser, when negotiating with someone from their own firm, will be as aggressive in their negotiation as they would be with someone from another firm. That said, for every client that wants an adviser to adopt a strong stance, there is another who believes that such posturing only increases antagonism between the parties and racks up additional fees. Ultimately, the approach taken by an adviser should be based on the brief from his client, not from who is advising the other side.
Some professional firms have gone so far as to physically separate the teams that advise employers and trustees, while others have protocols in place (possibly different for each client) which describe how relationships will be managed when both sides are advised by the same firm. For example, a full-disclosure approach might be agreed whereby all advice is copied to the other party as a matter of course.
These reactions are not just attempts by professional firms to maintain both sides of the client advisory relationship (although commercial realities mean that this is one of the drivers). It is also in reaction to the desire amongst many pension schemes and employers (particularly the smaller ones), to maintain existing relationships and, perhaps as importantly, not move to a separation of advisers that will, in their view, dramatically increase their costs.

Improving transparency in this way might be for the benefit of shareholders, lenders or just internally. For example, can a director really go to the board with the message “Our trustees, advised by XYZ Actuaries, want £5m (e7.2m) next year. I’ve taken independent advice on the subject, also from XYZ Actuaries, who agree this is reasonable.” Where there is a high level of trust this might be possible. But in other cases the director would not be able to take such advice to the table and be taken seriously.
An important issue in considering separation of advice is understanding the distinction between advice and information. Consider two questions posed to a scheme actuary:
p What is the lowest salary growth assumption that you think we could get the trustees to agree to?
p What would the results look like with a salary assumption of 1% per annum lower than your original results?
The former is clearly advice, and the scheme actuary response should be “I cannot answer that question”. The latter is information and the actuary should be perfectly happy to answer such a question (subject to it being made clear that it is only information, and that in providing the figures the actuary is not making any comment on the suitability of those assumptions).
In many areas, even true ‘advice’ can be comfortably provided to the employer by a scheme actuary. Advice on DC arrangements and accounting figures are commonly provided. Even advice on pension strategy can often (but not always) be provided without any conflict arising. But in this latter area the conflict might not only be with the trustees, but with the firm of advisers itself (why would an adviser recommend closing a scheme if this action would reduce that firm’s income?).
Whatever the circumstances, a scheme actuary may be given information in the course of his or her work which is relevant to the trustees and that should be shared with them. Consider two more requests:
p We are at the early stages of considering granting favourable early retirement terms to 100 members. Can you please tell us what the increase in the deficit would be?
p We have agreed to grant favourable early retirement terms to 100 members but haven’t told the trustees. Can you please tell us what the increase in the deficit would be?
The former is a hypothetical situation, the type of which companies consider all of the time. For a company to be expected to advise the trustees of every business decision that was being considered would be madness, and the actuary or consultant should be able to deal with such requests for information (note: not ‘advice’) in a sensible manner, while respecting the confidentiality of the company’s considerations.
The latter question clearly includes a fact, and one which could have a material impact on the trustees’ attitude to funding the scheme. At this stage the scheme actuary should pick up the phone and start talking to the trustees (probably having advised the company that he or she was going to do this).

For an actuary or consultant faced with such decisions, the guidance of their professional body, their employer and their own ethics will all play a part. And until actuaries really are replaced by robots (something that has been predicted for many years) there will always be a degree of judgement. Human nature means that some of the judgements will, in retrospect, be wrong, but that doesn’t mean we should outlaw them. This application of judgement is very similar to the position of a director who is also a trustee. As a director you would be expected to keep confidential and price-sensitive information to yourself. As a trustee you are expected to share that information, when relevant, with your co-trustees. How a company’s directors deal with these issues is one of the factors for an adviser to take into account (although not necessarily follow – remember Mr Maxwell) when determining how to deal with their own position.
As a practising actuary with a range of clients, it’s clear to me that one size clearly doesn’t fit all. The trend away from a single individual advising both parties is indisputable. But as the industry adapts to the change, various new arrangements are being put in place.
While some separation of advice between firms is happening, there is still a substantial number of schemes where advice continues to be provided to both parties from the same firm, and will continue to be for some time.
Long live diversity and common sense.

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