Conflicts of interest?
An independent actuarial valuation is essential for the health of a pension fund, but how can the actuarial firm be independent if it hopes to drink consulting cream?
There are lots of ways a valuation can be bent to flatter the parent company, and the problems of such flattery are growing with the increased attention given to scheme deficits. Some variation represents legitimate differences of view between actuaries, or legitimate differences in assumptions. But it can also arise from deliberate manipulation of assumptions.
Just as no accountant would risk his reputation cheating for mere accounting fees, few actuaries would be tempted to do so for actuarial fees. But what if the temptation is increased? At the very least shouldn’t we remove the appearance of any risk of temptation?
And why would any fund want to use an actuary for investment advice anyway? What do they know about bonds and equities? Actuaries understand numbers but not what’s behind them. They can calculate a correlation over a 10 year period, but they can’t explain why the two items might be related. And if they can’t explain it, they can’t say whether or not the relationship will persist.
An actuary is the last person to consult for an asset liability matching (ALM) survey. A number do a poor job with ALMs, and that should be expected given their narrow quantitative view. A few years ago one firm produced an ALM study for a client suggesting no need for large cap domestic equities – put everything into venture capital and emerging markets! Another firm recommended selling property one year, and buying it the next, not very sensible with such an illiquid asset. Nearly all were happy to recommend 60 or 70% equities as a sensible position three years ago, but now they think that a 50% weighting is a bit aggressive.
Why let them recommend things that then earn them search fees? One consultancy loves the idea of adding a few multinational managers to manage against their multinational index, an idea which seems to have little merit beyond winning search mandates.
Another concern is rewarding actuaries for recommending a switch from the manager they recommended a couple years previously.
Just as accounting has been improved by separating consulting from accounting, so both actuarial valuations and investment consulting would be improved by a divorce.