Conflicts still a possibility
Last month the UK’s Financial Services Authority (FSA) warned consultants, asset managers and pension fund trustees to guard against potential conflicts of interest in a highly concentrated consultant industry.
The financial watchdog’s ‘Financial Risk Outlook 2006’ raised concerns about an over-dependence by pension fund trustees on the advice, skill and integrity of “a small number of independent actuarial consultants”.
“There are concerns of potential conflicts of interest between pension fund consultants that offer services to both pension funds and asset managers,” said the FSA report. “Consultants, fund managers and trustees will all need to be alert to potential conflicts of interest,” the FSA said.
So how does the industry regulate and monitor itself to guard against this potential conflict and adhere to professional standards?
The FSA declined to comment on what measures industry players should take to prevent a conflict of interests.
“We are not an economic regulator and it is not be our role to ‘deconcentrate’ the industry. However, we have identified this issue as a potential risk to market confidence, one of our statutory objectives,” said an FSA spokesperson.
The FSA also sais it had no plans to investigate the matter. The spokesperson said: “In drawing the industry’s attention to the issue, we hope that asset managers, pension funds and consultants will ensure that their potential conflicts of interest are managed in a robust manner.”
According to the Institute of Actuaries – one of two chartered professional bodies representing and regulating actuaries in the UK - guidance to actuaries indicates that if a potential conflict turns into an actual conflict then they should not act.
The Morris Review raised concerns about the potential conflict of interests when a scheme actuary advised both the scheme trustees and the sponsor.
“Trustees represent scheme members’ interests and are likely to want to ensure that security for members’ likely benefits is maximised, while scheme sponsors may be concerned about minimising the cost of the scheme,” said the report.
“This may lead to potential conflicts of interest when the same actuarial adviser advises both parties. The review recommends that trustees, the scheme sponsor and the scheme actuary should explicitly agree that there are no material conflicts of interest prior to the scheme actuary advising both the trustees and the scheme sponsor.”
According to a spokesperson for the Institute of Actuaries, this is currently under review.
“If the law was changed, that would be the decision of Parliament. We would point out that it would be a move likely to increase costs to schemes,” she said.
According to the Institute “there is no continuous monitoring” of actuaries to ensure compliance with regulations.
“We get told by other actuaries, or the regulators if they come across anything amiss,” said an Institute spokesperson.
The spokesperson said the perceived ‘gap’ between the regulation and monitoring of actuaries was “not considered to be a big problem” due to the introduction of the peer review strategy.
However, the 2005 Morris report voiced concerns about the peer review. There was no requirement for the reviewing actuary to be independent of the scheme actuary, therefore resulting in a potential for a conflict of interests to arise.
“The review believes that independent scrutiny of scheme actuaries’ advice is critical, given the importance of actuarial advice to trustees,” said the report.
“The review therefore recommends that the Pensions Regulator should ensure that scheme actuaries’ advice is subject to formal scrutiny by independent experts, either through its risk-based supervision, audit or external peer review.”
In the wake of the Morris Review, the government charged the Financial Reporting Council to act as independent supervisor of the actuarial profession.
From April 2006, a Board for Actuarial Standards (BAS) will be in place to add any new actuarial standards when needed. The FRC will also have oversight of the actuarial profession’s disciplinary scheme, and will take on any public interest cases involving actuaries.
This would be a step in the right direction following a Morris Review recommendation that within two to three years time, the FRC “should satisfy itself that appropriate monitoring of compliance with professional standards and independent scrutiny of actuarial advice is occurring”.
Meanwhile, the Pensions Regulator said that its code of practice on Funding Defined Benefits could make many more trustees aware of the actuarial requirements for a peer review.