UK actuaries are facing its biggest shake-up in the last 100 years as the government –appointed expert recommends independent scrutiny of the profession and other measures to address the “quite serious” problems and conflicts of interest it faces.
Sir Derek Morris, the government-appointed head of the review, on Wednesday published his 168-page report. The review said the actuarial profession required independent oversight by the Financial Reporting Council.
This council should create an Actuarial Standards Board to set professional standards and oversee the actuaries’ regulatory and other activities, the review said.
The other main recommendation was to deal with the conflicts of interest currently inherent within most pension funds. Sir Derek said there should be independent expert scrutiny of pension scheme actuary’s advice through a choice of risk-based supervision, audit or external peer review.
The review also recommended that the pension fund trustees, the scheme sponsor and the actuary should explicitly agree that they perceive no material conflicts of interest prior to the scheme actuary advising both the trustees and the scheme sponsor.
If any of the three parties think there is a conflict of interest then the trustees should have the option to retain the existing adviser and the sponsor should secure separate actuarial advice.
The review also backed up the Myners review on pension funds by recommending that pension fund trustees should invite tenders separately for actuarial advice, strategic investment advice and fund manager selection advice.
Sir Derek said there reforms would address the “number of quite serious problems faced by the profession in the UK”. He added: “The review has no reason to doubt that the overwhelming majority of actuaries in the UK are dedicated, skilled professionals but the actuarial profession is, in my view, at something of a crossroads. It has come under quite intense scrutiny and will inevitably face change.”
The review was ordered in March 2004 after a separate report into the failure of UK assurer Equitable Life revealed a number of failures by the Government Actuarial Department and company actuaries.
The review was broadly welcomed by the profession, which has been making extensive efforts to anticipate the review’s recommendations and put in place the new best practice.
Aaron Punwani and Richard Murphy, both partners at Lane, Clark and Peacock, said: “We welcome the review in general. This is the biggest government-initiated shake-up in 100 years but we, as an industry, were already shaking ourselves up.
“Handling conflicts of interest will no doubt hit the headlines in the next few months as trustees demonstrate they are acting independently of the company sponsors. But the reason there are more conflicts now is because trustees have more power under the Pensions Act to set the investment strategy and company contribution level. But what was not addressed by the review was to say how independent scrutiny of advice will be achieved.”
Kevin Wesbroom, a consultant at Hewitt Associates, said:
"It is important for pension scheme actuaries to be clear who their client is and for conflicts of interest to be recognised and managed. However, Sir Derek Morris' proposals in this area do little more than formalise the status quo, and will if anything accelerate the trend towards companies and trustees having separate advisers.
"We is not convinced that this is in the interests of UK pension provision as it is likely to lead to a more confrontational relationship between employers and trustees."