The Role of your Actuary in your pension scheme

Transcription

1 The Role of your Actuary in your pension scheme

2 Contents 1 Introduction 2 2 Trust Deed and Rules and Legislation 3 3 Appointment of the Scheme Actuary and Other Actuarial Advisers 4 4 Key Duties of the Scheme Actuary 4 5 Scheme Finances 5 6 Investment 8 7 Individual Transfer Values 8 8 Additional Voluntary Contributions 9 9 Insured Schemes Money Purchase Schemes Major Events 11 Appendix 1 Letter of Appointment 14 Appendix 2 Certificates and other Documents 15 1

3 1 Introduction This booklet has been prepared to provide trustees of an approved UK occupational pension scheme with a broad overview of the role of their actuary. It does not cover personal pensions or small self-administered schemes. There are two main kinds of occupational pension scheme in the UK: Defined Benefit Schemes and Money Purchase Schemes. Most of the points in this booklet refer to the role of the actuary in advising trustees of Defined Benefit Schemes. However, trustees of Money Purchase Schemes may also decide to appoint an actuary to help them manage their responsibilities. The help that actuaries can provide in Money Purchase Schemes is covered in Section 10 and includes comments on mixed and hybrid schemes, which combine the features of the two main types of pension scheme. Actuaries are well qualified to advise on pension scheme issues, especially about the potential benefit payments, scheme liabilities and how to balance the interests of the various parties involved. Your actuary is an expert in assessing and communicating the likely financial impact of uncertain future events and will either be a Fellow of the Faculty of Actuaries (FFA) or the Institute of Actuaries (FIA). The Faculty and Institute set the highest professional standards of honesty, integrity, knowledge and experience. The profession issues guidance notes, which cover both mandatory requirements and best practice for actuaries when exercising professional judgement. As a trustee you have many decision-making powers and responsibilities under your scheme s trust deed and rules as well as under legislation. However, the scope of this booklet is 2

4 restricted to actuarial issues and covers the day-to-day actuarial issues with which you will come into contact as a trustee. There is also a section on major events that may occur from time to time and it is extremely important that you understand the role of your actuary when these events occur. 2 Trust Deed and Rules and Legislation Your trust deed and rules are likely to contain many references to actuaries and you may find it helpful to reread them, noting carefully the areas where actuaries will assist you and where you will need to take actuarial advice. Sometimes you will be required to act upon that advice. Remember that you, as trustees, are the actuary s client. Your actuary advises you but does not take decisions for you unless the trust deed and rules say that he or she should. Although your trust deed and rules outline what trustees can and cannot do pensions legislation specifies additional requirements. In particular the Pensions Act 1995 (the Act) and its associated regulations set out additional responsibilities and duties that you, as a trustee, must carry out and specifies penalties for failure to comply. One important responsibility is that trustees of Defined Benefit Schemes must appoint a named individual actuary (the Scheme Actuary). The Act details a number of duties, which can only be carried out by the Scheme Actuary. The Scheme Actuary will often provide the trustees with advice beyond that specified under the Act. Alternatively a separate appointment may be made with either another named actuary or a firm of actuaries (who may or may not employ the Scheme Actuary) to provide other actuarial advice. Where the term actuary is used in this booklet, that actuary may also be the Scheme Actuary. 3

5 3 Appointment of the Scheme Actuary and Other Actuarial Advisers The Act requires trustees to appoint in writing all advisers from whom they expect to take actuarial advice. Although the trustees will normally take their actuarial advice from the Scheme Actuary, if there is a separate actuarial adviser it will be necessary for the trustees to have separate appointment letters with both the Scheme Actuary and any other actuarial adviser covering the scope of the advice and the terms on which the advice is given. There is no standard form for such an appointment letter, but as a matter of good practice it should normally cover the matters set out in Appendix 1. The employer who sponsors the pension scheme may also require actuarial advice. This could be obtained from the individual who is your Scheme Actuary or your other actuarial adviser. However, if a conflict of interest arises then it may be necessary for the employer and the trustees to use separate actuaries to advise them. A vital part of the relationship between you and your Scheme Actuary or other actuarial adviser is an understanding of when, if at all, your actuary will also be giving advice to the employer. The appointment letter may cover this. 4 Key Duties of the Scheme Actuary Funding A key duty of the Scheme Actuary is to advise the trustees of the funding position of the scheme. In particular the Act requires the Scheme Actuary to carry out regular valuations and to provide various certificates and documents. These are set out in Appendix 2. Section 5 gives more details on the financing of the scheme. 4

6 In order to fulfil his or her duties your Scheme Actuary needs to be aware of all significant events affecting the scheme. Your Scheme Actuary will therefore provide you with a list of events which must be notified to him or her and ask for your written agreement that you will do so. You are entitled, under the Act, to require the employer to inform you of any of these events of which you would otherwise be unaware. Reporting to Opra Your Scheme Actuary has a statutory duty to report relevant breaches of law to the Occupational Pensions Regulatory Authority (Opra). This is sometimes called whistle blowing. These duties should be described in the appointment letter. An actuarial adviser who is not the Scheme Actuary has, under professional guidance, a duty to report relevant breaches either to the Scheme Actuary or to Opra. 5 Scheme Finances Funding Many pension schemes in the UK are funded, i.e. the employer and often the employees pay contributions into a fund, which is separate from the employer s assets and which is not under the employer s control. These contributions are invested so that the proceeds can be used to pay the benefits as and when they arise. This may not be for many years hence. The Act introduced the concept of a minimum level of funding known as the Minimum Funding Requirement (MFR) although not all schemes are subject to this (for example one-person schemes). The fact that there is a statutory minimum level of funding does not imply that the scheme should be funded at just the minimum level. Furthermore, even if a scheme is funded above the minimum level this will not necessarily mean that the 5

7 scheme could fully meet its liabilities were it to wind-up. Trustees should be aware that the MFR is currently under review. As pension schemes benefit from tax relief, the Inland Revenue specifies a maximum level of funding, the detail of which is set out in legislation. This Statutory Surplus Test will not apply to wholly insured schemes (see section 9), if all contributions are invested in policies which take account of surpluses when setting the level of contribution. Your Scheme Actuary will normally advise if you are affected by this legislation. A scheme will need to have a set of funding objectives that take into account the minimum and maximum levels of funding mentioned above. Actuarial Valuation At least once every three years you will need to ask your Scheme Actuary to complete an actuarial valuation of the pension fund. The key purpose of the valuation is to enable your Scheme Actuary to advise on the contribution rate that needs to be paid in future to achieve and maintain the funding objectives. The valuation will also include MFR calculations. Your Scheme Actuary will carry out a test to ensure that the contribution rate is not less than that required by the MFR, and will also estimate the funding position of the scheme if it had been wound up on the valuation date. The trustees must then agree the contribution rate with the sponsoring employer. The agreed contribution rate will be recorded on a Schedule of Contributions (SoC) and your Scheme Actuary must certify the contribution rate shown as being adequate to comply with the MFR. Contributions must be paid in accordance with the SoC until a revised SoC is agreed. The SoC will be reviewed at each subsequent valuation in the light of the experience of the fund 6

8 and the changing financial conditions. It may also be necessary to review the adequacy of the rate at an earlier date, for example if the scheme did not meet the MFR either at the valuation date or the date the initial SoC was signed. Your Scheme Actuary will provide the trustees with a formal report on the valuation. The basic content of the actuarial valuation report is set out in professional guidance but the trustees can request additional information if required. Your Scheme Actuary will also provide a number of certificates and documents depending on the type of scheme you have and its circumstances. These are set out in Appendix 2. As legislation provides strict timetables that both you and your Scheme Actuary must keep to, you should ensure that your Scheme Actuary is appropriately instructed and provided with all the necessary data and information needed to undertake the MFR calculations in good time. Changes to the Scheme One of your important responsibilities, as a trustee, is to ensure that you specifically notify the Scheme Actuary of events that might lead to significant changes in the scheme s assets or liabilities. As stated earlier your Scheme Actuary will provide you with a list of specific events which you must notify to him or her. You should ask your Scheme Actuary to advise you about the financial consequences of any proposals made to you by the employer, such as when changes to the scheme rules are proposed or augmentations of an individual s benefit or groups of members benefits are being considered. Normally it is the employer who proposes rule changes and augmentations, which would require your consent subject to advice from your actuary on any financial implications. 7

9 The decision as to whether and how to contract out of the State Second Pension and the method of contracting-out also rests with the employer. Again you should ask your Scheme Actuary to advise you about the consequences of any proposed changes to the scheme s contracting-out arrangements. 6 Investment Trustees are required to draw up a Statement of Investment Principles (SIP) after consulting the employer and having obtained written advice from an investment adviser (but for wholly insured schemes see Section 9). The SIP, which is available to members on request, sets out the agreed investment policy for the scheme. Your investment adviser may also be your actuary or a colleague of your actuary. Before your investment adviser is allowed to give you investment advice he or she needs to find out about your scheme and in particular the nature and the terms of its liabilities. Your Scheme Actuary will provide details of the scheme s liabilities (which may include the results of an asset liability study) to assist the investment adviser. You should be clear about the division of responsibilities and in what capacity each adviser is acting. 7 Individual Transfer Values Your Scheme Actuary is required to certify that the monies offered when a member wishes to transfer his or her benefits to another scheme are calculated in accordance with the appropriate statutory and professional requirements. 8

10 The actuarial basis used will be agreed with you and will be subject to a statutory minimum amount consistent with the MFR. If there is an established practice of providing discretionary benefits, an allowance for these must be included in the transfer value calculation unless, having considered the implications, you instruct your Scheme Actuary in writing not to do so. Discretionary benefits are, for example, pension increases or generous early retirement terms, not promised to be paid under the scheme rules. The calculation of transfer values may also take into account a range of other features of the scheme, such as commutation factors, the impact of any equalisation of pension benefits and, if the scheme is under-funded, its level of funding on various bases. Your Scheme Actuary may supply or approve the use of tables and instructions to enable the majority of transfer values to be calculated by your administrators. 8 Additional Voluntary Contributions Your Additional Voluntary Contribution (AVC) arrangement will normally consist of insurance policies, deposits or other investment funds earmarked for the members concerned. If this is not the case, you should ask your actuary to advise the terms on which additional service credits or other extra benefits should be provided. You can also ask your actuary to check that the level of AVCs being paid is not likely to give rise to benefits that, in aggregate, with other scheme benefits, would exceed the limits imposed by the Inland Revenue. However, in many cases the scheme s administrators would carry out this work. 9

11 9 Insured Schemes Where your pension scheme is invested wholly in an insurance contract a few special considerations may apply. You will probably be exempt from having to provide a SIP (see section 6) and it is unlikely that a Statutory Surplus Test (see section 5) will be required. The insurance company providing the insurance contract may employ your Scheme Actuary. However, his or her responsibilities are identical to those described elsewhere in this booklet. In some instances he or she may pass information to you from the insurance company but will make it clear if this is the case. It will not affect the actuarial advice given. 10 Money Purchase Schemes Pure money purchase schemes You will still need actuarial advice from time to time, for example to confirm to the Inland Revenue that the amount being contributed is not excessive. You will need to appoint an actuary for this purpose unless the investments consist solely of earmarked insurance policies. Such an actuary would not be acting as the Scheme Actuary and would not have a continuing statutory responsibility to monitor the scheme or to whistle-blow (see section 4). However, he or she would have a professional duty to whistle-blow if he or she became aware of a relevant breach of the law. Actuaries can also help in assessing the range of possible benefits that might arise from the payment of the defined contributions. Written advice on the appropriate investment policy and possibly also on the selection and monitoring of the investment manager is usual and many actuaries specialise in this area. 10

12 Mixed or hybrid schemes Some schemes are mainly money purchase but have a finalsalary component. For example, some money purchase schemes were contracted out in respect of service before April 1997 by reference to the same test that applied to final salary schemes. Another example is a scheme where members benefits are pure money purchase until a member retires when the scheme takes on the responsibility of paying the promised level of pension benefits from its funds in place of buying annuities with an insurance company. Such schemes may need a Scheme Actuary. 11 Major Events In most schemes major events do not happen very often and many trustees will not have to deal with any of them. They are, however, very important and when they do occur it is essential that you seek professional guidance including advice from your Scheme Actuary and possibly your legal advisers. It is essential that only actuarial advice directed specifically to you should be considered and that you do not act on advice provided by any actuary not appointed by you. If the employer s actuary and your actuary are the same person you and he or she should ensure that any potential conflict of interest is dealt with properly in accordance with your actuary s appointment letter. If you decide to take actuarial advice from an actuary other than your Scheme Actuary in relation to these major events, you should ensure that your Scheme Actuary is aware of the position. Sales and acquisitions It is very unusual for trustees, acting in their trustee role, to be formally involved in the commercial negotiations regarding the 11

13 pension aspects of the sales and acquisitions of businesses. The trustees are not bound by legal agreements made by others. It is for the employers to ensure that the terms for transferring pension rights would be acceptable to the trustees or that alternative arrangements are established. You should obtain advice from your actuary on the amount of any transfer value that it would be appropriate for your scheme to pay or whether the amounts you are offered are sufficient to cover the additional liabilities your scheme would be taking on. Scheme mergers It is important to obtain legal and actuarial advice on proposed changes. There may be bulk transfer provisions, a group of individual transfers or transfers being effected under the windingup clause. You should always obtain advice from your actuary on the financial ramifications of any proposals. Bulk transfers In some circumstances, where your pension scheme documentation permits, you can decide to pay bulk transfers without the consent of the individuals concerned. This situation is more likely when deferred pensioners are involved, because it may be difficult to trace them to obtain their consents. Legislation lays down the process that you have to go through and includes provisions on the need for an actuarial certificate from your actuary. Your legal adviser and your actuary will advise you on this. Winding-up As soon as you become aware that the scheme may discontinue or wind-up, or you consider that you may have a duty and the power to initiate the winding-up yourself, you should seek advice from your actuary and your investment adviser as well as your legal adviser. You will need advice on the financial and investment 12

14 implications for your scheme. You should also consult your actuary before exercising any discretions or granting benefit improvements during the period in which your scheme is being wound up. Your Scheme Actuary will need to investigate the effect on the MFR of any additional liabilities created. Trustees should be aware that the Act has laid down a specific order for meeting the liabilities on a winding-up. Before considering your scheme's finances you should ascertain what the priority liabilities are on the winding-up of your scheme. Your Scheme Actuary will then calculate the amounts to be attributed to each priority class. During the winding-up process, your Scheme Actuary may have to certify whether there is a deficiency that the employer will be asked to make good. You will need to advise the Scheme Actuary on the appropriate date for the calculations. Partial discontinuance Partial discontinuance normally occurs within multi-employer schemes when one of the participating employers leaves the scheme. Not all trust deeds allow for this, but many do. You will need to follow your trust deed carefully in this regard, as in many cases the winding-up rule is followed. This may well involve your Scheme Actuary having to produce a certificate on any deficiency due from that employer. Compensation The Act allows you to apply to the Pensions Compensation Board for compensation if your pension scheme s assets have been misappropriated and the employer has become insolvent. Your actuary will be able to provide information about how to claim. 13

15 Appendix 1 Letter of Appointment A typical letter of appointment might include or be accompanied by some or all of the following: 1. Parties to the appointment to include your named Scheme Actuary and any other adviser covered by the same letter of appointment. 2. Clause of your trust deed and/or particular piece of legislation under which the appointment is made. 3. Statement of the scope of advice covered by the agreement. 4. Information about whether any other actuaries are advising the trustees and if so how non-statutory responsibilities are to be split. 5. Description of persons to whom the Scheme Actuary and any other adviser will report, from whom instructions can be taken and the manner in which advice can be delivered. 6. Statement of whether your Scheme Actuary and any other adviser will, or will not, be permitted to advise the sponsoring employer and the manner in which conflicts of interest will be handled. 7. Statement of information that you as trustees are required to provide to your Scheme Actuary and any other adviser. 8. Procedures needed to remove your Scheme Actuary or any other adviser, or governing their resignation. 9. Description of your Scheme Actuary s duties to report to Opra and the way in which they would be carried out. 10. Statement confirming that your Scheme Actuary can exchange information with your other professional advisers and especially your Scheme Auditor. 11. Date the appointment is due to take effect. 14

16 Appendix 2 Certificates and other documents The following are required to be given by your Scheme Actuary. No * 9 10 Certificate or document Acceptance of appointment Actuarial valuation report Actuarial statement for annual trustee report and accounts Actuarial statement of minimum funding position including coverage of priority liabilities where under-funded Initial certification of schedule of contributions Check on schedule of contributions Emergency actuarial statement of minimum funding position including coverage of priority liabilities where under-funded Certificate of Inland Revenue surplus position Reference scheme test Certification of cash equivalent basis When required Within one month of appointment At least every three years Accompanies valuation and may be revised between valuations At least every three years Within 12 weeks of signing of MFR valuation Each year if the scheme did not meet the MFR either at the latest valuation or on the initial certification of the schedule May be necessary if the schedule of contributions proves inadequate at the annual check After every valuation On application to contract out from April 1997 on a salaryrelated basis Must be current at all times 15

17 No Certificate or document When required Scheme modification certificate Bulk transfer certificate If there is a change to any member s accrued rights or entitlements without their consent If members are being transferred to another scheme without their consent 13 Debt on the employer certificate If required, on scheme windingup, employer insolvency or cessation of participation Report on the allocation of liabilities to priority classes Report on the availability of assets for each priority class On scheme winding-up, if required Before scheme winding-up is completed 16 * Certificate to claim certain unpaid contributions from the National Insurance Fund On employer insolvency, if required Report to Opra Statement on resignation or removal If the scheme has not met a legislative requirement which is likely to be material to Opra When appropriate * Legislation does not require the Scheme Actuary to sign these. 16

18 No responsibility for loss occasioned to any person acting or refraining from acting as a result of the material in this booklet can be accepted. On any specific matter reference should be made to an appropriate professional adviser. Great care has been taken to ensure accuracy but the Faculty and Institute of Actuaries cannot accept responsibility for errors and omissions. Faculty of Actuaries and Institute of Actuaries

19 This booklet is issued by the Faculty of Actuaries and Institute of Actuaries who together represent the UK Actuarial Profession. Copies may be obtained from the Institute of Actuaries, Publications Unit, at the address below. Telephone (UK +44) (0) Information about the UK Actuarial Profession may be found on our web site at Faculty of Actuaries Maclaurin House 18 Dublin Street Edinburgh EH1 3PP Telephone: +44 (0) Facsimile: +44 (0) Institute of Actuaries Staple Inn Hall High Holborn London WC1V 7QJ Telephone: +44 (0) Facsimile: +44 (0) Institute of Actuaries Publications Unit Napier House 4 Worcester Street Oxford OX1 2AW Telephone: +44 (0) Facsimile: +44 (0) institute@actuaries.org.uk