On the go: Pension scheme actuaries are being called to improve the quality of the advice they are giving trustees on commutation rates, after a review of their work by the Institute and Faculty of Actuaries.
In a thematic review report published on Tuesday — which scrutinised a range of advice provided voluntarily by 63 individual scheme actuaries from 19 pension companies across the UK — the IFoA warned that while advice on transfer values was consistently in line with current regulations, advice on commutation factors “was more variable, with clear evidence of more reliance on scheme actuary judgment”.
Commutation factors are used to determine the amount of pension that needs to be given up in order to provide a lump sum on retirement.
Neil Buckley, IFoA regulation board chair, noted that the industry body is “concerned that the quality of actuarial advice in some instances may be contributing to commutation rates being well below transfer values, which may lead to poor value to members”.
The IFoA review concluded that the median transfer value at age 65 for £1 of pension a year is £29; the equivalent median commutation rate at the same age is £18.
Mr Buckley continued: “There are a variety of reasons for the difference in transfer values and commutation rates including the role of trustee and sponsors, and the impact on funding.
“In this environment, sound rationale and clear communication by scheme actuaries is critical and needs to follow all existing standards, in particular to explain why these actuarial factors differ and the implications of this difference for scheme members.”
While the IFoA found that standards of advice were generally high, it makes several recommendations for actuaries to continually improve the quality of their advice — such as explaining why transfer values and commutation rates differ, reviewing these rates often, and certifying them when required by scheme rules.
In addition, the review pointed out that the Office for National Statistics is due to cease publishing information on market-wide commutation rates, recommending that a pensions industry body takes on that collation to provide an authoritative source of benchmarking.
Finally, the IFoA is calling for further research to be conducted on the way commutation rates are set.
