Pensions World

Managing conflicts of interest is an important issue for scheme actuaries explains Rosslyn Scott, Mercer

Conflicts of interest may be back on trustee and employer agendas as a result of a consultation paper issued by the Actuarial Profession’s Working Party in October 2011.

The paper proposes introducing a new professional standard preventing actuaries from advising an employer in certain circumstances. If actuaries accept the proposals, they will come into effect from April 2012 with a transitional period until October 2012 to allow for contractual terms to be changed if necessary.

What is a conflict of interest?

So what is a conflict of interest and when might it arise? A conflict of interest (better called a conflict of duty) occurs when someone who owes a duty to two different persons cannot properly fulfil their duty to one person without failing in their duty to the other.

A trustee who is an employee of the scheme’s sponsoring employer is vulnerable to a conflict of interest arising, as is a scheme actuary who, although appointed by the trustees, also advises the employer in some circumstances. Potential conflicts of interest need to be carefully managed, as does the perception of conflict, which can be just as damaging to the integrity and reputation of those involved and can lead to decisions about the scheme being re-examined.

What does the Pensions Regulator say about conflicts?

The Pensions Regulator is strong on the issue of conflicts – it sees effective conflict management as fundamental to good scheme governance. It published guidance on the issue in 2008 and regularly tracks trustee behaviours on conflicts, such as having a written conflicts policy, via its surveys. The Regulator expects trustees to understand the implications of conflicts and identify and manage them; this includes managing scheme adviser conflicts. 

The Actuarial Profession is alive to the issue and the principle of impartiality is enshrined in the Actuaries’ Code. The Working Party says its survey of actuaries shows that, for the most part, actuaries do identify and resolve conflicts successfully and it intends its proposals to supplement this position. 

Its overall aim is that trustees should suffer no detriment (or reasonably perceived detriment) as a result of the scheme actuary acting for both trustee and employer. The Working Party does not want to bar an actuary from acting for both parties as that could impede sensible arrangements they have made and would add to complication and cost. It wants to achieve a proportionate response to any real or perceived conflict on the part of the actuary. 

What are the proposals?

The Working Party wants to introduce a new professional standard for scheme actuaries which would prevent them from advising an employer in relation to scheme funding or in relation to any matter which has direct bearing on the benefit payable under the scheme including, but not limited to, advice on actuarial factors. Outside these areas, the scheme actuary may still provide employer advice but this would be subject to their either taking specific required steps to reconcile any conflict arising or using an alternative approach which could reasonably be expected to provide equivalent protection for trustee interests.

The required steps suggested include:

• the scheme actuary, employer and trustee agreeing a written conflict management plan which would deal with how they would resolve a conflict and what would happen if they could not
• the trustee having the option of continuing with the scheme actuary if the conflict cannot be resolved; the scheme actuary would have to withdraw from acting for the employer
• the scheme actuary waiving his or her duty of confidentiality to the employer if necessary to safeguard the trustees’ interests.
• The scheme actuary would also have to disclose to the trustees any conflict which might arise if another person in the actuary’s firm were giving advice to employer.

What does the Working Party mean by advice “having a direct bearing on benefits payable”? This would it believes include advice to an employer on plan design, discretionary benefits and member factors for individuals or groups, such as transfer values and commutation factors.

Is only the scheme actuary affected?

The proposal would apply to the scheme actuary, but also to any actuary who provides or is materially involved in providing trustees with significant advice in relation to funding or in relation to any matter which has a direct bearing on the benefits payable. Significant advice is not defined, but the consultation paper suggests it would include any advice which invokes the exercise of professional judgment. This is likely to exclude straightforward calculations for the employer as long as no such judgment is involved. 

Some points for the agenda

Trustees and employers may want to reassess their own position on conflicts as well as that of their scheme actuary. They will want to be aware of the potential circumstances in which an actuary conflict could arise and what steps the actuary must take if it did. The Profession intends to publish a guide for trustees to help them manage relationships with their actuary.

Have a written policy

Trustee, employer and actuary could all gain confidence from the employer and trustee having a written conflicts of interest policy and an agreed conflict management plan with the scheme actuary. This could have the added advantage of showing the Regulator that the trustees take good governance seriously.