ACTUARIES IN THE DOCK Employers and the government are blamed for the

THE 19th century American philosopher Henry David Thoreau was not a fan of retirement planning. In his view: "Many old people receive pensions for no other reason but as compensation for having lived so long."

In the early 21st century, living too long, combined with a range of economic and political factors, have all but destroyed security in retirement for much of the workforce. Britain is facing a pounds-350 billion black hole - the cost of guaranteeing every final salary pension in the land. Up to 100,000 people have already been robbed of their retirement dreams after scheme collapses. Employers have walked away from generous final salary-linked pensions in their droves, and now the state is following.

How could Britain have gone from being the envy of the world, to a pensions basket case in little more than a decade? More pertinently, who is to blame? Is it government or employers?

And what about the role of actuaries, who advise both? These brainy number crunchers were in the frontline, and should have been the first to blow the whistle? Why didn't they?

Some will argue that they tried. A report, entitled Pensions and Low Inflation, published by the Institute of Actuaries in March 2000, warned that a "cost crunch" was looming. It was widely ridiculed.

An editorial in the Financial Times was witheringly caustic. "Actuaries have cried wolf too often", it claimed.

In another piece which appeared the same day, highly respected financial commentator Barry Riley wrote: "I try to ignore much of the gloom and doom that comes from actuaries - those folk who, proverbially, are not happy unless we are all dead on time. But the actuaries excelled themselves this week with a paper issuing alarming warnings about pension funds. It proposed a slogan:

'Lower pensions or higher contributions.'" Other actuaries will admit they were slow to recognise the full impact of longevity and were also guilty of being slow to respond to the changing economic climate. The damage which would trigger today's crisis had already been done before the institute report was published.

A fuller analysis of the role played by actuaries in the debacle will be provided in the spring, when Sir Derek Morris produces recommendations for modernising the profession. The government asked him to investigate after the Scottish judge Lord Penrose highlighted actuarial failings at Equitable Life.

Morris published an interim report before Christmas, where he accused the profession of being "too insular", and "slow to adjust to changing circumstances". He also concluded that commercial considerations and conflicts of interests, led to "inadequate protection of the public interest" in relation to Equitable Life and pension scheme under-funding.

Actuaries attended a packed meeting last week in London and a week earlier in Glasgow to hear Morris explain his thinking in person.

When the review process is over, the expectation is that an independent standards board will replace the current system of self- regulation. Actuaries will be given whistle-blowing responsibilities with protection for those who do, and training will be universitybased.

The question of conflict of interest is still being debated. Much of the actuarial dilemma, some argue, arises because they will often be simultaneously working for both the employer and the trustees, who are supposed to safeguard members pensions. If an employer, who is the client and paying the fees, wishes to take a particular course of action, an actuary may be powerless to resist.

President of the Faculty of Actuaries, Harvie Brown, explains: "Some actuaries argue these roles must be separated, that you can't advise the employer if you are also advising the trustees.

Others believe the additional costs do not justify this in most cases. They are both valid views."

We shall have to await the final Morris recommendations for an outcome, although the presumption is he may leave it to trustees to decide whether the two roles should be split for a particular scheme.

The bigger question though, is not how painful these transitions may prove for actuarial firms, but whether they would have prevented the current crisis if put in place earlier?

When final salary schemes became commonplace in the 1960s, the expectation was they would be paid for about five years, and then the former worker would die.

Now we are all living longer, pensions may well be paid for 30 years. So why didn't anyone wake up to the funding implications earlier?

Our massive historic surpluses left almost everyone, including governments, employers and unions complacent. Rather than facing a looming problem, they squabbled over who owned the surpluses. Successive governments meanwhile increased burdens on the funds, while also hiking taxes.

Pension funds were everyone's cash cow. Employers, usually with union collusion, exploited them to pick up the bill for restructuring businesses and funding large redundancy programmes.

But the game was over when the 1986 Pension Act introduced a cap of 5-per cent on surpluses, triggering contribution holidays for well- funded schemes to avoid a tax charge. No longer would there be money in the kitty built up in good times to eke out the bad.

This rule, though, was not as draconian as it is sometimes painted and it was still possible to be 140-per cent funded and not incur penalties.

A more serious blow was the introduction in the 1995 Pensions Act of limited price indexation, which guaranteed a pension increase each year in line with inflation or 5-per cent, whichever was the smaller. This should have been accompanied by a commensurate shift in investment strategy.

Before this, an increase was only granted if there were surplus funds to pay for it. Once guarantees were in place, these should have been matched by guaranteed investments. Some actuaries will admit they were slow to switch some of the fund out of equities and into fixed interest.

From this point, pension fund solvency was coming under pressure.

The Faculty of Actuaries in Scotland and the Institute of Actuaries in London lobbied the government for a realistic solvency measure which would give a true picture of the state of the finances.

What they got was the Minimum Funding Requirement (MFR) which the professional bodies told the government was inadequate.

Not only was it inadequate when it was introduced in the wake of the Maxwell scandal, but this government relaxed it twice in 1998 and 2002.

During that period interest rates halved, effectively doubling the cost of paying pensions. The stock market crashed, slicing 47-per cent off equity prices and slashing the value of pension funds by more than a quarter.

Chancellor Gordon Brown could not have chosen a worse period to launch his pounds-5 billion annual tax raid on the funds by scrapping advance corporation tax, which had allowed schemes to reclaim income tax paid on dividends, thereby removing in the order of pounds-35bn.

As funds plunged further into the red, a new accounting rule FRS17 forced the black holes to be recorded on the company's balance sheet.

The consumer lobby group Which?

believes actuaries failed the workforce, but, in mitigation, is not sure it could have done much differently given the regulatory framework at the time.

Principal policy officer Mick McAteer says: "Actuaries were not the guiding minds that caused these scandals. They failed to stand up to those taking the decisions, although it is fair to say, they might not have been able to do much more than they did, given the law."

Governor of the London School of Economics, Roz Altmann, absolves the profession from blame, but does believe individual actuaries failed employees in cases where they allowed employer-driven strategies, to weaken funds. These include big redundancy programmes, company restructuring and generous early retirement packages for directors.

She argues: "Actuaries didn't take the damaging decisions, it was trustees who were often also the employer. The profession was warning in the 1990s that the security of funds was not what it should be. As a profession, actuaries did a number of things correctly, but individual actuaries let down members of schemes."

Faculty president Brown said in future actuaries would seek to improve communications not just with trustees but with employees to ensure the widest possible audience was fully informed of any fears about funding.

He welcomes the prospect of protection for whistle blowers but points out that if nobody is breaking the law there is nothing to blow the whistle about.

Brown explains: "When the government introduced the MFR, we lobbied hard saying it was inadequate. Many schemes which subsequently got into trouble were meeting their MFR.

Provided it was, there was nothing an actuary could do."

Andy Scott of Punter Southall points out that a number of actuaries were very worried about the stock market valuations of the late 1990s, but again were powerless to act.

He explains: "How could we begin persuading stock market traders their valuations were all wrong? Actuaries already had a reputation for being cautious. It wouldn't have gone down very well, if we'd told employers that they should throw out all their valuations. We would probably have been sacked."

Actuary Peter Tompkins of PricewaterhouseCoopers puts much of the blame at the Chancellor's door.

"The tax raid played a big part. My clients used to get cheques from the Inland Revenue giving them tax rebates, now they don't, " he says.

In the final analysis, it may be that the reason we are now in a pensions dark ages is that our strategy was structurally flawed from the outset.

Altmann concludes: "Successive governments offloaded onto the corporate sector something that is the responsibility of the state almost everywhere else in the world.

"They said: 'Let companies take the strain and it will all be fine.' But it was never going to be fine. It was always an illusion."

Copyright 2005 SMG Sunday Newspapers Ltd.
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