Charles Cowling of Mercer Human Resources Consulting and Tim Gordon and Cliff Speed of Hewitt Bacon & Woodrow, in a paper to be presented next week to the Institute of Actuaries, are calling on their own ranks to change the way they approach pension valuation, according to the Financial Times (FT).
The group is focusing on the actuarial practice of counting on strong future investment returns to pay promised pension benefits, allowing funds to feel flush with cash when in fact they are not. Using terms such as “100% funded on an ongoing basis” when a fund is in fact not solvent, as seems to be implied, should not be allowed, the consultants assert.
The three actuaries are calling on member of their profession to switch to methods based on solvency as understood by the average pension plan member. “We believe these practices have the potential to mislead and are not in the public interest,” the paper asserts, according to the FT. “We are concerned that there is an element of self-delusion within the actuarial profession.”
The group attributes the widespread use of such practices to intense competition in the advisor sector. “There is a natural tendency for clients to want low contribution rates and to present a positive picture to members,” the paper says. “This creates commercial competition between advisers, leading inevitably to strong pressure towards weaker actuarial bases and methods.”
The call for reform comes on the heels of the bear market of 2000-2003, in which many pension funds had actuarial reports that did not reflect the holes in their plans, according to the report.