Actuarial valuations: a 3-year long red herring

Actuarial valuations: a 3-year long red herring

Companies today rely on technology to speed up the majority of business processes



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Companies today rely on technology to speed up the majority of business processes. However, when it comes to actuarial valuations, people are adhering to an un-necessarily long procedure that’s largely ignored the advent of modern computer systems. As a result, actuarial valuations in their current state are failing to add value for both the employer and pension trustees; and this is at a time where pension risks are more substantial than ever.

A cottage industry

I believe the very concept of triennial actuarial valuations is outdated and should be scrapped. Today’s technology can now provide businesses with real-time information, which allows them to fully capitalise on what their data is telling them.  In such an environment, who would invent a three year cycle from scratch now?  I don’t think anybody would; and that in itself should tell us that it is time for change.

Despite this, over the years we have seen a cottage industry emerge which has grown out of the expired notion that valuations need to be a very complicated and time-consuming exercise (usually with most of the permitted 15 months being utilised). This is simply a red herring, but most actuaries’ clients do not understand the process well enough to challenge it.

A nine-month old snapshot

Can you imagine if the banking industry, for all their sins, ran themselves on nine-month old information? This is the status quo for actuarial valuations (indeed, nine months might actually be quite good!), and the consequences are wide ranging. For instance, when every three years there’s huge focus on one snapshot which is probably already nine-months old, it is far more likely that companies and trustees will be blind to the real underlying issues of their pension scheme, and they will miss significant risks. Meanwhile, the actuaries disappear from six to twelve months at a time to gather data and do calculations, often at an enormous expense.

This is also preventing those companies and trustees from capitalising on the here and now. Without real time information to hand, companies and trustees are unable to pursue short-term opportunities to ultimately get their members the best possible outcomes they can.

Overbearing tendencies

Sadly, even though the technology already exists to vastly improve actuarial valuations, I believe that self interest among some actuaries themselves is a barrier to necessary change taking place.  There can also be a tendency among senior actuaries to want to personally oversee everything: “It has always been done this way, and we know best”.  This does not bode well for those attempting to instigate change in an age-old process, especially when it is these senior actuaries who dominate the industry’s decision-making bodies.

A real-time solution is needed

Bearing in mind how much technology has revolutionised the governance of businesses and institutions for the better, for how much longer can pensions continue to be left behind? I foresee that as companies and trustees start to see the emergence of computerised actuarial valuation systems that work in real time, we will simply see them taking their business away from those who do not move with the times.  And as this happens, for how long will Regulations based on a three year cycle be sustainable?

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.

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