Pensions - Articles - Canary in the coal mine

More than ever before, actuarial-trustee relationships in Britain’s largest pension schemes are going through considerable change. Almost half of schemes over £500m will change, or are considering changing, their actuarial consultant in the next year.

 By Paul Houghton, head of actuarial consulting at Barnett Waddingham
 This staggering statistic from our ‘Navigating Change’ report, which researches the views of senior trustees from £500m+ UK pension schemes, casts a stark light on the mounting challenges the pensions industry faces.

 Canary in the coal mine
 Schemes taking the decision to change actuarial consultant has been decidedly rare. It is often the longest established professional relationship a scheme has with an adviser. We believe this is a canary in the coal mine event; illustrative of a complex and arduous road ahead for schemes and consultants who fail to get to grips with a changing landscape.

 So what is driving Britain’s pension schemes to leave behind long standing relationships with their consultants? The catalyst is the environment mature schemes find themselves in today. Many have reduced investment risk through the use of liability driven investment (LDI), matching movements in asset values to changes in liability values. However, as the number of pensioners increases, schemes’ cashflow is becoming restricted, and turning negative. Schemes now face the end game of securing benefits for their members, and their need for security requires some reconsideration of strategy.

 Schemes are highly focused on major structural change or strategy realignment. Maturity and a focus on the potential end game of risk reduction, probably leading towards buyout, is a key consideration. Our research shows the majority (58%) of schemes are looking to increase their focus on the transition to the ultimate end-game stage as a priority, while 26% are currently considering it.

 Lack of free thinking
 That so many schemes are seeking new actuarial consultants suggests they are also looking for something different from their current actuary. A lack of free thinking and independence of thought is identified by 38% of schemes as being the second most common area where a consultant falls short of expectations.

 Some schemes clearly feel they are not getting the degree of free thinking they require from their existing consultant and are therefore looking for someone who can provide fresh thinking and new ideas.

 Independence of thought allows a consultant to be unrestricted in offering what they consider to be the most appropriate advice for the individual scheme they are advising. The scheme – and the consultant – can therefore be confident advice is not overshadowed or influenced by potential conflicts of interest.

 This should also deliver a more innovative approach for the next stage of a scheme’s development, by focusing on specific needs and finding suitable strategies.

 The pensions world has changed and so have the requirements of UK defined benefit schemes. Consultants must evolve to meet the challenges ahead or schemes will continue to vote with their feet.

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