We are responding as an adviser to trustee clients and also to corporate sponsors of pension arrangements in the UK.

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1 Katie Bromley Senior Associate Tower Place West London EC3R 5BU Tel/Fax Actuarial Policy Team Financial Reporting Council 8th Floor 125 London Wall London EC2Y 5AS Subject: Revised Specific TASs - Pensions Dear Sir or Madam Thank you for the opportunity to comment on the consultation on the revised specific technical actuarial standards (TASs) and in particular on TAS 300: Pensions. Mercer is a global consulting leader in talent, health, retirement, and investments. In the UK, our client base includes employers and trustees providing occupational pension schemes to employees in all sectors of industry. We provide pensions advice and services to companies in the FTSE100, but we also have a larger proportion of clients that are employers classed as Small to Medium sized Enterprises, or trustees of pension schemes with sponsoring employers in this class. We are responding as an adviser to trustee clients and also to corporate sponsors of pension arrangements in the UK. In general, we welcome the new approach for the overall structure of the TASs, and that taken in developing the scope of the specific TASs. Our responses to the consultation questions are in the appendix to this letter, however we have also set out some areas below which we believe require further consideration for TAS 300: Pensions. We have not responded to the questions on TAS 200 or TAS 400. In summary, our key points are: Overall, the specific TASs, particularly with regard to the core principles, just seem to expand on principles already included in TAS 100. If you agree that is the case then, arguably, someone carrying out work only subject to TAS 100 should have regard to the specific TASs, since they add extra context to how the FRC views the application of the TAS 100 principles. Mercer Limited is authorised and regulated by the Financial Conduct Authority Registered in England No Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU.

2 Page 2 In that case, the restricted scope of the specific TASs becomes somewhat spurious. It might be helpful if the FRC could clarify that point in its consultation response. Scheme funding - paragraph 11 introduces a new requirement to state where relevant if and how the assumptions used take account of the employer covenant. The scheme actuary is not in a position to advise the trustees on the strength of the employer covenant as this is outside their area of expertise. They can however comment on how the assumptions can allow for the trustees assessment of the strength of the employer covenant and we suggest the wording is altered to reflect this. Scheme funding - paragraph 14 sets out that communications should include sufficient actuarial information to help the trustees understand how the covenant, investment and funding risks (and their interaction) impact the trustees funding and investment objectives. While this reflects to some extent TPR s code of practice on funding, we would question how much of this is actuarial information. As noted above, covenant advice will be outside the actuary s area of expertise and most trustees will also receive separate advice relating to investment strategy. The actuary is however able to help the trustees understand how covenant and investment strategy might impact on the funding strategy, through for instance the influence on assumptions and recovery plans and we suggest that this is made clearer. It is also not obvious that communications provided as part of the valuation should necessarily provide advice in the ongoing management of the funding and, in particular, the investment strategy. Appendix A covering the scheme funding report includes a new requirement that the Scheme Funding report (SFR) should describe the trustees funding objectives, investment strategy and approach to integrated risk management. It is not clear what this envisages in practice. The SFR does not relate to technical actuarial work, since it is (normally) produced after all decisions material to the valuation have been taken. Mercer has always considered it odd that it is covered in such detail in a TAS. With regard to the specific point, the trustees approach to IRM could potentially include lots of information, which would detract from the main function of the SFR (a compliance document available to members as a report on the valuation). Equally, a short statement that the trustees have developed an approach to IRM would be largely meaningless so we would suggest that the reference to IRM is removed. We would also note that the current Pensions TAS only requires the funding objectives and a summary of the investment strategy and would suggest that the same approach is retained. While we agree that many areas of employer advice are adequately covered by TAS 100 and therefore should fall outside the scope of TAS 300, we have some concerns around the areas

3 Page 3 of scheme funding advice and modifications of accrued benefits. While the advice provided to the trustees will be covered by TAS 300, the outcome of these exercises will depend on negotiation and agreement between the trustees and the employer. It seems somewhat unbalanced that, to the extent TAS 300 imposes additional responsibilities, this should fall only on the scheme actuary and not on the corporate actuary. Given the reliance that the majority of schemes have on the ongoing support of the sponsor, it seems equally important for advice to the sponsor to include (for example) a detailed assessment of risk, cash flow and volatility and the potential impact on the sponsor s business, as this could have a significant impact on member outcomes. It does not therefore seem reasonable for the FRC to put the onus on the scheme actuary to achieve the FRC s risk mitigation objective, and we would argue some of this responsibility should also sit with the corporate adviser. Technical actuarial work for scheme sponsors relating to incentive exercises is in scope of TAS 300. However, while we acknowledge that the TAS definition has not changed, we think the use of the term incentive exercise is potentially misleading. In particular, as defined, it covers exercises where there is no member incentive but an objective is to reduce risk or cost for the employer and, as a result, it is not entirely clear how it differs from some modification exercises. Our response to the consultation is attached in the appendix to this letter. We would welcome the opportunity to discuss them further with you if that would be helpful. Yours faithfully Katie Bromley Enclosure Mercer helps clients around the world advance the health, wealth, and performance of their most vital asset their people. Mercer's more than 20,000 employees are based in 42 countries, and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies, a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital.

4 Page 4 APPENDIX COVERING CONSULTATION PAPER QUESTIONS C.2.1 Do you have any comments on the risk assessment process described in paragraphs 2.2 to 2.15? In general we agree with the approach, although it would be helpful to have clarification about how the FRC proposed to deal with new risks, or with changing views on the potential impact of existing risks. C.2.2 Do you have any comments on our proposed approach to risk monitoring (paragraphs 2.16 to 2.21)? It is sensible to review and 5 years seems reasonable, although some events may potentially require a more urgent response. C.3.1 Do you agree that the design principles described in paragraph 3.3 will help to ensure that the Specific TASs form a coherent and risk-focussed set of requirements that apply alongside TAS 100? Broadly yes while we support the aim that the specific TASs should not duplicate or repeat TAS 100, we would note that the core provisions of TAS 300 appear to do this to a large extent. C.3.2 Do you agree with the proposed style and structure of the revised Specific TASs outlined in paragraphs 3.8 to 3.15? Yes although we believe that further consideration be given to the inclusion of Appendix A covering the scheme funding report. Appendix A is notably more detailed and directional than the rest of TAS 300 and the SFR does not relate directly to technical actuarial work. C.3.3 Do you have any comments on draft Glossary of defined terms used in FRC technical actuarial standards? We have the following comments: The term incentive exercise is no longer appropriate. In many cases there is no incentive provided in the exercises covered by the term which has the potential for confusion. The definition of document is odd. Would it be clearer if the term being defined was to document? The definition of pension scheme seems circular and repetitive. We don t understand the need for professional in the definition of scepticism. Recovery plan does not appear to be defined, although it is in bold in TAS 300.

5 Page 5 C.6.1 Do you have any comments on proposed implementation of the revised Specific TASs? Implementation from 1 July 2017 seems reasonable although it would be useful for the FRC to clarify what the impact will be on work in progress that has not been finalised, in particular scheme funding valuations which have a 15 month deadline (and hence some might currently be in progress) may be not be completed before the proposed implementation date. ANNEX 2: TAS 300: PENSIONS QUESTIONS SCOPE OF TAS 300 P.1.1: Do you agree that technical actuarial work required by legislation to support decisions on contribution requirements or benefit levels should be in the scope of TAS 300? Yes however it may be useful to clarify the reference to benefit levels. We assume this refers to advice given to trustees in connection with decisions under section 229(2) of the Pensions Act 2004 (and hence required by legislation) rather than more general changes to benefit levels considered as part of a valuation. P.1.2: Do you agree that technical actuarial work to support employers in fulfilling these duties under section 229(1) of the Pensions Act 2004 should not be in the scope of TAS 300? We have some concerns about this as noted in our covering letter. While the advice provided to the trustees will be covered by TAS 300, the outcome of these exercises will depend on negotiation and agreement between the trustees and the employer. It seems somewhat unbalanced that different standards should apply to scheme actuary and the corporate actuary and this may increase the potential for acrimonious negotiations (at a time when the Regulator is keen to promote sponsor engagement). Given the reliance that the majority of schemes have on the ongoing support of the sponsor, it would seem equally important for advice to the sponsor to include detailed assessment of risk, cash flow and volatility and to allow the sponsor to understand the potential impact on its business, as this could have a significant impact on member outcomes. It does not therefore seem reasonable for the FRC to put the onus on the scheme actuary to achieve its risk mitigation objective, and we would argue some of this responsibility should also sit with the corporate adviser.

6 Page 6 P.1.3: Do you agree that technical actuarial work relating to the derivation of actuarial factors should be in the scope of TAS 300? Yes. However, it might be useful to clarify whether this is intended to apply to trustees and employers in the same way as the provisions for incentive exercises. The scope currently suggests this but the consultation document only refers to the governing body. We would also note that, although trustees might take advice from their actuary when reviewing scheme factors, the outcome might be that they select a factor, in accordance with scheme rules, that is not strictly actuarial. In these circumstances it is not clear that the advice would be in scope of TAS 300. P.1.4: Do you agree that calculations using actuarial factors should not be in the scope of TAS 300? Yes. We would note that the Pensions TAS doesn t cover calculations as such, but providing instructions to other parties on the calculations of benefits which use actuarial factors is in scope. To the extent that this is technical actuarial work, it would be in scope of TAS 100 and we agree that is does not need to be in scope of TAS 300. P.1.5: Do you agree that technical actuarial work concerning incentive exercises should be in the scope of TAS 300? Yes, although as noted we have some concerns over the term and its current definition. P.1.6: Do you agree that technical actuarial work for a governing body, relating to scheme modifications of accrued benefits, should be in the scope of TAS 300? Yes. P.1.7: Do you agree that technical actuarial work for scheme sponsors, relating to scheme modifications of accrued benefits, which are not incentive exercises, should not be in the scope of TAS 300? As stated above and in the covering letter, we have some concerns around this. We have already noted that the use of the term incentive exercise is potentially misleading. Therefore any attempt to distinguish incentive exercises and modification exercises could potentially result in confusion (we would note that the consultation document itself effectively refers to a PIE as a modification exercise type of incentive exercise ). It appears to us that the only material difference is that incentive exercises are with consent, but modifications requiring actuarial advice are not. While the consultation notes that modifications without consent may be made to simplify administration or to change the form of the benefits to obtain better terms from an insurer; often those better terms will be available due to there being a perception of less risk, for example different pension increases, and this is no different to a PIE. Consequently, we believe the differences between the two exercises needs to be clarified.

7 Page 7 More generally, it is inconsistent for advice to the governing body in such circumstances to be within scope but advice to the sponsor not to be in scope. It can potentially cause problems if advice to one party is subject to a TAS and advice to the other party is not. P.1.8: Do you agree that technical actuarial work for a governing body, relating to bulk transfers, should be in the scope of TAS 300? Yes. However, whilst incentive exercises and modifications largely affect defined benefit schemes, actuarial advice in relation to bulk transfers is also provided to trustees of defined contribution schemes. It might be helpful if this distinction was acknowledged even if it is not felt necessary to amend the principles. P.1.9: Do you agree that technical actuarial work for scheme sponsors relating to bulk transfers should not be in the scope of TAS 300? As stated above, we have some concerns around this. In our view, it is not appropriate for the FRC to seek to mitigate risk solely via trustee advice. In relation to bulk transfer decisions, these can sometimes be arrived at without a governing body being involved. P.1.10: Do you agree that the areas of technical actuarial work described above should not be in the scope of TAS 300? Yes, given that they will be covered by TAS 100. P.1.11: Are there any areas of technical actuarial work, including those described above, which respondents consider should be in the scope of TAS 300? No. However, we would note that the current provision in the Pensions TAS that no adjustment shall be made to any assumption used in, or proposed for use in, a model to compensate for a shortcoming in another unrelated assumption is not included in the revised TASs and it is not clear from the consultation document as to the reason for this. However it is likely to be balanced by the requirements in TAS 100 for consistency in assumptions and to explain their derivation. TAS 300 PROVISIONS P.2.1: Do you have any comments on the proposed core provisions? We would note that while they might add clarity to the requirements of TAS 100 in certain situations, they don t appear to require anything additional. Hence if the aim is to avoid repetition it is not clear that they need to be specified.

8 Page 8 P.2.2: Do you have any comments on the proposed provisions for scheme funding and financing? We have already noted some concerns in this area, in summary: In general, we support the new requirement to help trustees understand the level of prudence in the assumptions without necessarily requiring quantification, which is required (on a neutral basis) by the current Pensions TAS. We would however observe that level of prudence is not a well-defined term. While it is frequently used to refer to margins in bases, it does not reflect the legal requirement, which is to choose assumptions prudently. In particular, it is not the case that the greater the margin, the more prudent the assumption. In addition, a new actuary may not be able to explain the change in level of prudence since the last valuation. Paragraph 11 introduces a new requirement to state where relevant if and how the assumptions used take account of the employer covenant. The scheme actuary is not in a position to advise the trustees on the strength of the employer covenant as this is outside their area of expertise. They can however comment on how the assumptions can allow for the trustees assessment of the strength of the employer covenant and we would suggest the wording is altered to reflect this. Paragraph 14 sets out that communications should include sufficient actuarial information to help the trustees understand how the covenant, investment and funding risks (and their interaction) impact the trustees funding and investment objectives. While this reflects to some extent TPR s code of practice on funding, we would question how much of this is actuarial information. As noted above, covenant advice will normally be outside the actuary s area of expertise and most trustees will also receive separate advice relating to investment strategy. The actuary is however able to help the trustees understand how covenant and investment strategy might impact on the funding strategy through, for instance, the influence on assumptions and recovery plans. We suggest that this is made clearer. It is also not obvious that communications provided as part of the valuation should necessarily provide advice on the ongoing management of the funding and in particular the investment strategy. P.2.3: Do you have any views on whether TAS 300 should contain detailed requirements on the contents of scheme funding reports? Appendix A covering the scheme funding report is notably more detailed and directional than the rest of TAS 300 and elements of the contents of the Scheme Funding report are already covered in legislation. It would be preferable to cover these requirements separately, for example, in a technical memorandum.

9 Page 9 In addition we have some concerns regarding the proposal that the Scheme Funding report (SFR) should describe the trustees funding objectives, investment strategy and approach to integrated risk management. It is not clear what this envisages in practice. The trustees approach to IRM could potentially include lots of information which would detract from the main function of the SFR. Similarly, a short statement that the trustees have developed an approach to IRM would be largely meaningless. Instead, we suggest that the reference to IRM is removed. We would also note that the current Pensions TAS only requires inclusion of a summary of the investment strategy and would suggest that the same approach is retained. P.2.4: Do you have any comments on the proposed provision for factors for individual calculations? No. P.2.5: Do you agree with the proposed provision for incentive exercises, scheme modifications and bulk transfers? The transformation TAS highlights consideration of fairness between classes of members. We expect this is covered by principle 19, but it could be more clearly expressed. Also different classes of member is not well defined and could have multiple meanings for a given exercise so the intention could be made clearer. Finally, as noted previously it may be helpful to clarify whether bulk transfers of DC members would also be covered by the provisions. IMPACT P.3.1: Do you agree that the replacement of the Pensions TAS with TAS 300 will not lead to disproportionate costs? Yes. P.3.2: Do you have any comments on our analysis of the impact of the changes set out in section 3? No