Consultation: Revised Specifi c TASs Annex 2: TAS 300 Pensions

Transcription

1 Consultation Financial Reporting Council May 2016 Consultation: Revised Specifi c TASs Annex 2: TAS 300 Pensions

2 The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. We represent UK interests in international standard-setting. We also monitor and take action to promote the quality of corporate reporting and auditing. We operate independent disciplinary arrangements for accountants and actuaries, and oversee the regulatory activities of the accountancy and actuarial professional bodies. The FRC does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it. The Financial Reporting Council Limited 2016 The Financial Reporting Council Limited is a company limited by guarantee. Registered in England number Registered Offi ce: 8th Floor, 125 London Wall, London EC2Y 5AS

3 CONTENTS PAGE 1 Scope of TAS TAS 300 provisions 7 3 Impact assessment 14 4 Invitation to comment 16 Financial Reporting Council

4 Consultation: Revised Specific TASs Annex 2: TAS 300: Pensions (May 2016)

5 1 SCOPE OF TAS 300 Introduction 1.1 In this section we set out our proposals for the scope of Technical Actuarial Standard 300: Pensions (TAS 300). In deciding whether to include work in the scope of TAS 300 we have used the risk assessment process described in section 2 of the covering consultation document. 1.2 As a result of that assessment, the technical actuarial work described in paragraphs 1.4 to 1.24 is in the proposed scope of TAS In addition, there are a number of areas of technical actuarial work within the scope of the current Pensions TAS which are not in the proposed scope of TAS 300. These are described in paragraphs 1.25 to Summary 1.4 The proposed scope of TAS 300 covers four broad areas of work: actuarial work which affects the funding or financing of private and public sector pension schemes; actuarial work underpinning the derivation of actuarial factors used to calculate benefits such as transfer values, lump sums at retirement and early retirement pensions; actuarial work to support incentive exercises such as enhanced transfer value (ETVs) or pension increase exercises (PIEs); and actuarial work for governing bodies concerning changes which may affect members benefits from bulk transfers or modifications of accrued benefits. 1.5 All other technical actuarial work in pensions is in the scope of TAS 100: Principles for technical actuarial work. Scheme funding and financing 1.6 There are more than 6,000 defined benefit (DB) pension schemes in the UK with around 11m members in the private sector 1 and 13m in the public sector 2. The value of the liabilities is estimated to be more than 1trn in each of the private and the public sector. 1.7 Actuarial advice underpins decisions on contributions, benefit levels and related matters. This advice is supported by technical actuarial work which is heavily dependent on actuarial judgement, applies assumptions which are forward looking and long-term and so subject to significant uncertainty, uses data which may be limited and models which are often complex. 1.8 In view of the reliance decision-makers place on actuarial work, the number of members and the size of the liabilities, and the complexity of the underlying actuarial work we are 1 The Purple Book 2015 published by the Pension Protection Fund 2 ONS Occupational Pension Schemes Survey: 2014 Financial Reporting Council 1

6 proposing to include actuarial work required by legislation (eg Part 3 of the Pensions Act 2004) to support scheme funding and financing of all DB schemes (both public and private sector schemes, and both funded and unfunded) in the scope of TAS We have limited the work in scope to work required by legislation so that other technical actuarial work relating to funding and financing such as ad-hoc updates on the funding level would not be in the scope of TAS 300. Such work would, however, be in the scope of TAS The Scheme Funding regime imposes obligations on trustees and employers to reach agreement or consult on certain matters. The scope of the current Pensions TAS includes work to support employers in fulfilling these duties under section 229(1) of the Pensions Act 2004; however, the Act does not include any specific requirements thus inclusion in the scope of the Pensions TAS acts as a mechanism to require the Generic TASs to apply to this work. We consider that this work is adequately covered by TAS 100 and therefore do not propose to include it in the 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? 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? Factors for individual calculations 1.11 Actuarial factors are used to calculate some of the benefits available to members of DB pension schemes. Members benefits, including transfer values, cash lump sums at retirement and early/late retirement pensions, are often determined by the application of actuarial factors. While the factors may often be set by the trustees or other governing body, actuarial advice will usually underpin the selection of the factors. Small changes in the assumptions for the underlying factors can have a material impact on members benefits and we therefore propose to include technical actuarial work concerning the derivation of actuarial factors in the scope of TAS The calculation of an individual s benefits using actuarial factors is in the scope of the current Pensions TAS. Calculations are in the main mechanistic the key area of judgement is the selection of assumptions for the derivation of actuarial factors. We therefore consider that the risk to the public interest from the actual calculation of benefits using actuarial factors is not significant enough to warrant inclusion in the scope of TAS 300. 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? P.1.4 Do you agree that calculations using actuarial factors should not be in the scope of TAS 300? Incentive exercises 1.13 Incentive exercises are invitations or inducements provided to members to change the form of their accrued DB rights in a pension scheme, which are made to reduce risk or cost for the pension scheme or employer(s), and are not ordinarily available to members of the pension scheme. 2 Consultation: Revised Specific TASs Annex 2: TAS 300: Pensions (May 2016)

7 1.14 There are broadly two types of incentive exercise: exercises involving transfers out of a DB scheme these include enhanced transfer value exercises (ETVs) and total pension increase exchange exercises (TPIEs); and modification exercises within the DB scheme these include pension increase exchange exercises (PIEs) Actuarial work is carried out at various stages of these exercises and can influence the terms of incentives offered and the communications to members. We consider that employers and trustees should have sufficient information so that they can understand how incentive exercises might affect members. We therefore propose to include technical actuarial work concerning incentive exercises in the 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? Scheme modifications 1.16 Accrued benefits in DB pension schemes may be modified with or without members consents Modifications without consent might, for example, be made to simplify administration when there are several different benefits bases or to change the form of benefits prior to buying out benefits to obtain better terms from the insurer. Section 67 of the Pensions Act 1995 requires actuarial certification of equivalence before a modification can be made without consent Modifications can also be made with members consent. These have become more popular recently with exercises such as pension increase exercises where members are offered a higher pension in exchange for foregoing some or all of their entitlement to pension increases Actuarial work is central to the calculation of the modified benefits. There is clearly a public interest where benefits are modified without consent and we consider there is an interest in situations where benefits are modified with consent as the impact of modifications can be significant on members. We therefore propose to include modifications in the scope of the Pensions TAS We have not included technical actuarial work for scheme sponsors on scheme modifications which are not incentive exercises (eg pension increase exchange exercises) in the scope of TAS 300 as governing bodies will almost always be involved in the decisions to modify any liabilities. This involvement acts as a risk mitigation. Technical actuarial work for sponsors on modifications will be in the scope of TAS 100. 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? 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? Financial Reporting Council 3

8 Bulk transfers 1.21 Bulk transfers of assets and liabilities from one DB scheme to another can take place following an acquisition or as part of a scheme rationalisation exercise. Bulk transfers may also be made to an insurer as part of a wind-up of a pension scheme. In these situations members benefits may change or be reduced Transfers may take place with or without members consent. In either situation there can be a significant impact on the security of members benefits and actuarial work will usually be involved We are therefore proposing to include technical actuarial work for governing bodies relating to bulk transfers to another pension scheme or to an insurer in the scope of TAS We have not included actuarial work for scheme sponsors on bulk transfers in the proposed scope of TAS 300 as governing bodies will almost always be involved in the decisions to transfer any liabilities. This involvement acts as a risk mitigation. Technical actuarial work on bulk transfers for sponsors will be in the scope of TAS 100. 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? 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? Other areas of work 1.25 In our risk assessment we analysed a wide range of technical actuarial work in pensions and in many cases considered that the work is not of high enough risk to the public interest to be in the scope of TAS 300. However, all such work will be in the scope of TAS The following paragraphs set out the areas of technical actuarial work that are currently within the scope of the Pensions TAS but we consider are adequately covered by TAS 100. Financial statements 1.27 Actuarial work relating to the preparation of information on pension schemes for financial statements is in the scope of the current Pensions TAS. While this work affects companies financial statements it does not directly affect individuals. Furthermore, the accounting standards limit the scope for variation in the individual numbers produced as the approach for selecting assumptions and the methodology for calculating the numbers are set out in the accounting standards. For these reasons we do not consider that the net risk to the public interest from actuarial work supporting financial statements is great enough for the work to be included in the scope of the revised Pensions TAS. TAS 100 will apply to this work. Defined contribution projections 1.28 Actuarial work for projections of benefits from defined contribution schemes is in the scope of the Pensions TAS except where the assumptions are prescribed. The work in the scope of the Pensions TAS includes the selection of assumptions (where not prescribed) and the calculations. 4 Consultation: Revised Specific TASs Annex 2: TAS 300: Pensions (May 2016)

9 1.29 The calculations for projections are relatively straightforward and often carried out by non-actuaries. Key assumptions for statutory illustrations are set out in FCA rules and our standard AS TM1. For these reasons, as the actuarial element of the work will now be in the scope of TAS 100 and as projections do not directly affect members benefits, we are not proposing to include technical actuarial work concerning defined contribution projections in the scope of TAS 300. Reserved work not specified in the Pensions TAS 1.30 There are several areas of work where regulations or other legal obligations require that work be performed by an actuary (reserved work). Some of this reserved work is heavily regulated and some is carried out following guidance and using assumptions provided by other bodies. Examples are the calculation of liabilities for the assessment PPF levy under s179 of the Pensions Act 2004 and the certification of a section 75 payment (Pensions Act 1995) into a pension scheme where there is an insolvency or when a participating employer leaves a scheme. As these areas of work will now be in the scope of TAS 100 and, as in many cases where work is reserved to actuaries, there are other regulations or guidance in place, we have decided not to include all reserved work in the scope of TAS 300. Disclosure of directors information in reports and accounts 1.31 Work performed to support disclosures of directors pension arrangements in annual reports and accounts is in the scope of the current Pensions TAS. We have decided not to include this work in the scope of TAS 300 as there is limited actuarial content to the work and the information does not directly affect shareholders There are also a number of areas of work that were not included in the scope of the current Pensions TAS and where we continue to consider that there is not of high risk to the public interest for that work to require specific standards in addition to TAS 100. Employer advice 1.33 Actuaries provide advice to employers on a wide range of areas. We have considered advice to employers under the Scheme Funding regime at paragraph Where the decisions are key to the benefits provided to members of a scheme, governing bodies are usually involved in the decision-making process and the work undertaken to support governing bodies on such matters is in the proposed scope of the TAS 300. With the exception of work on incentive exercises (see paragraphs 1.13 to 1.15) we propose not to include technical actuarial work for sponsors in the scope of TAS 300. Investment work 1.34 Many actuaries undertake investment-related work for governing bodies of pension schemes. The work is wide ranging and includes investment manager selection and asset liability modelling. However, by no means all or even most investment work is carried out by actuaries and many of the techniques used, while actuarial, are techniques used by other professionals Investment work was not included in the scope of the current Pensions TAS and we still consider that there is not sufficient risk to the public interest for that work to require specific standards and provisions in addition to TAS 100. We therefore propose not to include technical actuarial work for investment in the scope of TAS 300 but this work will be in the scope of TAS 100. Financial Reporting Council 5

10 Buy-ins 1.36 In recent years the volume of buy-ins, where blocks of annuities are secured in the trustees names, has increased significantly. Further growth of buy-ins is expected as pension schemes mature and get closer to full buy-out. The technical actuarial work for the trustees of a scheme effecting a buy-in might include a comparison of terms offered by different providers and an analysis of the impact of a potential buy-in on the funding of the scheme We have decided not to include technical actuarial work for governing bodies on buy-ins in the scope of TAS 300 as this work does not directly affect members benefits in practice buy-ins are investments. However, subsequent scheme funding work is in the scope of TAS 300. Mergers and acquisitions 1.38 Actuarial advice will usually be required by purchasers and vendors when there is a sale or corporate restructuring involving a DB pension scheme. The work may be complex and performed with tight deadlines. However, as the work involved does not directly affect members benefits we have decided not to include it in the scope of TAS 300. Subsequent technical actuarial work involving transfers of pensions or revised scheme funding plans are in the proposed scope of TAS 300. P.1.10 Do you agree that the areas of technical actuarial work described above should not be in the scope of TAS 300? 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? 6 Consultation: Revised Specific TASs Annex 2: TAS 300: Pensions (May 2016)

11 2 TAS 300 PROVISIONS Introduction 2.1 In this section we discuss the proposed provisions of TAS The proposals reflect the output of the third stage of our risk assessment process in which we determined what additional requirements could mitigate the identified risks effectively. 2.3 As with TAS 100 we have not included much of the supporting text in the existing TASs which provided background information and guidance. Core provisions 2.4 We propose to have core provisions which are applicable to all technical actuarial work in the scope of TAS 300 and support the principles in TAS 100. Data 2.5 UK or European law may override scheme rules in some areas. On occasions there may be uncertainty how scheme rules are affected by such changes the requirement to equalise benefits for men and women in pension schemes following the Barber judgement is a well-known example. Care needs to be taken to ensure that benefit definitions adequately reflect any overriding legislation. 2.6 There will often be some uncertainty about the benefits to be paid to some members. This uncertainty may arise from changes to benefits which were not clearly documented or from scheme consolidations. 2.7 If there is uncertainty about benefits, a decision must be made about the allowance for that uncertainty that should be made in benefit calculations. If the uncertainty is material, provision 5.5 of TAS 100 requires communications to indicate the nature and extent of any material uncertainty in the actuarial information. We therefore propose to include the following provision which is based on paragraph D.3.6 of the existing Pensions TAS, in TAS 300: If there is any uncertainty, arising from legislation or scheme documentation, in how the benefits are calculated, the data sought for any exercise shall include any known relevant legal opinions in the possession of the client in relation to the pension scheme in question. 2.8 Trustees may award discretionary benefits to members, such as pension increases above the rates guaranteed by the scheme or enhanced early retirement terms. When undertaking any technical actuarial work in the scope of TAS 300, the data collected should include a history of any such discretionary practices and information about the basis on which discretion is exercised so an assessment can be made of likely future discretionary awards. 2.9 We propose to include the following provision which is based on paragraph D.2.20 of the existing Pensions TAS, in TAS 300: The data sought for any exercise shall include information about any relevant practice concerning discretionary benefits. Financial Reporting Council 7

12 Assumptions 2.10 The Pensions TAS requires that mortality assumptions reflect the current and anticipated membership of the pension scheme in question. We propose to retain this requirement with the following provision concerning mortality assumptions (based on paragraphs D.2.18 of the Pensions TAS): Mortality assumptions shall reflect the current and anticipated membership of the pension scheme in question Provision 3.3 of TAS 100 requires communications to state the material assumptions and describe their rationale. For work within Specific TASs we consider that for material assumptions, communications should go one step further and describe how the assumptions have been derived We therefore propose to include the following provision in TAS 300: Communications shall explain the derivation of the discount rate, mortality (base rates and projections), price inflation and other material assumptions While this provision lists the discount rate, mortality and price inflation assumptions there may be other assumptions which are more material to the technical actuarial work in some situations Paragraphs 2.8 and 2.9 considered the collection of data on discretionary practices. Assumptions will be made about the future exercise of discretionary practices and we consider these assumptions should be communicated to the user. We therefore propose to include the following provision which is based on paragraph D.2.22 of the existing Pensions TAS, in TAS 300: Communications Communications shall state the extent to which assumptions take account of past experience of discretionary practices and information about the exercise of discretion in the future Paragraphs 2.5 to 2.7 considered material uncertainties arising from legislation or scheme documentation. Provision 2.4 of TAS 100 requires that any material uncertainty relating to data and its treatment is communicated to users. We consider that for technical actuarial work in pensions the communication of material uncertainties needs to be extended to include uncertainties arising from legislation or scheme documentation. We therefore propose to include the following provision which is based on paragraph D.3.7 of the existing Pensions TAS, in TAS 300: Communications shall include an explanation of any known material uncertainty, arising from legislation or the scheme documentation, in how benefits are to be calculated and how this uncertainty has been treated in the work. P.2.1 Do you have any comments on the proposed core provisions? Work specific provisions 2.16 We propose to have work specific provisions that are applicable to particular areas of work The proposed provisions for specified work are, in the main, derived from the existing Pensions and Transformation TASs. 8 Consultation: Revised Specific TASs Annex 2: TAS 300: Pensions (May 2016)

13 Scheme funding and financing assumptions 2.18 We consider that it is important that trustees understand the level of prudence in the assumptions used to calculate technical provisions. The Pensions TAS (paragraph E.2.10) requires aggregate reports to include a comparison of the technical provisions with a calculation of liabilities using neutral assumptions. We have had feedback that other methods might better explain the level of prudence in technical provisions. We understand the feedback and have decided to modify the approach in TAS 300 to require an indication, rather than quantification, of the level of prudence In addition, we consider that trustees should know whether the level of prudence has changed from the previous exercise and also why the level of prudence has changed. We therefore propose the following provisions in TAS 300: Communications shall include sufficient information to enable the governing body to understand the level of prudence in the assumptions and the resulting actuarial information. Communications shall include an explanation of, and reason for, any change in the level of prudence from the previous exercise The discount rate for Scheme Funding exercises will need to take account of the likely returns from the scheme assets now and in the future. The investment strategy itself is likely to change over time as the composition of the membership and the proportion of pensions in payment change. This is especially true for schemes closed to new members. We therefore propose to include the following provision which is based on paragraph D.2.16 of the Pensions TAS: Communications shall explain how the discount rates used, or proposed for use, compare with the return that can be expected from assets invested according to any stated investment strategy, including any anticipated changes in that strategy We consider that trustees should also understand how the return assumed in the construction of recovery plans is derived and whether the investment strategy can support it. We have therefore included a new provision which is similar to the provision described in paragraph 2.20 above: Communications shall explain how the return on assets assumed over any recovery plan compare with the return that can be expected from assets invested according to any stated investment strategy, including any anticipated changes in that strategy Understanding the current strength of employer covenant and how it could change in the future is key in helping trustees decide the appropriate level of risk when deciding their funding strategies and selecting assumptions. This is brought out in the Pensions Regulator s Code of Practice 3: Funding defined benefits 3. We have therefore included a new provision which requires an explanation of how, if at all and if relevant, allowance for employer covenant has been made in the assumptions. While the actuary might not assess the employer covenant, he/she should be aware of how the trustees allow for it in funding decisions. The proposed provision is: 3 Financial Reporting Council 9

14 Where relevant, communications shall state if and how the assumptions used, or proposed for use, take account of employer covenant. Scheme funding and financing Statutory duties 2.23 It is clearly important that those responsible for funding and financing decisions have the information they need to discharge their duties. Paragraph E.2.7 of the Pensions TAS requires aggregate reports to contain sufficient information to support governing bodies in fulfilling their statutory duties. We have retained this requirement in TAS 300 with the following provision: Communications shall contain sufficient actuarial information to support the governing body in fulfilling its statutory duties in relation to funding and financing. Scheme funding and financing Risk assessment and future evolution of the scheme 2.24 We consider that governing bodies need to understand material risks to their pension scheme in relation to funding or financing and how they will change over time. TAS R requires an indication of future cash flows and the projection of the results of similar exercises carried out for the same purpose (paragraphs C.5.10 and C.5.20 of TAS R respectively). We have not included these requirements in TAS 100 as we considered that they were too detailed for all areas of technical actuarial work We do however consider that governing bodies of pension schemes should have the information available to enable them to understand how the financial position of the scheme might change in the future. This is particularly important for pension schemes closed to new members where the cash flow of the scheme will eventually become negative. We have therefore included a provision requiring an indication or description of cash flows and projections of how the funding level (of a funded scheme) is expected to change over an appropriate period. The proposed period is not specified in the provision and should be appropriate for the scheme in question We also consider that it is important the governing bodies appreciate the uncertainty underlying any projections and we have therefore included a requirement for indication or description of the volatility of the future funding level and the major causes of the volatility The proposed provision is: Communications shall include sufficient actuarial information to enable the governing body to understand the material risks to the scheme in relation to its funding or financing and the future evolution of the scheme. The information that is provided shall include: an indication or description of future cash flows including their timing; projections of the funding level, or a description of how the funding level is expected to change over an appropriate time period(s) with an explanation of the choice of the time period(s); and an indication or description of the volatility of the future funding level and the major causes of the volatility Provision 5.6 of TAS 100 requires communications to state the nature and significance of material risks to entities in relation to technical actuarial work being performed. There is a similar requirement at paragraph 5.5 of TAS R Reporting Actuarial Information while paragraph E.2.3 the Pensions TAS built on this by setting out risks which should be considered in Scheme Funding work. 10 Consultation: Revised Specific TASs Annex 2: TAS 300: Pensions (May 2016)

15 2.29 For TAS 300, we propose requiring that sufficient information be provided to governing bodies so they can understand and manage the three key risks identified by the Pensions Regulator in its Code of Practice 3: Funding defined benefits 4 sponsor covenant, investment and funding The proposed provision is: Communications shall contain sufficient actuarial information to support the governing body in: understanding the employer covenant, investment and funding risks (and their interaction) to the governing body s funding and investment objectives; and managing a funding and investment strategy to achieve these objectives. Scheme funding and financing Reports of record 2.31 Section E.4 of the Pensions TAS sets out information to be provided in Scheme Funding reports. These reports are required by legislation and are completed after key decisions are made and do not support the decisions made by trustees in the scheme funding exercise. The reports, however, set out a record of key matters considered and agreed during the Scheme Funding exercise and are available to members on request. The reports are also useful reference documents for governing bodies and others We have had feedback that the prescriptive nature of section E.3 of the current Pensions TAS does not fit well in a principles-based standard. We are therefore proposing to include a provision which requires reports to be written so an informed reader can gain an understanding of the financial position of the scheme. We have then set out the requirements for the content of the report in an appendix to TAS 300. The information in the appendix is based on section E.3 of the Pensions TAS but with the inclusion of a description of the approach to integrated risk management and with projections (paragraph E.3.3) and cash flows (paragraph E.3.10) replaced by a description of how the funding level is expected to develop With this approach we could decide at this point or at a later stage to move the requirements to another document, for example to a Technical Memorandum The proposed provisions on Scheme Funding reports are: The Scheme Funding report, or equivalent report produced on the completion of a required funding assessment for pension schemes not subject to Part 3 of the Pensions Act, shall be written so that an informed reader can understand the financial position of the pension scheme, including its development since the previous assessment and how it might change in the future. The Scheme Funding report shall contain the information in Appendix A. This information is material; however the level of detail is a matter for judgement and information about complex matters should not be excluded on the grounds that it might be too difficult for some readers to understand. 4 Financial Reporting Council 11

16 The equivalent report produced on completion of the required funding assessment for a pension scheme not subject to Part 3 of the Pensions Act shall contain the information in Appendix A suitably interpreted for that scheme. P.2.2 Do you have any comments on the proposed provisions for scheme funding and financing? P.2.3 Do you have any views on whether TAS 300 should contain detailed requirements on the contents of Scheme Funding reports? Factors for individual calculations 2.35 When setting actuarial factors used to determine benefits such as transfer values and reduced pensions on early retirement, we consider that the governing body needs to understand the potential impact of different factors on the benefits of members We also consider that when setting factors it is important that the governing body understands the financial implications to the scheme and the sponsor of adopting the factors. Therefore an understanding of the differences between the assumptions used for deriving actuarial factors and the assumptions used for funding is important We also consider that the governing body should understand the reasons for differences between assumptions used for different factors for example cash commutation factors and transfer value factors which are more likely to be compared following the introduction of increased pension flexibilities in Additionally, we consider that it is important that governing bodies understand the circumstances when factors might need to be reviewed (eg when there is a material change in the funding level or where there is a change in market conditions) We therefore propose to include the following provision: Communications shall include sufficient information to enable the governing body or other decision-making entity to understand the financial implications of adopting the actuarial factors to be used in the calculation of members benefits. The information provided shall include: an indication of the financial impact of choosing different actuarial factors on the funding of the pension scheme and the members exercising options; the rationale for differences between assumptions used for different actuarial factors; the rationale for differences between assumptions used for actuarial factors and assumptions used for Scheme Funding and for actuarial factors used for other purposes; the implications of changes in market conditions; and the circumstances in which the actuarial factors should be reviewed The first, fourth and fifth bullets are based on the requirement at paragraphs D.4.4 and D.4.5 in the Pensions TAS. The third bullet is based on paragraph D.4.7 of the Pensions TAS (which applied to transfer value factors rather than all factors). The second bullet is new. 12 Consultation: Revised Specific TASs Annex 2: TAS 300: Pensions (May 2016)

17 P.2.4 Do you have any comments on the proposed provision for factors for individual calculations? Incentive exercises, scheme modifications and bulk transfers 2.41 Although incentive exercises, scheme modifications and bulk transfers are different we consider the high-level considerations for the governing body or decision-making entity are sufficiently similar to be grouped under one heading for the purposes of provisions in TAS For these exercises, which could all lead to a change in the amount, structure or security of members benefits, we consider that the governing body or other decision-making entity needs to understand the potential impact on beneficiaries including any the changes in risks to the benefits, material changes in cash flows and value of benefits. We therefore propose to include the following provision which is based on paragraphs D.4.2 and D.4.10 in the Transformations TAS. Communications shall include sufficient actuarial information to enable the governing body or other decision-making entity to understand how different classes of members might be affected by an incentive exercise, scheme modification or bulk transfer to another pension scheme or an insurer (with or without members consents).the information provided shall include: the impact on different classes of members benefits of adopting alternative assumptions; any changes in the material risks to the benefits of the different classes of members; any material changes to the cash flows to members resulting from the incentive exercise, scheme modification or bulk transfer; and the potential reduction in the value of the benefits of the different classes of members. P.2.5 Do you agree with the proposed provision for incentive exercises, scheme modifications and bulk transfers? Financial Reporting Council 13

18 3 IMPACT ASSESSMENT Introduction 3.1 In this section we consider the impact of our proposals on TAS 300 including the resulting benefits and costs; our analysis focuses on the impact of our proposals on work carried out by members of the Institute and Faculty of Actuaries (IFoA). Context 3.2 There are more than 6,000 defined pension schemes with over 11m members in the private sector and around 13m in the public sector. The liabilities are more than 1trn in each of the private and public sector. 3.3 These pension schemes are financed by payments from employers, member contributions and investment returns. Technical actuarial work supports decisions by governing bodies and sponsors on contributions and the level of benefits paid to members. Benefits Users and the public interest 3.4 TAS 300 has been drafted following a risk assessment process which identified work which is of high risk to the public interest. As a result the work in the scope of TAS 300 is of high importance to users and in particular includes technical actuarial work to support significant decisions on the funding and financing of pension schemes and work which directly affects members benefits. 3.5 We consider that TAS 300 in conjunction with TAS 100 will: assist governing bodies and sponsors in understanding risk and uncertainty when making key decisions concerning funding and financing; support governing bodies following complying with regulations and guidance including the Pensions Regulator Codes of Practice including Code of Practice 3: Funding defined benefits 5 ; assist governing bodies in setting actuarial factors which are appropriate for their schemes; and assist governing bodies and decision-making entities in understanding the impact of incentive exercise, bulk transfers and scheme modifications on the benefits of members affected Consultation: Revised Specific TASs Annex 2: TAS 300: Pensions (May 2016)

19 Practitioners 3.6 Practitioners will benefit from improvements to the structure, style and content of the TASs which will result in a simpler framework, reduced volume of regulatory material and standards which are easier for practitioners to use and understand. The changes should result in a reduction in time spent ensuring compliance with the TASs. Costs 3.7 The proposed changes should not lead to material changes to work which is currently in the scope of the TASs there are few additional requirements in TAS 300 and we expect that most work which is compliant with the current Pensions TAS will be compliant with TAS Evidence collected in our post-implementation review indicated that the transitional costs of implementing the TASs ranged between very small amounts and 10% of the actuarial costs of the relevant organisation. The costs depended on several factors including the nature of the work and the size of the firm. The costs were proportionally higher for smaller organisations. 3.9 We consider that the transitional costs to practitioners of implementing the revised Specific TASs should be considerably lower than the costs of implementing the original TASs and no more than 1% of the annual cost of performing actuarial work. This equates to a one off cost in the range of 5m to 10m for pensions work. Overall 3.10 We recognise that moving to any new regulatory framework will result in costs to amend systems and processes to reflect the revised framework. However, for areas of work within the current Pensions TAS, we consider that the longer term benefits of adopting a more efficient structure by replacing the TAS D Data, TAS M Modelling and TAS R Reporting with TAS 100 and streamlining both TAS 100 and TAS 300, will offset any transitional costs, and potentially result in long-term efficiencies Our post-implementation review of the TASs indicated that the long-term costs of complying with the TASs are not significant. We therefore consider that the long-term costs of complying with TAS 300 for work not covered by the TASs will not be significant We consider that the changes TAS 300 will not be as costly as the implementation of the current TAS framework as this is largely a review and update exercise rather than a fundamental change in the framework. P.3.1 Do you agree that the replacement of the Pensions TAS with TAS 300 will not lead to disproportionate costs? P.3.2 Do you have any comments on our analysis of the impact of the changes set out in section 3? Financial Reporting Council 15

20 4 INVITATION TO COMMENT Questions 4.1 The FRC invites the views of those stakeholders and other parties who wish to comment on the content of this document. In particular we would welcome responses to the questions below. Please provide reasons for your response and provide an alternative approach where you disagree with our proposals. Questions asked in the covering Consultation Revised Specific TASs (for information) C.2.1 Do you have any comments on the risk assessment process described in paragraphs 2.2 to 2.15? C.2.2 Do you have any comments on our proposed approach to risk monitoring (paragraphs 2.16 to 2.21)? 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? 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? C.3.3 Do you have any comments on draft Glossary of defined terms used in FRC technical actuarial standards? C.6.1 Do you have any comments on proposed implementation of the revised Specific TASs? Annex 2: TAS 300: Pensions 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? 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? 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? P.1.4 Do you agree that calculations using actuarial factors should not be in the 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? 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? 16 Consultation: Revised Specific TASs Annex 2: TAS 300: Pensions (May 2016)

21 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? 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? 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? P.1.10 Do you agree that the areas of technical actuarial work described above should not be in the scope of TAS 300? 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? P.2.1 Do you have any comments on the proposed core provisions? P.2.2 Do you have any comments on the proposed provisions for scheme funding and financing? P.2.3 Do you have any views on whether TAS 300 should contain detailed requirements on the contents of Scheme Funding reports? P.2.4 Do you have any comments on the proposed provision for factors for individual calculations? P.2.5 Do you agree with the proposed provision for incentive exercises, scheme modifications and bulk transfers? P.3.1 Do you agree that the replacement of the Pensions TAS with TAS 300 will not lead to disproportionate costs? P.3.2 Do you have any comments on our analysis of the impact of the changes set out in section 3? P.4.1 Do you have any comments on the text of the exposure draft of TAS 300? P.4.2 Do you have any further comments on the proposals in this consultation? Responses 4.2 A template for responses is available on the FRC website. 4.3 Comments should be sent electronically to: PensionsTAS@frc.org.uk. Comments may also be sent in hard copy form to: The Actuarial Policy Team Financial Reporting Council 8th Floor 125 London Wall London EC2Y 5AS 4.4 Comments should reach the FRC by 5 August Financial Reporting Council 17

22 4.5 All responses will be regarded as being on the public record unless confidentiality is expressly requested by the respondent. A standard confidentiality statement in an message will not be regarded as a request for non-disclosure. We do not edit personal information (such as telephone numbers or addresses) from submissions; therefore only information that you wish to publish should be submitted. If you are sending a confidential response by , please include the word confidential in the subject line of your We aim to publish non-confidential responses on our website within ten working days of receipt. We will publish a summary of the consultation responses, either as a separate document or as part of, or alongside, any decision. 18 Consultation: Revised Specific TASs Annex 2: TAS 300: Pensions (May 2016)

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