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Willetts calls for greater transparency in the pensions industry
17 November 2005, David Willetts MP, Senior Adviser to Punter Southall, a leading actuarial consultant, has called for greater openness in the pensions arena, particularly in three areas which he believes would make a major contribution to raising the quality of the debate on pensions. Speaking at a conference organised by Punter Southall, Blake Lapthorn Linnell and Grant Thornton LLP, “A New Direction for Pensions”, he said that much of the pensions debate is being carried out in the dark without basic information that people are entitled to have access to.
The three areas where David Willetts calls for more transparency are:
The methodology used by the Pension Protection Fund (PPF) to assess the state of company finances;
The assumptions used by the actuarial and accountancy profession about the life expectancy assumptions used in setting out companies’ pension liabilities
And openness from the Government on its own public sector pension liability.
Commenting in his speech, David Willetts said:
“Many people call for a long-term consensus on pensions. That is certainly something British business cares about as they have to plan ahead for pension promises that could still be with them in fifty years’ time. Similarly, individual savers need to have some confidence about the regime for their savings in the future. To achieve consensus we need clear and open provision of information. I am calling today for transparency in three particular areas where it seems to me that the whole long-term debate on pensions would be far better with reliable, open information shared by everyone.
“My first example concerns the Pensions Regulator and the Pension Protection Fund which have the power to approve or disapprove of many corporate transactions, and also have a major impact on a company’s finances via the insolvency risk rating they use in calculating the risk-related element (by far the largest component) of the pension protection levy. The Regulator uses Dunn and Bradstreet to assess the financial condition of British businesses and, although brief details of the key criteria used by them have been published, at the centre of the model is a “black box”, the contents of which are unknown.
“Some might say that it is important that businesses don’t know exactly how they are being assessed otherwise they may be able to make adjustments to their accounts to score better on the Dunn and Bradstreet test. But on balance the public interest is in favour of this information being publicly available so companies can work out how changes in their financial position will affect their rating for the purposes of the pension levy and wider regulation. If this information is kept secret the danger is a privileged few get access to information hidden to the many. Dunn and Bradstreet may regard their methodology as being as precious as Coca Cola’s formula for its syrup, but now that it has been put at the service of the Pension Protection Fund (effectively, a tax raising body) I think it needs to be in the public domain.
“My second example concerns reporting on the state of pension liabilities in the company’s accounts through FRS17. While much progress has been made to bring greater transparency to companies’ pension liabilities, the crucial assumption used for the life expectancy of pension scheme members in determining a company’s long-term pension liability is still very difficult, if not impossible, to track down. Changes in life expectancy have an enormous impact on a company’s pension liability, especially now in the days of low inflation. If companies were obliged to show this then we would be able to tell whether they were massaging their accounts by using excessively modest assumptions for future life expectancy. It is an important part of our ability to assess the financial strength of a company and should be publicly available information. Capital markets need this information if they are to function properly.
“My third example falls directly at the door of Government. One of the biggest single liabilities which Government faces is the obligation to pay public sector pensions in the future. We are entitled to have reliable, properly explained calculations by the Government as to the size of this liability. Some attempts have been made by individuals to calculate this cost (for example, the recent estimate of £817 billion as at March 2005 provided by Neil Record of the IEA), but the Treasury has not provided any estimate in the recent past. Despite my attempts through Parliamentary Questions it has proved impossible to get the Government to get a reliable and updated figure for the total liability with the basis for its calculations set out. We cannot preach transparency and openness to British business and British actuaries whilst the Government draws such a thick veil over its own financial position. This needs to change.”
For media information please contact:
Penrose Financial
Notes to editors:
Punter Southall:
Consulting actuaries Punter Southall & Co Ltd, and the independent financial adviser PSFM Ltd are businesses within the Sanlam Financial Services Ltd group.
Sister businesses include PSolve Asset Solutions, PSolve Alternative Investments and PSigma Investment Management (PSIM), which are divisions of PSigma Investments Limited and authorised and regulated by the FSA. PSigma Investments Limited is the regulated investment-business subsidiary of the Sanlam Financial Services Ltd group.
Drawing on the shared intellectual capital and expertise of the different businesses within the SFS umbrella, the group provides innovative, integrated, liability-led, client-focused investment and financial planning solutions.
Founded in 1988, the actuarial consultancy is managed by experienced principals, each of whom leads a multi-disciplinary team. The company prides itself on its combination of the highest technical expertise with its own, unique, consultative, creative and innovative approach. Punter Southall & Co provides a complete range of pensions consultancy and administration services including actuarial funding reviews; arrangement and review of risk benefit insurances; benefit calculations; communication of scheme benefits to employees; employee benefit design; financial and investment advice; pension scheme administration and statutory compliance.
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