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Art of predicting right numbers as people live longer.

The fact that we are all living longer should be universally welcomed as good news, one would have thought.

However, while actuaries are happy to celebrate our longevity on a personal level, professionally it is causing them some problems.

Projecting future mortality rates is crucial to an actuary working with pension schemes but doing so with any degree of accuracy is becoming increasingly difficult.

As Gordon Sharp, a director at KPMG and chairman of the Pensions Board of the Actuarial Profession, puts it: "The big issue is that every time we produce new mortality tables, we find that mortality rates are actually improving at a faster rate than we anticipated with our previous projections of future mortality rates.

"We are finding that the gap {between projections and reality} is much wider than in the past and we asking ourselves whether it a permanent or a temporary thing?

"There has certainly been a vast improvement in people born between 1925 and 1940, the so-called golden cohort."

The reason that accurate predictions in this area are so important to actuaries is self-evident.

If people are living longer, then the pension scheme pays out for a longer period of time and this puts financial pressure on the scheme and could lead to the necessity of increasing contributions.

And while a portion of the media and the Government may be constantly re-iterating the fact that issues such as the increase in morbid obesity puts many lives at risk, the figures suggest this is outweighed by improvements in medical science in other areas.

"About five years ago, pension actuaries might assume a 65-year-old would live until 82. Now we are assuming that figure is 85," says Mr Sharp.

"In terms of the pension lifetime, that is a big increase. There is still no sign of the rate of improvement slowing down and the debate now is whether pension schemes can cope.

"Some of this is to do with the advances in treating heart and other circulatory problems. If we get a similar improvement in cancer treatment, life expectations will be even higher.

"People are living longer and that is a challenge to us as actuaries. We are starting to look at this in more of a scheme specific way now."

The other challenge facing pensions actuaries is dealing with increased regulation in the profession.

An actuary deals with the financial impact of risk and uncertainty. He evaluates the likelihood of events and quantifies the contingent outcomes in order to minimise losses associated with uncertain events.

This is crucial in the pensions field where the amount of a future payment, or the likely period over which it will paid, is uncertain but can be calculated with a fair degree of accuracy.

The job, then, is part risk assessor, part mathematician and part informed soothsayer.

Effectively regulating a profession that is based on analysis of future events isn't the easiest of tasks.

Which is why much of the regulation covers not the analytical aspects of the job but concentrates on areas such as how a pension scheme is valued, industry standards and potential conflicts of interest.

A value needs to be placed on a scheme's accumulated pension promises. This could be for a formal valuation of a whole scheme, which is legally required every three years, or for an individual's benefits.

A new regulatory regime for the profession was initiated following the Morris Review. From last May, technical actuarial standards have been set by a new independent body, the Board for Actuarial Standards, working under the Financial Reporting Council, which also oversees the profession's broader regulatory responsibilities.

It is, to a degree, self-regulation based on a memorandum of understanding.

Mr Sharp takes the view that the profession was moving in the right direction anyway and that much of its thinking about future conduct and responsibilities was echoed in the Morris Review.

"The Morris Review said that you could give clear guidelines to actuaries," says Mr Sharp.

"What we have been saying anyway, on conflicts of interest, has been brought into much sharper focus because of the Pensions Act 2004."

In the past, says Mr Sharp, potential conflicts of interest could easily arise if an actuary was involved with both a trustee and an employer.

"Some trustees and employees are now seeing the need to have separate advisers," he says.

"That is feeding through to a certain extent but it can take a while to trickle down to smaller companies."

There is, however, a middle ground.

"You can get the same firm advising trustees and employers but you would need to have different teams. It can work but it has to be structured properly," says Mr Sharp.

"You also need to tell the client about any potential conflicts.

"We've spent a lot of time looking at it. Conflicts are to some extent inevitable but being professional is about managing any conflict."

The big issue is that every time we produce new mortality tables, we find that mortality rates are actually improving at a faster rate than we anticipated with our previous projections of future mortality rates. We are finding that the gap is much wider than in the past and we asking ourselves whether it a permanent or a temporary thing?

Gordon Sharp, director at KPMG and chairman of the Pensions Board of the Actuarial Profession

CAPTION(S):

Gordon Sharp, a director at KPMG and chairman of the Pensions Board of the Actuarial Profession; People are living longer, which means that pension schemes are paying out for longer
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Publication:The Birmingham Post (England)
Date:Dec 6, 2007
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