Interview with Scheme Actuary
We spoke with Kirstie Nicholls, our Scheme Actuary, to understand a little more about her role and how your benefits are valued.
Q: What is an actuary?
A: An actuary is a qualified professional who assesses and manages financial risk. Actuaries work in a range of areas, but in a pension scheme the actuary works closely with the Trustee and with other professional advisers, such as investment managers and pension administrators, to help the Trustee ensure that the pension scheme is operating effectively and efficiently and has enough money to pay members’ benefits.
Q: Interesting, and how do you specifically help the Trustee?
A: The Trustee of the pension scheme must appoint a Scheme Actuary to calculate and advise on the financial obligations of the Scheme. The Trustee has to obtain a full valuation of the Scheme at least every three years. This involves the Scheme Actuary advising on the appropriate assumptions to use for future investment returns, inflation and life expectancy and using these, together with the member records held and maintained by the Scheme’s Administrator, to calculate the expected liabilities of the Scheme (the value of all the benefits built up by members of the Scheme). This value is compared to the assets held to determine whether the Scheme is adequately funded and if this is not the case then the Scheme Actuary will work with the Trustees in discussion with the Employer to agree a plan for improving the funding position.
The funding position is monitored regularly, with an annual update being produced on the anniversary of the valuation in each year that a full valuation is not carried out.
Q: So, this is what the Summary Funding Statement covers?
A: Yes. The Summary Funding Statement is the communication to members that summarises the results of the valuation or annual update and its purpose is to help members understand the financial position of the Scheme and how this is being managed. The Statement sets out the funding position of the Scheme and how and why this has changed since the last Statement, how any funding shortfall is being met, what contributions are being paid to the Scheme by the Employer and other relevant information.
Q: Are there any further responsibilities you have, as Scheme Actuary, which we haven’t covered today?
A: Yes, members have a degree of choice about when, or in what format, they take their benefits from the Scheme. This requires actuarial factors to convert one form of benefit to another (such as transfer value factors to exchange pension for a cash sum that can be transferred out of the Scheme) or adjust pension for a variation in the period over which it will be paid (such as early retirement factors). The Scheme Actuary advises the Trustee on the appropriate actuarial factors to use for these calculations.
Q: That brings me to a specific question you can help us with. For deferred members an indicative transfer value is available online, via MyPension. The value seems to go up and down, does this mean deferred members benefits can go up and down?
A: The BAA Pension Scheme is a defined benefits scheme which means that the benefits for Deferred members are defined based on salary and service up to the date that they left the Scheme. A transfer value is an estimate of the amount of money required today to provide this defined benefit from the point the member retires, for as long as the member (and their Spouse/Dependant) live and allows for any potential future pension increases before and after retirement.
Interest rates are particularly important to the calculation of transfer values. As interest rates rise, you need a smaller amount of money today to generate the same income in the future and so transfer values decrease. Interest rates have risen significantly over the past few years, but continue to fluctuate, which is why members may see their transfer values go up and down on a monthly basis.
It is important to understand that members’ pension benefits in the Scheme are unchanged and a reduction (or increase) in the transfer value does not reflect a reduction (or increase) in the benefits payable to members if they were to stay in the Scheme and retire at their Normal Retirement Date.