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Actuarial Monitoring Programme – observations from pilot phase
Actuarial work plays a systemically important role in enabling transparent and well-functioning pensions and insurance industries. In September 2023, the Financial Reporting Council (FRC) launched the pilot phase of its actuarial monitoring programme.
This programme is designed to assess the effectiveness of the TASs, and enhance the quality of actuarial work being carried out by practitioners. The programme supports the FRC in setting principles-based, outcome-focused and proportionate actuarial standards.
The pilot exercise received submissions from across the pensions and insurance sectors, covering pensions funding valuation advice to trustees and sponsors, insurance actuarial function reports, and internal model validation reports.
The key observations from the pilot exercise are summarised in this publication where we identify examples of good practice as well as areas for improvement. We are mindful of the different environments within which pensions and insurance practitioners operate, which can influence the approach a practitioner takes when completing a piece of technical actuarial work and the extent of the communication and documentation considered appropriate in relation to that work.
We thank the participants for their positive engagement in the pilot phase of the monitoring programme and encourage practitioners to reflect on whether our observations apply to their specific circumstances, and use their judgement to determine how best to meet TAS requirements and demonstrate compliance.
We will continue to work with practitioners to support their efforts to meet the TAS requirements in a proportionate manner.
The FRC is currently preparing for the next cycle of the monitoring programme
To register your interest in taking part or if you would like to discuss the contents of this publication, please email your usual FRC actuarial contact or [email protected].
Further information can be found our website www.FRC.org.uk
Key observations from the Monitoring Pilot
Reliance on centrally developed processes, controls or models
Practitioners sometimes rely on processes or controls or models developed centrally within their organisation. For example, insurance practitioners may rely on the firm's data controls or model development and governance, and pensions practitioners may rely on central teams for aspects of assumptions setting or a standard valuation system for use across a range of pension schemes. In placing such reliance on the work of others, the practitioner has made a judgement that it is appropriate to do so. Such reliance will typically be material to the outcome of the technical actuarial work.
We observed a wide range of practice in explaining how the practitioner has gained comfort that the work relied upon, combined with any work carried out by the practitioner, meets the requirements of the relevant provisions of TAS 100 and any sectoral TAS applicable to the work.
In relation to the use of centrally developed models we observed several pensions cases where it was not clear how practitioners had complied with TAS 100 Principle 5 or considered Section 2.12 of Technical Actuarial Guidance: Models. As set out in TAS 100 Principle 5, the practitioner must ensure models used are fit-for-purpose and subject to sufficient controls and testing. They may exercise judgement on the extent to which reliance may be placed on the central team's TAS 100 compliance and evidence, where available, when complying with Principle 5. The practitioner will also need to consider how the model has been adapted to the scheme or product-specific circumstances.
Evidence of compliance
The pilot exercise has provided an opportunity to examine evidence of compliance with the TASs. Unsurprisingly, there is no established approach adopted by practitioners to evidence their compliance, though some organisations have internal compliance frameworks in place. We observed examples of good practice where the evidence provided by the practitioner demonstrated their consideration of the rationale behind the TAS provisions and explained how they had met the provisions.
This exercise has also highlighted to us that some consideration will be needed in relation to provisions where compliance is not always readily evidenced such as TAS 100 P7.5 and P7.6, around follow-up communications on information which was previously provided orally or was not understood. We will be exploring these aspects further in the next cycle of the programme.
Application of proportionality and materiality
The TAS requirements should be met in a way that is proportionate to the nature, scale and complexity of the decision or assignment to which the technical actuarial work relates and the benefit that the intended user would be expected to obtain from the work. The proportionate application of TAS requirements should help to inform practitioners' work efforts and avoid unintended burdens, resulting in higher quality technical actuarial work and ultimately, more effective decision-making.
During our review, we observed a range of practice as to how proportionality is interpreted and applied by practitioners. Below are some examples of cases where it was evident that proportionality and materiality had been considered:
- Within the pensions submissions we observed communications which clearly focused on items material to decision to be taken by the intended user.
- Within the insurance submissions we observed evidence of a proportionate level of model governance in relation to spreadsheet models used to support an actuarial opinion consistent with Technical Actuarial Guidance: Models, Section 7.
Practitioners are encouraged to refer to Technical Actuarial Guidance: Proportionality, which contains illustrative examples of how proportionality can be applied.
Application of TASs – using actuarial information as inputs
Within an insurance context, technical actuarial work may be in the form of validation or oversight of the work of others, such as within the second line or audit. In such cases, the input to the validation or oversight work will be in the form of output from the work being validated or overseen. For example, model outputs may be used as inputs to a model validation exercise.
In a pensions context, situations may also arise where an actuarial practitioner is using output produced by another practitioner as input to their work. For example, a practitioner may use the output from a scheme actuary's valuation as input to their corporate pensions advice.
In both contexts, we observed that some practitioners did not evidence how they gained comfort that the inputs were appropriate for use in their work. Under these circumstances, the inputs could be considered to constitute data for the purpose of the technical actuarial work in question and TAS 100 P3.1 requires practitioners to ensure effective checks and controls are applied. Further TAS 100 A3.1 requires that practitioners should ensure that the checks and controls applied to data are sufficient to establish whether the data is sufficiently accurate, complete and appropriate.
Documentation of work
TAS 100 Principle 6 requires practitioners to ensure documentation relating to their technical actuarial work contains sufficient detail to allow technically competent persons responsible for reviewing or providing assurance in relation to the work to understand the matters involved and assess the judgements made, allowing for proportionality.
Documentation is important for several reasons. It provides clear instruction and explanation to those who need to access the work, providing the information needed by a colleague should it become necessary to hand over responsibility for the work to them. It provides a record of judgements and decisions which enhance accountability, and the act of documenting material matters relating to data and models can act as an additional check on the work, mitigating the risk of errors.
Generally, we observed the quality of documentation to be consistently higher for insurance work, reflecting the regulatory environment that insurance practitioners operate in. In some pension submissions, documentation on material matters related to data and models was insufficient for technically competent individuals without direct involvement in the work to understand and assess the judgements made. We also observed instances where the documentation was not produced at the time the actuarial work was completed.
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