Love actuary? It's tough times ahead for the actuarial profession

Three years ago, at the height of the bull market, American actuaries were
coming under fire. In 2005, Charles Bryan, a former president of the
American
Academy of Actuaries, wrote an article warning that, although “at
first glance it appears that we have reached actuarial nirvana ­ lots of work,
great value placed on actuarial estimates and good pay ­ the whole position
could unravel.”

He pointed out there were more lawsuits ­ real and threatened ­ against
actuaries. What was particularly troubling was that these lawsuits were for
enormous sums relative to the fees that actuaries were receiving for their
calculations. Bryan used an example from the insurance world, pointing out that
an actuary’s fee for a loss reserve opinion could be around $50,000, while the
loss reserve estimate itself might be as much as $100m ­ 2,000 times as much as
the fee. An alleged error in the loss reserve, he said, could easily generate a
claim for $15m ­ or 300 times the fee.

Similarly, in an M&A deal where the actuary is asked to provide an
opinion on the target company’s final salary scheme, damages claims could dwarf
the fee if the scheme in question turns out to be in deeper distress than the
actuary indicated.

Actuaries on this side of the pond will breathe a sigh of relief that the UK
approach is not yet quite so geared to encouraging swingeing damages claims. Yet
according to Biggart Baillie pensions litigator, Brent Haywood, who has been
involved in several actions over the past few years, there are clear signs of a
marked upward trend in actions against actuaries here as well.

Professional negligence
The odds do not particularly favour litigants, however, unless the actuaries
have been disciplined by their own profession for professional negligence in the
case in question. This is not unheard of, since it is all too easy for
actuaries to find themselves in a conflict of interest having drifted into a
position where they are offering advice to both the company and the trustees.

“As a litigator you need a ‘nugget’ ­ some solid piece of evidence that you
can work from ­ and if you can find one, then it makes an action so much
easier,” Haywood says. The disadvantage that scheme trustees have in pursuing
actuaries is one of scale. Say, for example, they find themselves with a fund
that is massively short of achieving a match between its assets and its
liabilities to members and they feel that the actuary (and, often, the scheme’s
investment advisors as well) are to blame in some way.

To fund their action they will have to look to the assets of the scheme,
depleting them even further. The actuary, on the other hand, will often either
be part of a massive insurance company or will have professional indemnity
insurance from a very large insurance company.

“The stand the indemnity insurance people take is simple: they are not going
to roll over for any claim. They do not want to set precedents and they are
going to make you work all the way up to the point where they would be incurring
court expenses in what looks like a losing action for them,” Haywood says. “That
is a hard road to go down, but people are increasingly willing to contemplate
it.”

Blame game
David Robertson, a partner in
Mercer’s
financial strategy group, says while he has not seen much sign of a build up of
actions against actuaries in the UK, the blame game that is sure to follow the
present debacle in global equities is bound to generate some activity.

“One area where actuaries might be vulnerable is with certain scheme rules,
particularly involving contributions. Some schemes leave the setting of the
contribution rate solely with the actuary and there are probably a few actuaries
sitting rather uncomfortably right now,” he says.

Haywood points out the problem with going after actuaries is that you have to
prove they acted in a way that no reasonable actuary, standing in their shoes
would have acted, and that is a high hurdle to jump.

David Knox, pensions partner with law firm
Dundas
& Wilson, says in many instances it will come down to exactly
what the actuary was asked to do. “Trustees’ advisers are now advised to hire
expert advice in writing, with a clear written record of what it is that the
expert is being asked to do. The second duty, if you want to litigate and win,
is to look at the extent to which you can show that the expert has failed to do
this.

The third and final task is to connect that failure with real, quantifiable
loss,” he says. “Scheme de-risking strategies and the statutory funding regime
are focusing more attention on actuaries. The Cornwell and Allied Domecq cases
show the courts’ increasing interest. Recent stock market movements and the
FRS17 rules increase scheme deficits and could set up claims against actuaries
that set contribution rates that now look too low.”

If all that sounds as if bringing a winning action against actuaries is still
difficult, it is. Nevertheless, Biggart Baillie’s Haywood says he gets the
feeling that the actuarial profession has something of the “rabbit in the
headlights” look about it at present. The next year or two should be
interesting.