Taking control of the accounting process
RSA Insurance Group plc (“RSA”), the leading global insurer, licensed RiskFirst’s risk management platform PFaroe in the summer of 2012 to help improve management and oversight of its two largest UK pension schemes, which have combined assets and liabilities in excess of £6 billion.
RSA’s key business case for implementing PFaroe centred on bringing in-house the regular IAS19 accounting processes – to not only improve speed and efficiency, but also, crucially, to reduce cost. In addition PFaroe would provide a greater understanding of the schemes’ risk profiles and provide information on different funding scenarios which would be helpful in funding negotiations with the Trustees.
A clear business case
RSA looks at its two schemes through three key lenses: funding, accounting and capital. The scheme sponsor felt that it could improve efficiency and accuracy in all three areas:
1. Funding valuations
At the time of PFaroe implementation, RSA was gearing up for the triennial funding valuations. Clearly, funding negotiations are a material concern for RSA, as well as the Trustees, meaning that preparation is of paramount importance. As such, RSA felt that granular information on the schemes’ liabilities, as well as the sensitivity to different assumptions, would be useful in enriching the conversation with the Trustees.
2. Accounting valuations
RSA traditionally relied on information from its advisors when producing the main year-end IAS19 accounting disclosure. In the intervening period, internal actuaries would apply high-level sensitivities formed at year-end to “roll-forward” the valuation, and report internally. RSA was of the opinion that allowing the internal actuaries to access real-time information more regularly, and perform more accurate stress-testing on demand, would be a huge boon to the finance team which used the data (and was increasingly asking questions of the validity of the quarterly valuations).
3. Capital position
RSA produces regular updates of its schemes’ capital positions, as well as the formal reporting to RSA’s regulators. It was felt that implementing PFaroe would drive more accurate information and therefore ensure the robustness of these calculations.
Carole Sheldon, RSA pensions actuary, comments: “As an insurance company, we had the actuarial capabilities to bring the accounting processes in-house, and there was a clear financial incentive to do so. The fact that PFaroe would allow us to perform our year-end accounting valuation at a cheaper annual cost was justification alone for implementation.”
Sheldon adds: “The fact that the software would also allow us to change key assumptions prior to execution to test a range of differing suggestions and advice, in real time, was a bonus – and we could see how this may have significant benefits in terms of risk management and our decision-making processes. Everyone who saw the platform – from our corporate finance team, to our financial reporting, capital, and actuarial colleagues, as well as the auditors –realised that it could greatly add to our risk management and reporting processes, and save time and money.”
Outlining the benefits
Allowing the internal actuaries access to information on a regular basis has put the control in the hands of the sponsor, improving the robustness and timeliness of reporting for accounting purposes. Also, PFaroe was invaluable during the 2012 funding valuation process, enabling RSA to perform its own assessment of the funding position very quickly and fully engage in the process.
“PFaroe was flexible, quick, user friendly and crucially we could “drive” it ourselves,” says Sheldon. “Another major factor was that this was an independent tool that we could use objectively, without the necessary need for add-on consulting.”
RiskFirst’s Software as a Service (SaaS) model granted this control while removing the need for RSA to handle the installation, set-up and daily upkeep and maintenance of the technology, all handled by RiskFirst’s team of experts.
“The third-party service also helped from a reporting aspect,” adds Sheldon. “Having RiskFirst verify our valuations as accurate – subject to the data we put in and the assumptions we make – is welcomed by our auditors, who are keen to see such third-party verification.”
2. Flexibility and understanding
The ease-of-use of PFaroe, combined with demands from the financial department for more regular internal information, has seen RSA move from calculating its IAS19 accounting position on a quarterly basis to a monthly basis.
It has also driven increased flexibility with regards to sensitivity analysis, which has helped improve the scheme’s understanding of how liabilities may fluctuate given different assumptions.
“When we used to consider changes to mortality assumptions, discount rates or inflation, we had limited information about the impact a change may have on the scheme’s liability profile,” comments Sheldon. “Having access to PFaroe helps me in performing sensitivities very quickly, and assessing the impact of using different bases. The quality and robustness of the tool which runs off individual member data also gives me greater comfort that we are producing accurate information.”
3. Better placed to capitalise on opportunities
Given its business, RSA is a very sophisticated risk manager and PFaroe provides it with the analytical tools to allow better management of its defined benefit risk exposures. Being able to view liabilities on demand, puts the scheme in a much stronger position to de-risk appropriately when market conditions allow.