Actuary Graeme Muir explains his role in helping the Golden Charter Trust safeguard plan holder funds, and tells funeral directors what simple tests can show them the strength of a trust.
Actuary Graeme Muir explains his role in helping the Golden Charter Trust safeguard plan holder funds, and tells funeral directors what simple tests can show them the strength of a trust.
Malcolm Flanders [00:00:04] Hi, I'm Malcolm Flanders and I'm the director of Emerging Market Insight at Golden Charter. Welcome to another Partnership Podcast, our 10 minute updates getting to the heart of issues across the funeral sector. Today, we're returning to the world of funeral planning trusts. They underpin the prepaid sector, protecting plan holders' funds, and of course, ultimately paying these out to funeral directors.
Malcolm Flanders [00:00:29] As Jim Auld recently told us, families will often want to know, is my money safe? So this time we're going to find out exactly what role an actuary plays in giving reassurance to plan holders and families. I'm hoping to understand why different trusts publish different actuarial information, and why some use different descriptions for what appears on the face of it to be the same measure.
Malcolm Flanders [00:00:54] Helping me to roll back the fog, I have Graeme Muir, who is the actuary to The Golden Charter Trust. Graeme, who works for consulting actuaries Barnett Waddingham, has been involved in funeral planning for more than 20 years, so has seen most of the potential pitfalls at firsthand.
Malcolm Flanders [00:01:14] So Graeme, delighted you’re with us here today. Can you give us some idea of the scope of the actuary's role for the trust here?
Graeme Muir [00:01:22] Thanks, Malcolm. A pleasure to be here. There are about 9,000 actuaries working in the UK. Most work in pensions or insurance, and only a very small handful work on funeral trusts. And for those like myself who do it will be for a very small part of their time. So it's a very tiny part of the actuary profession who actually get involved with the funeral and pre-paid planning industry.
Graeme Muir [00:01:47] It's certainly improved a lot since I qualified, but most of the population still have not heard of an actuary and even fewer know what we might do. So the answer to the question we all dread of what actuaries do is the really sexy ‘we are assessors of financial risks and uncertainties’.
Graeme Muir [00:02:07] Now pension funds, insurance funds, funeral trusts are all quite different in many ways, but very similar at a fairly basic level. They're all pools of assets that are built up to both accept future cash flows into them and pay out future amounts of cash, at times dependent on future uncertain events, and usually dependent on human survival or not. In simple terms, there's two fundamental questions. How much they need to pay into one of these funds, so there's enough to pay out what's been promised? Or given what has been paid in, what can we expect to pay out in future, at a very uncertain point in time? Actuaries, therefore, build quite complex mathematical and statistical models to try and forecast future outcomes and the risks associated with those outcomes to help answer these questions.
Graeme Muir [00:03:03] So our role for The Golden Charter Trust is to make a projection of future plan maturities, i.e. plan holder deaths, and then the amounts that the trust aims to pay to the funeral directors who perform the funeral. And compare that amount with the assets held by the trust, allowing for a prudent assessment of future investment returns on the assets.
Graeme Muir [00:03:24] This involves making lots and lots of assumptions about very uncertain future events. Of course, actual events are highly unlikely to ever be completely in line with previous assumptions. And so we carry out an actuarial valuation each year to assess how the trust is progressing and reviewing assumptions in light of what's actually happened, and what we might expect to happen in future. The rules of the Funeral Planning Authority, or FPA, suggest a three year interval between actuarial reviews could be reasonable. But The Golden Charter Trust goes beyond that, carrying out a full actuarial review every year.
Malcolm Flanders [00:04:03] Great. Thanks, Graeme. Very, very helpful. But on your last point, I'm guessing that must add some cost. Why carry out the review every year, if it's not a legal requirement?
Graeme Muir [00:04:16] Yeah. For a small trust, the extra cost could be significant, but for a large trust, such as The Golden Charter Trust it's relatively immaterial, and from a governance point of view, it's absolutely the right thing to do.
[00:04:31] The Golden Charter Trust holds over a billion pounds of someone else's money. Pre-paid planning is built in reassurance, so by reviewing each year and publishing the actuary statement online, and in regular reports, the Trust are confirming on an annual basis to all the plan holders, and their chosen funeral director, that the trust's assets are sufficient to meet the expected future funeral costs.
Malcolm Flanders [00:04:56] Understand, thanks Graeme. Now, a few weeks ago, we had Gareth Howlett as a guest and he was explaining to us how the trust sets its investment strategy to deliver the future returns, with the key aim of maintaining the funding level over 100% and meeting future funeral costs for all plan holders. So how do you incorporate this into the valuation?
Graeme Muir [00:05:19] Yeah, so in the valuation we project the future amounts that will be payable, and with the trustees' aims in mind, determine the amount required now to meet these future payments, and then compare that with the available assets. So in determining the amount required now to meet these future payments from the trust, we need to determine the expected future returns from the underlying investment strategy. So the actual investment strategy is a key factor in assessing whether the assets will be sufficient to meet the future payments from the trust.
Malcolm Flanders [00:05:52] Thanks. Now, a while ago, you mentioned the Funeral Planning Authority. What actuarial information did they require of trusts?
Graeme Muir [00:06:00] Yes, there have been some developments of late. The new FPA rules require the funeral plan providers, rather than the Trust, but the providers, to produce an asset adequacy report each year starting in 2020, which will include information on the Trust's assets and will reference the Trust’s actuarial valuation. That's in addition to the FPA's various requirements beyond the actuarial side of things.
Malcolm Flanders [00:06:24] Right. Well, that all sounds really comprehensive. But in a world where consumers expect businesses and the authorities to mitigate all potential risks, what does the FPA not ask for that other financial regulators do seek?
Graeme Muir [00:06:39] Yeah, to be fair, there is no simple, direct comparison. A pre-paid funeral plan trust, it's not a pension plan, it's not an investment product. So there will be differences. If regulatory supervision were to be beefed up, I think there are two areas where we might see a change. We may see a requirement for more transparency on the financial status of trusts. The Golden Charter Trust publishes the accounts of its wholly owned investment company, The Golden Charter Trust Ltd, which includes its key performance indicators and full details of the financial position and structure of the Trust.
Graeme Muir [00:07:17] Not all trusts are that transparent, and I can see that becoming more of a requirement in future. We may also see greater disclosure of the actuarial position of trusts and the assumptions used in the valuation. Different trusts will use different assumptions, reflecting different investment strategies, different mortality rates of plan holders, the amount of prudence built into their assumptions, etc. This is perfectly valid as we don't all have the same view of the future. Greater disclosure of valuation assumptions and funding positions will allow some level of comparison between trusts, but it would probably only be actuaries who could make those comparisons.
Graeme Muir [00:07:57] So to help make the comparison easier, we probably need the FPA, or some other regulator, to set out some simpler standards of measurement or metrics for trusts to report that most people can understand.
Malcolm Flanders [00:08:09] Great, thanks. Now look, I'm all for simplicity, so you are saying actually all trusts do not use the same basis of calculation, which makes comparisons difficult. So how can we make comparisons easier for funeral directors and plan holders?
Graeme Muir [00:08:25] Yes, I mean, it is perfectly acceptable for different trusts to adopt different assumptions, as in completing a valuation that actuary has take account the specific circumstances of each trust. For example, how a trust is structured will determine its tax position and with different structures available, the assumption about future levels of tax borne by trusts will mean different tax assumptions.
Graeme Muir [00:08:48] That said, I recently compared what looked like marketing led headline numbers released by another well-known funeral plan trust against the equivalent Golden Charter Trust numbers. What I found was that whilst the headline number produced by the other trust implied a higher funding level than The Golden Charter Trust, in reality, the two trusts were not that different in terms of funding positions, due to the way we think the other trust had allowed for future growth and plan values. In fact, The Golden Charter Trust was actually better funded if we just looked at some simpler metrics.
Graeme Muir [00:09:24] So some of the simpler metrics we could look at are numbers such as assets per plan. Just simply take the assets held by the trust, divide that by the number of plans. As long as you take into account the potential for a trust to have an unusually high number of instalment plans, a comparison this way, I think, is workable.
Graeme Muir [00:09:45] Another measure would be average plan value, and average plan liability. Simply, you could just compare the average amount held by the trust for each plan and how this compares with the average plan liability.
Graeme Muir [00:09:57] Another would be the average planned maturity paid out in, say, each of the last three years. Or the average increase in plan value over a similar period. Of course averages are pretty crude measures, and don't tell you anything about the range of the underlying metrics, but they are robust enough statistics when making fairly high level comparisons of whatever you're measuring.
Malcolm Flanders [00:10:21] Thanks Graeme. Will that position change if the FCA, the Financial Conduct Authority, takes on responsibility for the oversight of the industry?
Graeme Muir [00:10:30] I think it has to. The FCA principles are all about customer fairness and transparency. So I believe we will move in that direction, which will be a major benefit to funeral directors and to their plan holders.
Malcolm Flanders [00:10:42] So if I'm a funeral director listening to this chat and I'm anxious about what actions to take ahead of regulation, what would you recommend I do?
Graeme Muir [00:10:51] I don't think we should be seeking to alarm people. As part of the regulatory debate, some trusts shared their methodologies and figures with a well known consumer champion organisation. And I know Golden Charter and other leading providers such as Dignity and Co-op Funeralcare were all publicly given a clean bill of health.
Graeme Muir [00:11:11] What a funeral director may want to do, is ask to see the same sort of information which the FPA recommends that trusts publish. So if I were a funeral director rather than an actuary, ideally I would want to see any trusts' most recent audited accounts, which the FPA require providers to submit annually anyway. However, trusts are not limited companies and their accounts are not filed on public record at Companies House. The Golden Charter Trust is different, however. It holds all its investments in a limited company wholly owned by the Trust. Therefore the accounts of the Trust's investment company are publicly available. These contain full information about the trust and its investment company, including an easy to read highlights page.
Graeme Muir [00:11:57] For other trusts, where possible, I would just take the published assets figure and divide it by the total number of live plans to calculate an average sum available per plan, if every plan holder were to have died on that day. Very crude, I know, but indicative of the relative ability of a trust to continue to maintain payouts at similar level to today's.
Graeme Muir [00:12:20] Plan holders' money in a trust is safeguarded until required to pay the funeral director who performs the services under the plan. You may want enough information to be able to form a view as to the strength of the trust and the likelihood of it meeting your relevant costs when the plans mature.
Malcolm Flanders [00:12:37] That's really helpful, Graeme, thank you. Now, I can see this is an onion that we could unpeel for hours, and I appreciate your efforts to distill what we need to know into bite-sized nuggets. Now, your point on transparency becoming more important is key. Funeral directors will see more on this topic from the CMA and the Treasury.
Malcolm Flanders [00:12:56] And it's probably worth me putting in a little advert here. All the information Graeme spoke about is firmly in the public domain. The Trust's website, goldenchartertrust.co.uk, contains all the most recent reports, including the statement and investment principles, audited financial statements, and of course the consulting actuary statement authored by my guest, Graeme.
Malcolm Flanders [00:13:19] Once again, many thanks, Graeme, this has been really helpful and insightful for all our funeral directors.
Graeme Muir [00:13:24] Thanks for having me.
Malcolm Flanders [00:13:26] Customers can also access this information online and, of course, all funeral directors who offer Golden Charter plans are sent a copy of the company's annual review, which contains the Trust's chairman's statement and investment report for the year under review.
Malcolm Flanders [00:13:42] Thank you for joining our Partnership Podcast today. These little chats will be coming thick and fast during 2020. You can subscribe to us on Apple Podcasts, Spotify or wherever you get your podcasts, to be sure you get episodes as soon as they appear. Alternatively, watch goldencharter.buzzsprout.com for our full feed. And of course, Golden Charter will keep you up to date with new issues by email.
[00:14:06] Next time out, we'll be speaking to James Daley of Fairer Finance about price transparency, the future of funerals and what's right for customers. For now, take care of yourselves and I'll talk to you then on the Partnership Podcast.