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Actuaries&#39 anger at terminal reserves

The Faculty and Institute of Actuaries has issued a scath-ing response to the FSA&#39s consultation paper on the prudential sourcebook, claiming proposals requiring life offices to reserve for terminal bonuses could cost the industry £1bn.

The actuaries claim that no life office would have been able to offer stakeholder if the FSA proposals, which force life companies to take financial strength into account when launching new products, had already been in place.

The FIA believes reserving for terminal bonuses would diminish investment freedom and reduce bonuses by up to 25 per cent.

The FIA&#39s also expresses its disappointment that the regulator seems to have alr-eady made up its mind.

It believes the FSA has “seriously underestimated” the cost of change to the industry&#39s often antiquated systems, which could for bigger offices amount to “several million”.

It is also severely critical of proposals to segregate with-profits business.

It says: “It could actually make offices less able to withstand adverse conditions as funds would be in separate pots rather than available to cover any part of the business that might require them.”

Cazalet Financial Consulting principal Ned Cazalet says: “I think reserving for terminal bonuses would cost more than £1bn. Liabilities would increase quite sharply. If you reserve for it, it is no longer a terminal bonus.”

KPMG actuary and partner John Jenkins says: “Reserving for terminal bonuses will have to come – Australia and South Africa with similar setups have introduced regimes where they are accounted for as a liability.”

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