Clause 26 is again relatively straightforward. It contains a regulation-making power, which may require schemes offering collective benefits to obtain a document prepared by our friend an actuary and defined in the Bill as a “valuation report”. The valuation report will value the assets held by the scheme for the purposes of providing collective benefits and will assess the probability of the scheme meetings its targets in relation to those benefits. Regulations may then require the actuary to certify whether, in his or her opinion, the probability of the scheme meeting the targets is equal to, higher than or lower than a required probability level. That said, the term “probability level” is changed to “range” by the amendment that was just made. Regulations could also require the report to be obtained from an actuary with certain qualifications.
As I have repeatedly said, members need to know that their schemes are being properly run. Without a valuation report, trustees and managers will not know whether the scheme is likely to pay benefits in line with its targets. We need to be able to specify the content of the valuation report, which is why the clause contains a regulation-making power.
The valuation report will be a key document for trustees and managers. It will tell them whether the scheme is on track to provide members with benefits at the targeted level. It is expected to identify risks to the plan’s financial condition early and produce smoother, more predictable responses by the scheme to changing conditions.
Regulations may require the actuary to certify whether, in his or her opinion, the probability of a scheme meeting the targets is within the range, higher than the range or lower than the bottom end of the range. We expect that they will do so using a stress-testing approach similar to those used abroad. For example, in Canada, where this activity occurs as part of the governance of collective benefits, the future performance of a plan is simulated under 1,000 different economic scenarios over a period of 20 years. This is a process known as stochastic modelling—I have been dying to get that phrase into Hansard. The key variables in the model are related to each other by a series of equations. There are also random fluctuations in the model to produce the 1,000 different scenarios. Those scenarios enable the actuary to determine the ability of the scheme to pay out the targeted benefits under a range of plausible scenarios for what might happen to costs and asset values in future. In a given proportion of those scenarios, it might not be possible to pay out the targeted benefits. If that proportion is sufficiently low or high, it will trigger the policy under clause 28 by breaching the required probability range.
I hope that gives the Committee a bit of the colour of what is going on behind this rather dry clause. I commend the clause, as amended, to the Committee.