Funeral Plans - Asset Adequacy Report (AAR) requirements

20 September 2020

The Financial Reporting Council approved an update to its actuarial guidance standard known as TAS 400 : Funeral Plan Trusts on 1 July 2020.  Although early adoption is encouraged, the effective date of the guidance is 1 December 2020 and so the full impact has not yet been felt.

The change relates to the introduction by the Funeral Planning Authority (FPA) with effect from 1 January 2020 of the annual Asset Adequacy Report (AAR) requirements.  The government has announced that the future regulation of funeral plans will be mandatory under the Financial Conduct Authority (FCA) rather than via voluntary registration with the FPA, but the timescale for this is not clear and perhaps more uncertain than usual given the strange times we are currently living in.  The AAR may therefore be with us for some time and indeed more permanently if adopted in some form or other by the FCA. 
It is not a requirement for the AAR to be prepared by an actuary.  However, where an actuary does participate in the production of the AAR the FRC guidance introduces a number of requirements on the actuary in relation to compliance with FPA rules, assumptions, data and deficits. At OAC we believe that pre paid funeral providers and Trustees, particularly those where there is a potential deficit were the provider to fail, would benefit from actuarial input to the AAR process.  The issues that arise can be complex and very specific given the material differences between Trust Deeds and contractual arrangements between Trusts and providers and how things can change if a provider fails.  These differences are such that what constitutes a deficit or shortfall for a particular purpose, whether it be for the AAR or in an ongoing context, can vary widely and may be open to interpretation above and beyond the usual subjectivity arising from the assumptions underlying its calculation.   

Actuaries have existing professional responsibilities in relation to the security of the promise made to purchasers of pre paid funeral plans that are not limited to the financial position of the Trust, and these apply irrespective of whether a provider is FPA registered.  There is potential for the AAR process to drive an improvement in the understanding of the security of the funeral promise, on both a discontinuance and ongoing basis, and that in turn could feed into aspects such as investment strategy and pricing, leading to a broader more coherent approach to risk management. 
Philip Staunton commented 'OAC has experienced consultants that can help you navigate the changes that are currently underway and those due in the near to medium term.  This experience ranges from helping new entrants to the market all the way up to advising the largest pre paid funeral plans.  We are finding that despite the regulatory uncertainty there is growing interest in this market and it is an area in which only a small number of actuarial consultancies have the necessary expertise. '

Philip Staunton

For more information
Philip Staunton
Consultant Actuary

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