Losing a loved one is one of life’s most challenging experiences, and the burden of arranging a funeral can add to the emotional distress. Pre-paid funeral plans offer a solution to alleviate the stress, time, and worries associated with making funeral arrangements.
These plans allow individuals to specify their funeral preferences in advance and cover the essential elements of the funeral. In the UK alone, over 1 million pre-paid funeral plans have been utilized to secure peace of mind for both individuals and their families.
A significant development in the realm of pre-paid funeral plans occurred on 29th July 2022 when the Financial Conduct Authority (FCA) began regulating these plans. This regulation brings with it a host of advantages and ensures that customers’ money is protected through the Financial Services Compensation Scheme.
FCA regulation and its impact
The FCA now requires funeral plan providers to maintain adequate resources for meeting their financial obligations at all times, and advises that they should assess the liabilities and assets on realistic valuation assumptions. Additionally, trust-backed plan providers must publish a Solvency Assessment Report (“SAR”) on their websites, making the information easily accessible to current and potential customers and advisors. SARs are written by the plan’s actuary.
SAR tips
After analysing the current SARs available, from 18 trust based providers covering 38 trusts, and OAC identified some best practices. To put their best foot forward, funeral plan providers should:
Make it easy to find. The best practice is to provide a link to the SAR from the home page on the provider’s website. Of the 18 providers, only eight did this. Seven provided a link but made it difficult to find, including some where it was necessary to visit a separate trust website. For three providers OAC was unable to obtain a copy.
Customers will want to know that their money is safe and providing the solvency position at the beginning of the report is important in providing that assurance.
Publishing a concise and plain-speaking SAR also ensures compliance with the actuarial standards for communicating clearly and in a way that is appropriate to the intended audience. OAC found that the SARs of only two of the 18 trust based funeral plan providers followed this approach. OAC suggest that providers ask their actuary to adopt this practice for their next SAR.
Follow the regulation and disclose what is necessary. The regulations require certain disclosures, and OAC found that not all SARs disclosed all the required information. For example, only nine disclosed the cancellation assumption and only one disclosed the funeral plan cost assumption used in their solvency assessment. Eleven disclosed the breakdown of plans in force by single and regular instalments, and eight disclosed the amount deducted from the trust.
- Highlight what could go wrong. Assumptions for the future such as funeral cost inflation and investment returns are required by the regulations to be best estimate, which means the actual value is equally likely to be greater or less than the estimated value. The solvency assessment is sensitive to these assumptions: greater funeral cost inflation and lower investment returns would lead to reduced solvency. It is important to identify what future events, whether in isolation or combination, would lead to strain or even insolvency. 14 of the 15 SARs we were able to analyse include a list the major risks to solvency, and 12 include the sensitivities for funeral cost inflation or investment returns, and OAC recommends these be included.
- Include information about the trust. The reader will be interested to know how the trust protects their money, including a summary of the trust deeds (with 10 of the SARS providing this) and investment strategy (with eight providing). One SAR includes the actuary’s assessment of any potential trustee conflict of interest. OAC recommends that this information be included in all SARs where applicable.
- Adopt the Technical Actuarial Standards 400 (funeral plans). The latest update from the Financial Reporting Council became effective 17 July 2023 and encourages non-actuarial practitioners to comply. It applies to both trust based and insurance based funeral plans, and covers assumptions, valuations, risk assessments, actuarial approvals, transfers, and communications.
Conclusion
The regulation of pre-paid funeral plans by the FCA is a significant step towards protecting consumers and providing peace of mind during difficult times. With the annual actuarial solvency report now a requirement, funeral plan providers are encouraged to follow best practices and provide transparent and accessible information to customers. By adhering to the regulations and adopting industry standards, providers can ensure that the wishes of the deceased are honoured, and families can have the reassurance that their loved ones’ funds are secure.
Written by Erika D. Parker FIA FSA, Consultant Agency, OAC Limited
