Trustees' long-term strategy must be driven by circumstance

Written by Theo Andrew

Defined benefit trustees’ long-term strategy must be driven by their circumstance and not just through the valuation tools available, Aon has said.

In its new white paper Choosing the right actuarial approach published today, 1 November, Aon said that a scheme’s objectives and strategy should drive the valuation methodology and not the other way around.

The white paper comes as an “overwhelming majority” of pension schemes currently target buyout or self-sufficiency, while money is leaving the DB market at record pace, with £40bn in outflows expected throughout 2018.

Aon partner, Jay Harvey, said: “For all schemes, different valuation approaches are ultimately just measurement tools. But selecting the right one is essential - and not letting the tool drive the decisions is even more important.

“With this paper we hope those involved with schemes can make certain they do more than just kick the tyres on historic valuation approaches and instead ensure that the valuation tool they use is the right one for their scheme’s future needs.”

Aon added the it is “best practice” for schemes to check that their valuation method remains appropriate throughout.

“For something so fundamental to a pension scheme, valuations are a famously complicated area with many factors which need to be considered before a single number is calculated.

“Among others, these will include the strength of the scheme sponsor, the long-term objectives of the scheme, the resulting investment strategy - and whether there is an appetite to use one of the more technically sophisticated approaches,” Harvey added.

Last week, Redington published its own whitepaper Destination Endgame, suggesting that pension schemes must implement a decision-making framework as they approach the “endgame”, ensuring they are making the best decision for members.

However in recent months, many figures from within the pensions industry have questioned the legitimacy of the triennial cycle of valuation for pension schemes, with some calling for it to be scrapped.

The three-year cycle, which determines the value of the pension scheme has been labelled a “dangerous sideshow” and “antiquated”, for its short-term approach and ability to “take resource away from real-world decisions, at the expense of focusing on one out of date number”.

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