Pension funds should use a run-off approach towards discounting their liabilities, rather than the current mark-to-market approach, the European head of J.P. Morgan Asset Management’s Strategy Group Paul Sweeting has suggested.

The approach that is now used to calculate pension liabilities is too focused on the short term, while pension schemes have long-term liabilities. Sweeting therefore believes that a so-called run-off approach, where schemes focus on their long-term liabilities and how much money would be needed to pay out the pensions of all their members, is more suitable for pension funds.

Speaking at a J.P. Morgan conference, in association with Pensions Age, Sweeting questioned how much pension funds really need to care about the mark-to-market volatility of the assets they are holding.

“Now to an extent they need to care because there are various accounting and funding regulations which tell them to care and tell them to put a value on their assets and liabilities,” he explained. “But the more they move away from that point of view, the more a pension scheme can focus on the long term, the less it needs to concern itself with what price something is trading at in the market.”

He said that this approach can look at contributions as just another cash flow and can also allow for the possibility of employer insolvency in future.

However, as this approach is based on assumptions on liabilities and long-term returns of assets, a delegate at the conference expressed his concern about all the ‘guesses’ that need to be made and where to get the right assumptions needed for such calculations.

Sweeting replied that it is indeed not easy, but liability flows need some assumptions about inflation and longevity. He said that it is “not just one single assumption, but a distribution around it”. It would then no longer be a yes/no but a probability of success scenario.

He also touched upon The Pensions Regulator’s attitude to this new way of looking at discounting liabilities. TPR has not accepted it at the moment, Sweeting said, but “it is sympathetic to this approach”.

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