Companies encouraged to take more control of DB pension valuations

Sponsoring employers should take more control of the defined benefit (DB) pension scheme valuation process ahead of forthcoming triennial valuations, according to Hymans Robertson.

The firm made the call after a poll at one of its webinars found that 61 per cent of respondents said that trustees led the last valuation process, rather than the company.

Hymans Robertson noted that the tougher regulatory regime and enhanced regulatory powers that are now in place mean that companies should take control to get the best outcome and to manage increased regulatory risk.

“Companies should plan the forthcoming valuation like they would a corporate transaction,” commented Hymans Robertson head of corporate DB, Alistair Russell-Smith.

“By considering the options upfront and taking a proposal to the trustees, rather than waiting for the trustees to act, they can achieve better corporate outcomes and manage increased regulatory risk.

“There are many factors to include as they develop a proposal. Key actuarial assumptions to consider include RPI, the CPI wedge and longevity. There is a case for introducing an inflation risk premium to reduce the inflation assumption, particularly when inflation risk is not hedged.

“Arguably there is also now sufficient evidence to make some allowance for Covid-19 in the longevity assumption. Longevity specialist, Club Vita, has developed four longevity scenarios - three of these lead to a reduction in the liabilities. The modest ‘bump in the road’ scenario reduces liabilities by 0.9 per cent.

“It is also worth considering funding expenses out of scheme assets if the scheme is in a technical provisions surplus.

“As DB schemes hurtle towards their end game, this valuation cycle is also the ideal opportunity for corporates to review their endgame goals, understand the timescales to buyout, and actively plan the scheme’s route.

“Improved funding levels and the maturing of the liabilities mean that buyout might be sooner than the corporate expects. There’s a useful conversation to be had with pension scheme trustees around balancing investment risk and covenant risk – is it better to keep on investment risk and buyout sooner or keep de-risking and take longer to buyout?

“It’s worth remembering, too, that newly emerging end game solutions such as superfunds and capital backed journey plans should also be assessed when developing a corporate DB endgame strategy.”

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