Industry questions ‘antiquated’ triennial valuation cycle

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its short-term approach and ability to “take resource away from real-world decisions, at the expense of focusing on one out of date number”.

Changes to the triennial valuation were considered in the Defined Benefit White Paper, published in March, however the DWP concluded that there is “no compelling evidence” to suggest the triennial cycle is a “significant problem for schemes”.

Despite this, some trustees have said that the current system isn’t adding value and leading industry figures have called for a more strategic, risked-based approach to be considered.

Speaking to Pensions Age, Redington managing director for integrated consultancy, Marian Elliott, said: “Increasingly, I am hearing from trustees that the actuarial valuation process isn’t adding a great deal of value and they want to move towards a more dynamic way of managing their strategy.

“It is something we are passionate about here, that the actuarial valuation is a dangerous sideshow and needs to be overhauled, so that it becomes an opportunity to recalibrate the strategy, rather than a process in and of itself.

“It was one of the themes that came through at a recent industry event I attended, people were broadly in agreement that they don’t want to be anchored to one number and that the process is broken and antiquated.”

Currently, the compliance process around the valuation happens every three years and takes 15 months to complete, which Elliot argues “drives the wrong behaviours”.

“The pension strategy should be managed on a continuous basis, and time and resource should be allocated to setting direction and managing towards long-term objectives. Things like the DB chair’s statement, if it is done well, will help,” she added.

PTL managing director, Richard Butcher, also believes it gives little value to trustees, adding that sponsors don’t get much back from the process either, but that where employer covenant is weaker, having a regular review is a sensible plan.

“Do I think it’s a good idea? Yes, yes and yes … it doesn’t really deliver anything of value to trustees, but lots of extra value to the actuaries … technical provisions are largely a discredited measure in an environment where some trustees are looking for an exit route.”

Although it is clear that there is widespread support for an alternative process, Lincoln Pensions CEO Darren Redmayne said that any strategic planning structure would need to ensure the “covenant retained appropriate focus”.

TPT Retirement Solutions in-house actuary, Rob Archer, agrees: “The devil will be in the detail, and it could very difficult to design an alternative regime that ensures sufficient regulation and oversight, across schemes of all shapes and sizes, without some form of strict time period and approach to valuations.

“One key risk is that a move away from fixed triennial valuations could result in more disputes between trustees, sponsors and the regulator about if and when any change in approach is needed.”

Butcher adds: “[TPR] have backed off a little bit because of the Carillion’s and BHS’s of this world, but I think it is an idea still worth debating and I think trustees would welcome it and I think corporate sponsors would as well.

“I think if the DWP did it would be fairly pragmatic regulation, it needs to be risk based.”

The DB White Paper said that it wished to “avoid placing further burdens on schemes”, and pointed to the strengthening power of the regulator.

Pensions Age has approached TPR for comment.

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