Valuation Models -
Reviewing the Assumptions
(including the discount rate)
March 27, 2019
Cass Business School
Free to Trustees and Pension Executives
It is estimated that by 2037 current DB liabilities of around £1,800 billion will have reduced to under £800 billion. This suggests that more and more schemes, having closed to new entrants, are now on a steady journey down the maturity path and for many termination and insurance via bulk annuities will become a tangible possibility in the next 20 years, if they can close the valuation gap between technical provisions and buy out. At the same time many schemes are becoming cash flow negative and with higher volatility expected to be back in the market, they are likely to have to cash investments on too many occasions at inopportune times. This will be an increasing problem for those trying to grow their way back to 100% technical provisions let alone beyond. It also sits alongside the challenge of setting discount rates and investment returns that are not too conservative that the required contributions from employers are too high for them to be sustainable but not too optimistic that the associated risks might result in promised benefits not being paid.
Against that background, many trustees might benefit from taking a fresh look at their approach to their valuation and assumptions used when it is next reviewed. Too many trustees and scheme sponsors have anchored their thinking around technical provisions with adjustments at each triennial valuation, mainly using deficit recovery plans to get back on track. Unfortunately, such thinking does tend to create tension with sponsors keen to minimise their costs and not risk trapping in surpluses, while encouraging trustees to excessively reduce risk. The concept of having a secondary funding target, alongside technical provisions, that ties in with a journey plan that extends into a run off plan, is a possible approach that could set the parameters for a better discussion and go some way to addressing the Pensions Regulator’s requirement that trustees adopt an integrated approach to risk management taking into account their long term funding and investment targets.
This seminar will, therefore, look at setting a scheme’s technical provision assumptions and recovery plan requirements, if needed, in the light of the Regulator’s integrated risk management approach and increased emphasis on longer term funding and investment targets while considering how to best meet the differing needs of trustees and sponsors to achieve a result that produces contribution levels that satisfy both parties.
Pensions Policy Institute
Mars Pension Trustees Ltd
17.00 – 17.30 Registration
17.30 – 20.00 Seminar
20.00 – 21.00 Drinks Reception/Light Buffet