Companies should take more control of their valuation process as they approach forthcoming triennial valuations warns Hymans Robertson.
Trustees, rather than the company, took the lead at the latest valuation, according to nearly two-thirds of pension plan professionals who attended a recent webinar.
Hymans Robertson warns that the new regulatory environment, which includes a stricter regulatory system and more regulatory authorities, requires firms to take control in order to achieve the best results and manage higher regulatory risk.
Hymans Roberts head of corporate DB Alistair Russell-Smith says: “Companies should plan the forthcoming valuation like they would a corporate transaction. 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 buy-out, and actively plan the scheme’s route. Improved funding levels and the maturing of the liabilities mean that buy-out 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 buy-out sooner or keep de-risking and take longer to buy-out? 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 end game strategy.”
