Today’s Autumn Statement is expected to announce a review of the way the financial health of pension schemes is calculated. This could see funding positions assessed with regard to market conditions averaged over a period of time. This contrasts with current arrangements under which employer contributions are based on the funding position on a single date from up to four years previously.
Pension experts at Capita’s employee benefits business would welcome this proposal as a pragmatic concession for employers who have faced increased scheme deficits and contribution demands as a consequence of the very low gilt yields seen in recent years.
Kenneth Donaldson, head of actuarial consulting at Capita Employee Benefits, commented: “The use of averaging would reduce the impact of the ‘valuation date lottery’, under which employers with schemes in similar positions could face markedly different valuations and contribution demands depending on the date they are assessed. But this should be viewed as an opportunity for employers and trustees to negotiate prudent and fair funding arrangements, based on a less arbitrary picture of their schemes’ funding positions, not as a general dispensation for sponsors to reduce contributions.
“This would be a pragmatic response to legislation and unprecedented market conditions, and could provide some breathing room for employers struggling to meet contributions that will be used to pay benefits up to 60 years in the future. But, as the valuation methods used for accounting purposes are expected to remain the same and the markets look set to continue punishing companies with heavy pension burdens, employers and trustees must keep focused on strategies to manage funding and de-risking.”
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