Xafinity is warning that current market conditions could mean many companies are being forced to put pension liability management plans on hold.
The current level of government bond yields, driven down by the latest wave of quantitative easing, make both offers to members and the purchase of matching assets increasingly unattractive.
Xafinity advises pension scheme sponsors to ensure that scheme valuations are placing an appropriate value on their liabilities.
Since the introduction of funding guidelines from the Pensions Regulator in 2005, most schemes have used an approach where discount rates are set with reference to government bond yields. Xafinity advises that whilst, this may be appropriate for schemes with a weak employer covenant, which need to have one eye on the security of members’ benefits; those with a stronger covenant should consider how they can take advantage of future expected investment returns.
In addition, Xafinity advises schemes to take the following measures to ensure liabilities are being assessed correctly:
• Understand the impact of CPI.
o Using the historical differences of around 0.7% p.a. may underestimate future differences between RPI and CPI leading to Scheme’s overstating their liabilities by as much as 10%.
• Get the “soft” assumptions right eg, proportions married and take up of tax free cash
o A proportion married assumption that is 10% higher than the Scheme’s actual experience could overstate the liability value by around 1%
• Make sure scheme data is clean.
o Benefits need to be properly understood before a value can be placed on them. Sample testing can provide a cost effective way of determining whether data is reliable.
Chris Fletcher, Consulting Actuary, Xafinity said: “It is essential that sponsors and trustees work together in the current environment to place the right value on pension scheme liabilities. Utilising sponsor covenant may allow sponsors to make longer term assumptions that will avoid the pressure to make large contributions in the short term. Getting the secondary assumptions right can also have a significant impact on the calculation of scheme liabilities.”
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