Having ‘on demand’ data could save £30bn across UK DB
Over half (53%) of trustees are relying on data that is six months out of date, according to 2017 Trustee Barometer
This is in response to a changing pension landscape where freedom and choice can have a material impact on membership and the future funding, risk and cashflow outlook of schemes. Schemes are also increasingly in drawdown and facing expensive forced asset sales to pay pensions. Across UK DB, having this ‘on demand’ data could save £30bn due to better informed de-risking.
Commenting on the need for on-demand valuations, Calum Cooper, Partner at Hymans Robertson, said: “As the DWP’s recent green paper on the future of DB stated there’s too much focus on the triennial valuations. Instead DB schemes should ensure that the right ongoing monitoring processes are in place. The DWP was rightly concerned that for struggling employers with underfunded schemes, undertaking more frequent valuations might prove to be counterproductive if it racked up costs.
“Our new ‘on demand valuations’ offer a transformational approach to funding and risk management based on detailed, accurate, up to date data. We will switch it on automatically for actuarial clients at no extra cost, giving all schemes, including those that are struggling with significant levels of underfunding, the security of more frequent and robust valuations. Each quarterly funding update will have the rigour of a full triennial valuation with associated cashflows and risk analytics available ‘on demand’ too.
“Our 2017 Trustee Barometer shows a real need for more up to date and accurate information to underpin schemes’ decision making. 94% of trustees do not have access to formal triennial valuation results within one month and over half of trustees (53%) said it would take six months or more to get access to formal triennial data. Nearly three quarters (72%) said they would welcome more accurate data on funding, risks and scheme cashflows, driven from member-by-member data to enable them to monitor and set more accurate liability benchmarks and de-risking triggers.”
“There is a misconception in the market at the moment. 58% of trustees believe they already have access to ‘on-demand’ member by member data from their actuaries and administrators but we would question whether this is the case. As the vast majority of trustees only receive their valuation data within three months, six months, or even over six months, this is not balance sheets and cashflows on demand based on bang up to date administration data. As consumers, we’re used to banking on our mobile phones, reading our credit statements online and even buying and selling our investments via apps. It is anachronistic that modern day trustees find it so hard to gain access to timely key performance indicators for their scheme such as chances of success, risk and benefit security.
“In a political and economic environment where seismic changes can happen from one day to the next, trustees deserve – and frankly, need – better. The traditional triennial approach simply doesn’t meet the needs of today’s trustee.
Schemes are increasingly cashflow hungry and Freedom and Choice will increase cashflow uncertainty with the likelihood that significant numbers of members’ benefits will be fully settled earlier. If valuation data doesn’t reflect these settlements as they happen then cashflow forecasts could be way off the mark. This makes cashflow planning ineffective and could have major funding, investment and de-risking implications.
“For a £500m scheme, over or under-estimating scheme funding can be as significant as £30m over the triennial cycle in adverse markets. This figure combines the effect of schemes de-risking on out of date data as well as others failing to take advantage of opportunities to de-risk despite having appropriate triggers in place. Having more precise information would avoid both these scenarios.”
Commenting on the new service Calum Cooper continues: “From a funding and investment perspective, neither the traditional triennial valuation cycle nor using analytics based on historic data meet the needs of today’s DB pension schemes. Trustees should to have confidence that the data upon which they are basing their risk management decisions is sound. With fleeting opportunities to de-risk, schemes tell us they want a more dynamic, precise and responsive approach to managing funding and cashflows.
“Using our approach, investment and funding strategy discussions can take place at any time, safely in the knowledge of the scheme’s true funding and risk position and the impact different decisions will have. Schemes will no longer experience the planning blight that so often occurs in waiting for the formal valuation.”
|
