In the recent ‘Chart Your Own Course’ survey undertaken by LCP earlier this year, respondents noted the extent to which the three-yearly valuation process can dominate a scheme’s time and attention for long periods of time. Yet, according to Michelle Wright, the three-yearly valuation is of diminishing value for many schemes, in a fast-changing world where many industries rely on ‘real-time’ data to understand what is happening in their markets and as the ‘technical provisions’ funding measure becomes less relevant
Because of the length of time taken to complete and sign-off a triennial valuation, some pension schemes are currently working with a valuation which reflects market conditions and membership data up to four years ago. This provides little or no guide to the scheme’s current funding position and does not help with making informed choices about, for example, the time horizon for a move to buyout and the actions trustees and sponsors should be taking to prepare for that.
Some key reasons why historic triennial valuations, whilst still a legal requirement, are inadequate on their own as a tool for scheme management include:
Recent years have seen exceptional political and economic turmoil; since the effective date of some scheme’s valuations, we have seen a Global Pandemic, war in mainland Europe, a surge in inflation and the end of the era of ultra low interest rates; all of these factors emphasise the importance of devoting sufficient attention to understanding the forward-looking implications of the current macroeconomic climate.
Dramatic movements in interest rates and other market factors have radically shortened expected durations to buyout for many schemes; schemes giving too much weight to historic valuation data risk missing the rapidly-moving opportunities to secure attractive buy-in and buy-out terms as they arise;
-In the recent turmoil around LDI, the schemes who were best placed to respond were those who had an up-to-the-minute understanding of their investments and liquidity position and could make well-informed judgments; it is essential that schemes have access to the real-time metrics and up-to-date scenario planning necessary to ensure this level of clarity.
In light of this, Michelle Wright is calling on all schemes to review whether they need to do more to have a ‘real-time’ picture of their scheme’s assets and liabilities, including more up-to-the-minute membership data and asset feeds as a matter of course, as well as challenging the time spent on the triennial valuation process versus discussing broader strategic journey planning matters.
Commenting, Michelle Wright said: “For many years, managing a DB pension scheme involved having a perspective running decades into the future, and a regular three-yearly check-in was probably sufficient. But a combination of extraordinary political and economic turbulence and the greater proximity to the end game means that DB schemes now need much more ‘real-time’ data to make sure they can make the most of the opportunities which are now available. In many other industries it is taken as read that there is up-to-the-minute monitoring of consumer behaviour and market trends, yet in some parts of the pension landscape a valuation document which can be three or more years out of date remains a key reference point. It is time for the DB world to harness the latest technology and tools to make sure that trustees have the information that they need at their finger-tips to ensure that they can deliver the best possible outcomes for members”.
|
