Most defined benefit pension schemes in the UK are faced with having to ask the sponsoring employer to fund large deficits. These deficits are largely generated by the Pensions Regulator requiring a prudent approach to scheme funding. Schemes would have much less significant deficits (many would have surpluses) were funding allowed on a more realistic basis. Such a best estimate basis is the required starting point for calculating cash equivalent transfer values for members leaving the scheme.
At Pope Anderson, our approach to funding is to show trustees and employers the realistic scheme funding position (based on a best estimate analysis) alongside the worst case scenario of the amount that would be needed to top up the scheme’s assets to allow the scheme to be bought out fully with an insurance company. We also show the ‘critical yield’ – the investment return required so that the scheme’s assets and liabilities are in balance.
We then engage in discussions with the trustees and the employer to discuss how much prudence they feel is appropriate to adopt in their Scheme Specific Funding basis. In the modern computer age it is easy to produce an extensive range of results to show the effect of varying each actuarial assumption. Our initial focus is on the three primary assumptions of the discount rate, the inflation rate and the mortality assumptions.
We were among the first consultancies to have the new SAPS (self administered pension schemes) mortality table encoded onto our actuarial valuation systems and this provides a good starting point for mortality discussions. Actuaries in the last century underestimated how long pensioners would live but in this century are perhaps in danger of over-reacting. Only time will tell.
We encourage healthy debate with trustees and employers about allowance for future mortality improvements and discuss each scheme membership’s situation with regard to the important mortality factors of location, occupation and size of pension.
We always search for a pragmatic and realistic solution to scheme funding but ensure that trustees and employers are aware of the various explicit (and implicit) Regulator triggers that could require them to enter into robust discussions with the Regulator. We are fully conversant with the Regulator’s views on primacy of technical revisions and flexibility in recovery plans and have extensive experience of such discussions.
Actuarial valuation results are generally available within two months of the valuation date where we also act as scheme administrators or one month following receipt of full membership data where we do not. This allows plenty of time for discussion of the results within the 15 months regulatory framework.