Complete and accurate pension scheme data is an essential ingredient for effective management by trustees and corporate sponsors. Otherwise there is a serious risk that incorrect benefits will be paid and the company and trustees will not be in full control of the funding position. This article focuses on occupational defined benefit schemes but many of the principles also apply to defined contribution arrangements.
Inadequate data issues often come to the fore when pension schemes are winding up or Read more »
This year is likely to bring more unwelcome news for members of company pension schemes and finance directors grappling with accounting disclosures. In fact, that is a bit of an understatement.
Improving world stock market returns in 2009 will have helped the asset side of the pension balance sheet, particularly for those pension schemes with a meaningful equity exposure, albeit it has been a bit of a volatile ride. This may have given some finance direction a false sense of optimism. Read more »
The draft Financial Assistance Scheme (Miscellaneous Amendments ) Regulations 2010 were laid before Parliament on 20 January and this was followed up on 28 January with consultative documents on draft guidance which amongst other areas sets out a proposed actuarial valuation process for pension schemes eligible for the Financial Assistance Scheme (FAS) and which will transfer assets to the government – these are referred to as FAS2 schemes. This guidance takes into account earlier consultation in the period 2 April to 15 May last year and a webinair for actuaries with speakers from the Pension Protection Fund.
Broadly the draft guidance sets out a mechanism for determining if members of FAS2 schemes should receive higher benefits than standard FAS compensation.
As mentioned in our earlier blog, “How pension schemes will be valued for admission into the Financial Assistance Scheme“, the PPF is proposing that the FAS2 actuarial valuation calculations will include equalisation of Guaranteed Minimum Pensions.
The current draft guidance does not differ materially from that issued last year and from the processes presented in the webinair; we believe that it is therefore unlikely that there will be many changes in the final guidance which we anticipate coming on stream by the middle of this year.
The PPF have built onto some the S143 actuarial valuation principles for schemes going through assessment but there are a substantial number of material differences. One area of similarity is that data has to be cleansed before the actuary is instructed to proceed and the actuary has to be satisfied with the quality of the data.
Spence and Partners have extensive experience of carrying out S143 valuations including data cleansing, and we are gearing up to adapt our professional skills for FAS2 schemes.
The calendar year end pension accounting season approaches as do the Chrismas and New Year festivities, but there is unlikely to be much cheer amongst finance directors with the former.
Improving world stock market returns over the year will have helped the asset side of the pension balance sheet, particularly for those pension schemes with a meaningful equity exposure albeit it has been a bit of a volatile ride. This may have given some finance direction a false sense of optimism. For example over the year to date the FTSE 100 has increased about 17%.
However this good news is likely to be more than offset by a very significant reduction in bond yields since the 2008 year end. Pension disclosures require liabilities to be discounted using AA corporate bond yields of appropriate duration of the liabilities. One common measure of this is the Markit 15 year iBoxx Corporates AA 15 year + index and over the course of 2009 this has fallen from around 6.7% p.a. to about 5.5% p.a. The impact that this will have on individual pension schemes depends mainly on the age profile of the membership. It will also depend on the extent of any margin that was deducted from the rate used at the previous year end to allow for the effect of the “credit crunch”. For a young scheme with a typical benefit structure and average weighted age of say 45 this will increase the liability value, other things being equal, by about 30%. For a more mature scheme, say with average age 55 the increase is of the order of 20%. Of course there are other factors at play e.g. changes in the inflation and longevity assumptions. This assumes a discount rate of around 6.5% p.a. was adopted at 31 December 2008.
AA corporate bond yields at 31 December 2008 factored in a much higher risk of default than applies today and this resulted in what may be viewed as an artificial reduction in the liability valuations. However, at the time it was a welcome offset to sick asset valuations.
To help to offset the impact of an increase in the year end deficit, finance directors should review if the other asssumptions are derived on a best estimates basis. It is often the case that many of the other assumptions match those used by the pension scheme trustees for funding purposes and these are likely to include margins for prudence i.e. it could be argued that they are not best estimates. This may include for example the allowance made for salary increases or future longevity improvements. This may be an area worth investigating as a possible way of mitigating some of the increase in the year end deficit.
Spence & Partners have extensive experience in advising corporates on pension accounting computations and disclosures and we are gearing up for a very busy end December/early January!
For information regarding pension accounting computations and disclosures contact Ian Campbell on 0141 331 1004 or email email@example.com
Three letter acronyms abound in pensions and now it seems they may be rhyming.
The Board for Actuarial Standards (BAS) issued a consultation paper last month on a proposed pensions-based Technical Actuarial Standard (TAS). The objective of this specific TAS is to build on three generic TAS’s already issued by BAS on data, modelling and reporting. The TAS regime gives guidance to actuaries; they are principles based and replace more prescriptive ‘Guidance Notes’ previously issued by the UK actuarial profession and adopted by BAS on an interim basis. Read more »
Interesting to read in the Financial Times this week that the Pensions Regulator has decided to intervene in the setting of the funding plan for the current ongoing actuarial valuation of the BT pension scheme and that it has appointed a firm of actuaries to advise it. The discussions will be mainly centred around the choice of the discount rate used to calculate the actuarial value of the accrued benefits (aka the ‘technical provisions’). Comparing this with the market value of the assets gives the funding shortfall or deficit. The higher the discount rate, the better the funding position and the lower the level of contributions BT will have to pay. Read more »