As all trustees and advisers know, actuarial valuations need to be completed within 15 months of their effective dates. Now, to partially steal a phrase, even a year can be a long time in pensions, and 2020 did not disappoint. While the storm clouds gathered and then rained down on us for much of last year, despite common misconceptions, working in pensions was anything but dull.
Let’s step back to the beginning of 2020 (or the ‘old normal’). In early Q1, it was looking okay on the pension scheme funding front. For many schemes, their funding levels were generally stable. The sun was trying to shine.
However, as we got closer to the end of Q1, things were looking very different. COVID-19 and the global response triggered the perfect storm, and the imperfect treble whammy: equity markets collapsed, gilt yields went south, then very briefly north, then south again, and employers struggled - particularly those who found it either hard, or nigh on impossible, to switch to a remote working model. Q2 was also very challenging.
The outcome for pension schemes was generally rising deficits and deteriorating funding levels, coupled with weaker employer support. It was a full-on thunderstorm.
The situation started to improve during Q3 and by the end of Q4 quite a few schemes had more or less recovered back to where they were prior to the outbreak of COVID-19. However, uncertainty continued to linger. The clouds may have begun to disperse but there was a continued threat of more rain.
So what were trustees and their advisers doing last year when it came to actuarial valuations?
In the majority of cases, trustees whose schemes had effective dates in Q1 and Q2 2020 took their time in finalising the actuarial valuation process. They were aided in this approach by the words of The Pensions Regulator. It strongly encouraged trustees, sponsors and advisers to consider the impact of post-valuation date changes – on both the funding position of the pension scheme and the ability of the sponsoring employer to continue to provide support – before completing the process.
While 2020 was unforgettable, it was also a year to forget completely! Although, it should be pointed out that there were one or two silver linings in the gloomy clouds.
For instance, schemes that had largely hedged out key risks, such as those relating to interest rates and equity markets, faired okay. And some industries were able to adapt to working-from-home models without too much disruption, thanks to ever improving computing power.
Those trustees who had dutifully put in place their risk registers and contingency plans were better equipped to respond to the extreme events, even though some degree of pain most likely ensued. Technology played its part too. Trustees who had access to daily funding valuations at their fingertips found the whole experience of dealing with the constantly changing environment around them far easier than those who didn’t. Access to real-time information enabled these trustees and sponsors to work collaboratively to solve their funding problems. Others in less fortunate positions simply spent a lot of time struggling to work out what was going on, only to find out the position had changed again by the time they thought they knew what had happened.
Will it be a similar story this year with funding levels bouncing around (mainly down) like they did for much of 2020?
So far, the answer looks like being “no”. Scheme funding levels on the whole appear favourable at the moment, particularly compared to most of 2020. Therefore, the mantra for finalising actuarial valuations in 2021 may prove to be “the quicker the better”. There are, however, a couple of important caveats.
Firstly, it is essential that trustees continue to examine critically the strength of the employer covenant, which for many schemes may still remain highly uncertain. Secondly, there remains a large degree of uncertainty in the financial markets, which could manifest itself in the form of more funding level volatility. However, on the whole, pension scheme funding levels do look a lot better than a year ago. The sun is peeking out again, or is at least trying.
Advisers need to prove their worth too, and furnish trustees with timely and accurate funding level information, as we have seen just how quickly things can change. Having access to this information – whenever it’s needed – may end up being as important as last year, even though the current outlook for scheme funding looks rather brighter.
One thing that is for certain though, despite what some people think, there’s never a dull moment in pensions.