Archive for May 2017

Rachel Graham

The Pensions Regulator (TPR) has now issued their 2017 annual funding statement (“the Statement”) for defined benefit (“DB”) pension schemes undertaking valuations with effective dates in the period 22 September 2016 to 21 September 2017. The statement focuses on the longer-term and emphasises some key principles from the TPR’s Code of Practice 3 for funding DB pension schemes, and their supporting guidance on integrated risk management (“IRM”), investments and employer covenant. These are all areas in which Spence & Partners Ltd (“Spence”) has the necessary expertise to assist trustees meet TPR’s requirements.

Schemes with 2017 valuations will be affected differently by market conditions. Generally, TPR expects that scheme liability values will have increased since their 2014 valuations and despite most major asset classes having performed well, this does not fully compensate the increase in liabilities and most schemes are therefore likely to have larger funding deficits than expected.

Spence’s Head of Investment Simon Cohen has provided investment advice to a number of scheme trustees. We have seen that schemes which have adopted interest rate risk hedging are in a better funding position than those schemes that did not over the last three years. The Statement refers to TPR’s investment guidance published recently which sets out what TPR expects of trustees when setting their investment strategy. Spence can assist trustees set an appropriate strategy for their schemes. This is very important as TPR will intervene and engage with schemes where they believe the scheme’s investment strategy is inappropriate or too risky.

Spence’s unique in-house actuarial and administration software, Mantle, has proven to be a useful tool for trustees when considering the impact of the extent to which changing market conditions impacts the level of risk in their schemes. Mantle has the functionality to illustrate how sensitive a scheme’s funding level is to the valuation assumptions used. This gives trustees and employers a much better understanding of how funding, investment and employer covenant strength interact, and assists trustees in making better scheme funding decisions, taking into consideration the longer-term impact of those decisions. Mantle can also be used as an ongoing risk management tool, trustees have direct access to their scheme on Mantle and can check the scheme’s funding level on a daily basis to determine if the scheme appears on track to meeting its long term funding objective.

TPR outline the ‘appropriate action’ they expect trustees to take with regards to funding; this is dependent on the strength of their scheme’s employer covenant. Spence provide scheme actuary services to a number of private pension schemes and have vast experience supporting trustees and employer in recovery plan discussions. Whether trustees wish to reduce or continue with the current pace of scheme funding, or whether higher contributions are required now, Spence’s actuarial team can provide the analysis and advice trustees and employers need during funding discussions, whilst considering employer covenant strength and the investments the scheme has.

The Statement specifically focuses on the expectations of trustees of stressed schemes. Spence can assist trustees in fully evidencing that they have taken the measures appropriate for their scheme, for example Spence can assist with the following services which TPR mention in their statement;

•    employer covenant analysis
•    scheme closure to accrual
•    scheme wind up services

The Statement can be thought of as a good practice guide for trustees. The continuing uncertainty over future economic conditions highlights the importance of effective risk management and collaborative working between trustees, employers and advisers. Trustees should regularly monitor risks and all schemes should have contingency plans in place in the event a downside risk materialises, in order to prepare to recover their funding level and mitigate against any further downside events.

Simon Cohen

You can see the headlines at the moment – FTSE hits an all-time high, DOW hits all-time highs, and the DAX joins in as well.  Add to that the VIX index (a market indicator of volatility), is at lows.

You wouldn’t be the first to think that global economies are growing strongly and corporate profitability is rising fast… there is nothing to worry about.

However, there are always two sides to every story, and I have my worries (especially being a glass-half-empty kind of person).  Read more »

Alan Collins

Spence & Partners latest blog for Pensions Expert:

Back in the day, actuarial valuation results contained an element of surprise. The actuary would be sent the data, it would be processed, the numbers would be crunched and many months later, the results would appear.

There was often limited fore-knowledge among the recipients, be that trustees or the sponsoring employers, about what the results would show.

An actuarial valuation was a lengthy, time-consuming process, which is one of the main reasons why a valuation was only deemed necessary once every three years, and why the timescale for completion was set at 12 months and later extended to 15 months. Read more »

David Davison

In my last bulletin I outlined the issues that charities are likely to face should they look to exit an LGPS. The cessation debt is calculated by the Fund Actuary in most cases using a least risk approach based on Gilts. For many employers in LGPS the dramatic reduction in gilt yields over the last 10 years has resulted in very significant increases in applicable cessation debts.

Based on the table above an admitted body with a cessation debt of a few £100,000 10 years ago could well now have a debt well in to the £millions.

This I believe highlights a fundamental flaw in the cessation approach adopted in LGPS. In a private sector standalone or segmented multi-employer scheme to manage risk it could be agreed that no further benefits would be accrued. The trustees and employer could then agree to continue to fund the scheme on an on-going basis only deciding to buyout / secure the liabilities when market conditions, and the scheme and employer financial position, merited it. Read more »

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