Can a three-year valuation cycle be justified?

by Alan Collins   •  
Blog

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.

It was too costly and too much hassle to do it more frequently than that. It was also a time when your mobile phone (if you had one) was the size of a brick, and you had to charge it every five minutes to keep it going. Times have changed, technology and computing power have moved on beyond the wildest imagination of what might have been thought possible many years ago. Yet the timescales and process for an actuarial valuation have hardly moved. What needs to change? To me it is simple – trustees should have anytime access to an accurate view of their scheme’s funding position. The progress or otherwise against the funding strategy should be discussed and recorded at each trustee meeting with necessary actions taken. The number of meetings each year is a matter for schemes themselves, but this simple process would ensure the most important issues facing a scheme are looked at once or twice each year, at least. A scheme’s strategy should not be driven by the existence of a formal valuation process. Market conditions will not magically move into line once every three years, so that all decisions can be based on the funding position at that date. A scheme should set a long-term goal with plans in place for the evolution of the strategy. Any one formal valuation process should not change that strategy; trustees and employers should not be pressing the ‘reset button’ every three years. My only concession to the current regime would be in terms of formal reporting. The red tape-laden actuarial valuation process is prohibitive when it comes to carrying it out more frequently than every three years. Yes, there has to be a formal process, and once every three years is perhaps enough. I am also in favour of a more streamlined, lighter-touch process for schemes that are clearly in surplus, as mentioned in the government’s recent green paper. So how can trustees demonstrate to the outside world that they are reviewing their position more frequently? Again, this can be done simply by adding in funding update numbers on the annual scheme return. This will give the trustees an audit trail, a history of funding progression, and allow the Pensions Regulator to examine ‘inter-valuation’ and intervene in the (unusual) cases where required. No excuse for taking 15 months Looking at the time it takes to complete actuarial valuations, there really is no excuse to come close to the current 15-month timescale. Closed scheme valuations should be instant and perhaps a few months longer for those with active members or salary links. A target of something in the region of six or seven months – which would tie in with the production of a scheme’s accounts – seems much more sensible. I am pleased by the recent announcement from the regulator that it will take a “tougher approach where trustees and employers fail to agree a valuation and schemes do not submit their valuations on time”. The regulator has flexed its muscles on the chair’s statement for defined contribution schemes, and I expect they will jump at the opportunity to show similar strength against non-compliance for defined benefit valuations. Trustees, particularly those of a professional variety, will do well to heed these clear warnings. Pensions Expert

Further reading

Is your DB scheme an asset rather than a liability?

Blog
by Alistair Russell-Smith   •  

2024 Charity Defined Benefit Pensions Benchmarking Report

Blog
by Alistair Russell-Smith   •  

Spring Budget 2024 – What does it mean for pensions?

Blog
by Angela Burns   •  

More Insights?