Spence & Partners latest blog for Pension Funds Online –
The number of firms offering daily valuation tools has risen significantly in the last 12 months and many pension scheme trustees now have access to real time updates of their funding position.
This is a step change from the days when accurate figures were available once every three years, fifteen months after the effective valuation date, with an approximate roll forward provided once a year between valuations.
Whilst each consultancy firm extols the particular virtues of their system, is it time to take a step back and ask whether trustees are actually getting the most they can out of their spend on these tools?
Are there ways in which daily valuation systems could be integrated with other scheme management functions in order to drive efficiencies and improve decision-making?
One of the main areas of inefficiency and risk within a pension scheme lies in the way in which data is defined, stored and transferred.
Combining the actuarial and administration databases to drive reporting from live administration data cuts down on the cost of data transfer, the risk of error. Introducing discipline and consistency around the way in which benefits are defined and valued.
Placing a value on pension scheme liabilities essentially involves projecting forward the life of each member and the benefits which would be paid to them in a range of circumstances.
If all administration calculations needed for each member are coded at outset, then this not only makes it easy to produce daily actuarial valuation results, but it has the added advantage of ensuring that administration processes are streamlined.
Putting in the work up front to accurately define the benefits each member is entitled to in a range of circumstances over their lifetime means that all quotes can be provided at a push of a button.
Members receive information about their benefits more quickly, administration costs reduce and the risk of paying out incorrect benefits reduces as well.
Whilst daily valuation systems provide information about the funding position on any given day – it is critical that there is a framework in place to use this information to drive decisions around investment strategy and contribution levels.
In order to do this, the funding and investment strategies need to be aligned and consistent. It is also important that both investment consultants and actuarial advisors can access the system and rely on its outputs.
Using a single set of figures will reduce duplication of effort and remove the need to reconcile results at each reporting date.
Collaboration between different advisors
A valuation system which can be accessed by employer advisors, trustee advisors, investment consultants and administrators ensures that consistent advice is provided to both trustees and employers – without the wasted effort associated with producing and reconciling various sets of calculations.
There is no reason why a pension scheme can’t be run on a single system with all consultants able to use the outputs of that system on which to base their advice.
Think of the savings if it wasn’t necessary to pay the employer’s actuarial advisors, the trustees’ actuarial advisors and the investment consultants to produce slightly different versions of the same figures before they deliver advice.
At a time when the Regulator is putting the onus on trustees and employers to develop integrated funding and investment strategies, the proper use of automated systems can enable the day to day to be streamlined.
This means trustees and employers are free to focus on strategic decisions and effective monitoring of progress towards objectives.
Pension Funds Online – 10/04/2015