Playing the waiting game

David Davison

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In our fast paced society no one really likes waiting for anything, however for those financial directors of charities participating in local government pension schemes in England & Wales I’m sure they wouldn’t mind waiting a bit longer for their valuation results given everything else going on around them.

The results of the March 2016 valuations for these Funds are likely to be hitting desks imminently and the news is unlikely to be good.

In an attempt to see the positive, I suppose that is, that valuations are as at 31 March 2016 so are pre-Brexit and pre-Trump. This means that it’s a case of funding positions being worse, though not as bad as they could have been if the calculations were a few months later, given the deterioration in funding assumptions since March.

Investment markets remain volatile though, with some bright spots, particularly where companies have had a significant proportion of their income derived from overseas, thereby benefiting from favourable exchange conditions on this income, increasing returns. However, results have been pretty patchy and the actual impact on the assets will depend upon the approach adopted by individual Funds, so we’re likely to see very material variations.

Continuing low gilt yields and interest rates have seen defined benefit scheme deficits remain high and in many cases increasing further, despite often significant increases in contributions. An increase in interest rates might have helped reduce the value of liabilities, but it’s difficult to see the position improving dramatically over the short to medium term, and any improvement won’t impact on the historic position, and this is what will drive contributions.

So, overall I would expect funding levels to have further deteriorated, increasing deficits and therefore the level of contribution likely to be required to fund for them. Admitted bodies, especially those who are closed to new members, could suffer from a double or even triple funding whammy. It is difficult to be too prescriptive about what organisations can expect as there is such a variation in approach, however the sorts of issues I would expect participants to have to deal with would be:-

  • On closure to new entrants, as membership ages and therefore the percentage cost of providing benefits is likely to increase in comparison to those remaining open and with a relatively constant membership age and profile, admitted bodies could see increases in cost coming through as a result of this decision. It is also possible in these cases, that there is a greater focus on fixed monetary contributions than increases to the percentage funding rate, given that this will fall over time with a closed membership.
  • In addition, for those organisations who now have a small number of members and/or where the term to all members leaving/retiring is likely to be within 10 years, the Fund may look to move employers to contribute at, or close to the cessation basis, which would again increase costs.
  • Many funds are now undertaking detailed covenant assessments for their admitted bodies. Should these assessments identify weak employers, or those that have become weaker over the valuation period, again the contributions could be adjusted upwards to try to ensure the Fund benefits from the required contributions over as short a term as possible.

It’s unlikely that any of these options will impact positively on contributions.

Admitted bodies need to understand the position that they’re in, and the options open to them.

Ultimately, organisations need to understand what they can afford to pay. This might be very different from what they want to pay but the Fund will only be interested in affordability if they are to consider any revision to the funding proposal they have made. Funds are not in the business of making organisations insolvent, but they must go through a process to look to recoup the maximum contributions possible within their overall funding plan, in order to protect all the participants in the Fund.

Admitted bodies may also need to consider if they can continue their participation in the Fund on the same basis as historically, and to fully understand what the impact of any possible change may be.

It is likely following the publication of scheme information that employers will have a very limited time period to agree contributions, so they really need to be on the ball in terms of considering their options and exploring these with their Fund.

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers

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