Scheme valuation process 'broken', consultants say

Speaking at a roundtable event about the valuation process last week, experts raised concerns that the process did not closely examine scheme risks and covenant. The Pensions Regulator now requires schemes to take an integrated approach to investment, covenant and funding.

“[Valuations] are very much a budgeting exercise, they focus on discount rates and the deficit,” said Calum Cooper, partner at consultancy Hymans Robertson, which has an online valuation tool. “Investment advice often comes later when there’s less value that it can add.”

A time horizon of between 12 and 15 months means it is poorly suited to take advantage of opportunities in the financial markets, he said.

Cooper gave the example of a client whose equities had grown by 20 per cent last year and had reduced risk three times during the same period.

“That just wouldn’t have been supportable with a traditional valuation approach,” he said. "For me it’s clear that the current approach is broken… at best it’s lost its relevance but at worst it actually leads to poor decisions and out-of-date information."

Technology has reached a stage where it can offer trustees the analytics they need faster than their actuarial consultants.

But schemes were urged to be wary of adopting new approaches and tools wholesale without considering their specific needs.

“It’s for each scheme to decide how much of that [technological] capacity they want to buy, because there’s no point buying sophistication if you’re not going to be sophisticated in what you do with it,” said Alan Pickering, chairman of professional trustee company Bestrustees.

Schemes should ideally look at their funding situation every three months and compare it against their destination and timeline as agreed with the sponsoring employer, he said. Reviewing the scheme funding too regularly risks trustees developing concerns unnecessarily.

Informed action

The cyclical nature of the valuations process can also reduce its relevance to trustees, who may view it as something to be completed rather than a useful part of running the scheme.

Alastair Meeks, a partner at law firm Pinsent Masons, said he was "wary" of the concept of the valuation cycle. 

"It means that [trustees] tend to see what they’re getting through in terms of numbers rather than what numbers mean and where they should go," he said.

“The valuation process is seen as a process in and of itself and not automatically integrated fully into what schemes should be doing.”

Some schemes have established funding risk and investment committees for trustee meetings, which allows the actuary to work directly with the investment and covenant consultants under the direction of the trustee.

“This will be the beginning of a new journey where we will genuinely bring together the funding, investment and covenant strand,” Pickering said.

Integration of the different areas of the scheme strategy is seen as crucial for effective valuations in the future.

“The trustee environment is increasingly complicated, the investment strategy options are richer, you have to integrate covenant and funding and it’s harder,” said Cooper.

"So using technology to make it easier to dovetail with the governance structures trustees already have, and put them back in control, is important and needed now more than ever."