The £36.7bn BT Pension Scheme moved its date forward by six months, as other schemes lengthen their valuation negotiations to take advantage of favourable economic conditions
The move allowed the parent company to make a substantial contribution to help fill the pension deficit within its financial year and also let the scheme take advantage of a more favourable gilt market.
Valuation flexibility
Schemes are required to carry out a valuation every three years and report their results to the Pensions Regulator within 15 months of the chosen date.
Due to the three-year timeframe, it is very unlikely schemes would be able to push back their valuation date.
But schemes are able to bring their dates forward, without seeking the regulator’s approval, if they can make a legitimate business case for doing so.
There has been an increasing trend for schemes to make full use of the 15-month negotiating period to see if economic conditions improve.
In a note to members, BT Pension Scheme chairman Paul Spencer said the “abnormal market conditions” affecting gilt yields in December made it difficult to assess the funding position at that point.
But the Pensions Regulator has warned other schemes looking to move their valuation date that they must not do so if the sole reason is to take advantage of more favourable economic conditions.
Instead, the regulator and consultants have suggested schemes may wish to take maximum advantage of the 15-month period between the valuation date and when they must submit their valuation to the regulator.
This would allow them and their sponsor to make assumptions based on economic conditions if they improve after the valuation date.
"Economic conditions will continue to develop while trustees are going through the valuation process,” said a regulator spokesperson. "Where appropriate, the use of actual post-valuation experience is acceptable."
Schemes and sponsors wishing to make use of the full 15-month negotiation period need to have a clearly defined timetable and make sure all stakeholders are aware of key deadlines.
BT’s date move
The £36.7bn BT pension scheme was due to have its triennial valuation date on December 31 2011, having recorded a £9bn deficit three years earlier.
We would expect valuation dates, if changed, to have been done so on a sound and justifiable basis
Pensions Regulator
But the scheme agreed with the company to bring the date forward by six months, so the deficit stood at £3.9bn on June 30 2011.
Between the 2008 and 2011 valuations, the scheme’s assets had increased by £5.5bn thanks to 10.1 per cent average annual investment returns over the period.
Over the same period, the scheme’s liabilities had increased by £600m due to it changing its real discount rate from 2.5 per cent to 2 per cent.
In March this year, BT made a £2bn lump sum payment into the scheme and has committed to paying £325m in 2013 and 2014, and then £295m each March until 2021.
At the time of the March announcement, Spencer said: "The trustee [board] is very pleased to have reached an agreement with BT on the 2011 valuation.
"Since the last valuation, BT has had a successful period, enabling it to pay a £2bn upfront payment and eliminate the deficit within 10 years."
Russell Agius, partner at Aon Hewitt, said the main reason for BT moving its valuation date forward was so the parent company could make such a large contribution within its financial year.
"It is always easier to move the date if there is a tax advantage, rather than just to move to more favourable market conditions," he said.
Other reasons to move your valuation date
Trustees are able to bring their valuation dates forward under legislation but it is much harder to push the date backwards as schemes need to agree a funding level with the employer every three years.
Why not wait and see if there is an upturn?
Russell Agius, Aon Hewitt
The most common reason for a scheme moving its valuation date forward is if it has multiple sections and would save time and money if their valuation dates were aligned.
The regulator does not need to approve such actions, but the spokesperson added: "When we receive the recovery plan, we would look to understand why the effective date had moved.
"Moving a valuation date forward is not common practice. We would expect valuation dates, if changed, to have been done so on a sound and justifiable basis."
Agius said there was a trend for schemes and their employers to lengthen the time it takes to agree the funding level after the valuation date, as they wait to see if market conditions improve.
"It is something that will be happening a lot more this time round than during previous valuations," Agius said.
"You get 15 months to agree the deficit recovery payments. Why not wait and see if there is an upturn?"
But Agius warned that if employers wanted to extend the consultation process they would improve the discussions if they let the trustee board know what they are doing and set defined timescales for reaching decisions over assumptions.
