The UK pension scheme of consultancy and insurance business JLT Group saw its IAS 19 deficit jump during 2016, as bond yields proved a leveller for schemes of all sponsor types.
The £489.5m Jardine Lloyd Thompson UK Pension Scheme has previously completed buy-ins representing 42 per cent of its allocation, but its remaining exposure to non-matching assets saw its funding level drop to 72.6 per cent from 79.3 per cent.
Critics of liability-driven investing have previously argued that it hinders pension schemes from investing for long-term growth, despite broader market agreement on the dangers of calling rate movements.
Trustees need to assess their risk levels through a number of lenses, one of which may be IAS 19 as this directly impacts the covenant
Ajeet Manjrekar, P-Solve
JLT’s £184.5m UK deficit means the scheme lags the FTSE 350 average, which is stated at 92 per cent funded on the same basis at March 31, by JLT Employee Benefits’ own fund index update.
Its assets went up by 7 per cent during the year, but the scheme’s liabilities grew considerably, despite having been closed to future accrual in December 2006.
JLT declined to comment or provide further details of the scheme.
Tolerating liability increases
The UK scheme has undertaken considerable derisking through buy-ins, but retained a 38 per cent allocation to equities at December 31 2016.
The prevailing narrative in pensions in recent years has been that schemes cannot afford to gamble with interest rates. But industry experts said this logic could not be blindly applied to schemes without consideration of a range of factors.
“It all comes down to employer covenant, risk appetite, and people understanding what risks they’re carrying," said Jonathan Reynolds, client director at professional trustee company Capital Cranfield.
He said there was no one-size-fits-all approach to investment strategy, except that “everyone goes in with their eyes wide open” and risks taken are in proportion to the employer’s ability to back them.
Risk-on?
Others praised the scheme’s commitment to equity risk within its portfolio.
“It’s good to see that the JLT trustees persist with a long-term investment strategy,” said Henry Tapper, business development director at First Actuarial.
He said the “pretty difficult” funding results were being experienced by most schemes in the UK, but the scheme’s faith in equities could pay off in the long run.
“Hopefully the situation will turn around because they’ll have got a decent equity bounce in 2016 and 2017,” he said.
However JLT’s decision to insure some of its liabilities may mean their investment strategy is not as ‘risk-on’ as it may seem.
“They’ve taken a lot of risk out of the scheme already,” said Hugh Nolan, director at consultancy Spence & Partners and president of the Society of Pensions Professionals.
The former JLT chief actuary added that buying in liabilities, in addition to limiting the company’s exposure to rate risk, had also taken risks such as mortality off its books.
Should you care about IAS 19?
The picture given by the company’s annual report and accounts is muddied by the mandatory disclosure of the deficit on an IAS 19 basis.
The measure’s ability to assess the health of a scheme is limited, due to its rigid presumption of an investment strategy based on corporate bond yields.
Nolan: Inflexible actuaries and trustees harm DB employers
Trustees and their actuaries must consider the impact of deficits and funding negotiations on struggling defined benefit sponsors, the president of the Society of Pension Professionals has warned.
Nolan highlighted the ineffectual nature of the measure at a Spence & Partners event on Tuesday, while calling for the industry to take a more flexible approach to funding deficits.
For now though, the accounting standard is a requirement, and as such may impact scheme decisions and has to be considered because of its link to the sponsor covenant, said Ajeet Manjrekar, co-head of P-Solve.
“Ultimately, trustees need to assess their risk levels through a number of lenses, one of which may be IAS 19 as this directly impacts the covenant and the sponsor’s ability to sustainably fund the pension scheme,” he said, although he warned schemes not to create risks elsewhere in addressing IAS 19 volatility.
Take care with buy-ins
Manjrekar said buying in liabilities at opportune times can be very beneficial to schemes, but warned that trustees should be aware of the dangers of tying up assets.
“This ultimately means a scheme has less assets to generate return or deploy as collateral for any liability hedging,” he said.
The segmentation of the membership in a buy-in can also mean schemes have to take more risk with their remaining assets to fill the funding gap.
“In particular, this may lead to schemes being forced to reduce the level of liability hedging on the remaining assets, and therefore the overall risk profile of the scheme may not be as significantly derisked,” said Manjrekar.
