• 61% of schemes say the Trustees rather than the Company led the process at last valuation
• Tougher regulatory regime and enhanced regulatory powers mean companies need to take more control to manage increased regulatory risk

Companies should take more control of their valuation process as they approach forthcoming triennial valuations warns Hymans Robertson. Nearly two thirds (61%) of pensions scheme professionals at one of its recent webinars reported that the Trustees, rather than the Company, took the lead at the last valuation. The leading pensions and financial services firm cautions, however, that the tougher regulatory regime and enhanced regulatory powers that are now in place mean companies should take the control to get the best outcome and to manage increased regulatory risk.

Commenting on what Companies must do to take more control of the valuation process Alistair Russell-Smith, Head of Corporate DB, Hymans Robertson, says:

“Companies should plan the forthcoming valuation like they would a corporate transaction. By considering the options upfront and taking a proposal to the trustees, rather than waiting for the trustees to act, they can achieve better corporate outcomes and manage increased regulatory risk.

“There are many factors to include as they develop a proposal. Key actuarial assumptions to consider include RPI, the CPI wedge and longevity. There is a case for introducing an inflation risk premium to reduce the inflation assumption, particularly when inflation risk is not hedged. Arguably there is also now sufficient evidence to make some allowance for Covid-19 in the longevity assumption. Longevity specialist, Club Vita, has developed four longevity scenarios - three of these lead to a reduction in the liabilities. The modest ‘bump in the road’ scenario reduces liabilities by 0.9%. It is also worth considering funding expenses out of scheme assets if the scheme is in a Technical Provisions surplus.

“As DB schemes hurtle towards their end game, this valuation cycle is also the ideal opportunity for corporates to review their endgame goals, understand the timescales to buy-out, and actively plan the scheme’s route. Improved funding levels and the maturing of the liabilities mean that buy-out might be sooner than the corporate expects. There’s a useful conversation to be had with pension scheme trustees around balancing investment risk and covenant risk – is it better to keep on investment risk and buy-out sooner or keep de-risking and take longer to buy-out? It’s worth remembering, too, that newly emerging end game solutions such as superfunds and capital backed journey plans should also be assessed when developing a corporate DB end game strategy.”