Are we wrong about how to value DB liabilities?
In a letter to the editor, retired actuary Richard Abramson explains why both Dan Mikulskis and Con Keating could be wrong about how to value DB liabilities…
Dear Editor,
Following on from the articles by Dan Mikulskis (22 September) and Con Keating (23 September), I would suggest that both are wrong regarding the correct way to value DB liabilities.
What matters to investors in a company are the likely future cash calls related to pensions; for that purpose the discount rate is whatever is agreed between the trustees, the actuary and the employer. That may seem to beg the question as to what the rate should be, but bear with me.
What matters to the pension scheme members is security in the event of the employer's insolvency (as Mikulskis correctly points out). So ideally the pensions would be insured against the failure of the employer. Oh, look, they are! The PPF provides just that insurance. In doing so it will measure the liabilities on a gilt-related basis and the company specific risk of insolvency on the best evidence it has, but be that as it may it provides insurance. So up to the PPF level of benefits members are fully protected regardless of the funding approach.
The only issue, then, is that PPF cover for members is not 100% cover. Well, how much does that matter?
If it matters to the trustees, they can press for super-cover using a tough investment and funding basis, and that is what will then matter to investors. But often the trustees will accept that it is reasonable for the employer to fund on a reasonable estimate of the long-term return on an investment mix including risk assets, and that then is what will matter to investors in the company (together with the PPF levies).
It's simple really!
Richard Abramson is a retired actuary
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