Gilts plus 'unhelpful' in current climate, survey says
Over half of pension professionals believe the 'gilts plus' valuation method is unhelpful in the current economic environment, according to Aon Hewitt research.
However, the method is not necessarily broken, with the same 57% of respondents saying it "still has a place".
The calculation estimates future liabilities based on current gilt yields, or a margin above current yields, and adjusts discount rates accordingly. Just a small change in the discount rate can massively increase liabilities due to the long-term nature of pension liabilities.
The survey of over 800 pension professionals, conducted during the consultancy's annual conference series, also showed just over a quarter (27%) believed the method is still appropriate.
The poll was conducted after a session which considered the advantages and disadvantages of various alternatives to gilts plus, and also found that 8% believed the method is entirely "broken and shouldn't be used".
Partner and scheme actuary Paul McGlone said schemes need to recognise they cannot ignore the low yield environment.
"The first concern about the ‘gilts plus' method is that it places a value on the liabilities that is too high," he said. "But when you examine that closely, it's not clear that the first criticism stands up to scrutiny.
"If we accept that we are in a low yield and low return environment, then the amount of money needed to pay pensions goes up, and contributions need to do more of the work. Denying that and assuming that returns will be higher doesn't solve the problem - it just hides it."
The research was carried out on the back of falling gilt yields, which have dropped 3% since 2010 and have in turn raised scheme liabilities by around 50%.
McGlone said schemes should be focusing on the long-term horizon, but could also consider adapting the ‘gilts plus' used in their calculations.
"Measuring funding by reference to gilts will result in gilt-like movements in liability values, which can then only be hedged by gilt-like investments," he continued. "But schemes should be investing and measuring based on their long-term objectives. If those long-term objectives are not to hold gilts, then measuring progress with a strict ‘gilts plus' method is not going to be helpful."
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