Companies urged to take control of DB valuations

Trustees rather than sponsor leading valuation in 61% of cases say schemes

clock • 1 min read
Alistair Russell-Smith - sponsors can achieve better corporate outcomes and manage increased regulatory risk
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Alistair Russell-Smith - sponsors can achieve better corporate outcomes and manage increased regulatory risk

Companies should take more control of valuation processes for their defined benefit (DB) schemes to help manage the regulatory risk they face, according to Hymans Robertson.

The consultancy has found nearly two thirds (61%) of pension scheme professionals reported valuation being overseen by trustees instead of the companies.

Hymans Robertson head of corporate DB Alistair Russell-Smith said oversight must shift to companies due to the greater regulatory pressure now aimed at sponsors - urging companies to plan valuations like they would a corporate transaction.

He says: "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."

Factors to consider include key actuarial assumptions such as RPI, the CPI wedge and longevity, as well as whether or not to introduce an inflation risk premium to reduce the inflation assumption, particularly when inflation risk is not hedged

He said there is arguably also now sufficient evidence to make some allowance for Covid-19 in the longevity assumptions - adding it was also worth considering funding expenses out of scheme assets if the scheme is in a technical provisions surplus.

Russell-Smith added: "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."

Jon Yarker is a financial journalist at Rhotic Media

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