Traditionally a valuation process can seem most akin to a tennis match with trustees and sponsors on separate sides of the net. At best it will be a straight forward couple of sets, but it has been known to feel more like an epic grand slam that tests both parties to the limit.
Is there a move towards a more collaborative approach where both parties realise they can at least agree on the same tune, even if there is still some way to go towards a strictly style waltz?
There is perhaps beginning to be an understanding within the pension industry that there is more than one way to approach the triennial valuation and that not everything needs to be about gilt yields. The gilt markets have set trustee and sponsor unprecedented challenges in terms of the scale of the deficits that need to be managed. Increased values being placed on liabilities in an environment where schemes have matured can compromise the scheme where trustees want to de-risk.
Where the main sources of funding are the sponsor and the investment returns, tension inevitably exists between a desire to match assets to liabilities and the wish to generate real growth. Trustees shouldn’t be shy of challenging their actuaries on how liabilities are valued, what the alternatives are to linking assumptions to gilt yields and how stochastic modellers can perhaps be moved to scenario testing that both the trustees and sponsor can agree.
Trustees can take the lead at valuation and proactively engage with the sponsor to achieve a funding arrangement that meets the need of all interested parties by:
- Challenging the norm without waiting for the sponsor or their advisers to raise questions.
- Exploring options for valuing the liabilities.
- Considering a package of options and not just deficit recovery contributions can give other areas to discuss. Such options might include guarantees, contributions linked to dividend policy and/or business performance, or use of escrows/funding trusts that bridge the gap between prudence and a more palatable basis for the sponsor.
The good news is that the valuation process doesn’t need to be adversarial and trustees no longer have to wait to be asked to dance.