Around 340 mainly small and medium-sized schemes have adopted a system of asset-liability modelling, previously only affordable to much larger plans.
Clients of consultants Punter Southall, with assets totalling £30bn, have been given access to the Pfaroe system, which gives schemes immediate actuarial valuations and allows them to analyse future cash flows using a number of different scenarios for inflation, interest rates and longevity.
If actuaries were regulated by the Financial Services Authority, they would say it would be irresponsible to run schemes like this
The deal will make available software formerly the domain of multibillion-pound schemes such as National Grid, Babcock, Daily Mail & General Trust, HSBC and Trinity Mirror.
John Batting, chief executive of Punter Southall, said he is confident the deal would strengthen his firm’s relationship with clients, rather than diminish its role, as the schemes now control access to information normally provided by actuaries.
Some believe this could reduce actuarial fees. However, the counter-argument is the information at the fingertips of trustees and employers will prompt them to seek more advice and implementation from their advisers.
Batting added the neutral provision of information could enhance cooperation between trustees and employers.
Other expected outcomes are for trustees to be persuaded to overcome their aversion to using derivatives. “It helps them get used to swaps and derivatives and it makes them think more carefully about how they buy assets to match risk,” he said. He also foresees faster decision-making.
David Norgrove, chairman of PensionsFirst, which runs Pfaroe, said the software helped trustees and sponsors with ever-more complex problems.
“Historically actuaries came down every three years like Moses and said ‘here are the numbers’,” he added. “These are in effect underfunded insurance companies and they need to be run in a much more active way.
“If actuaries were regulated by the Financial Services Authority, they would say it would be irresponsible to run schemes like this.”
The £759m Aga Rangemaster pension fund has worked out a funding plan with its sponsor that commits it to being self-sufficient by 2020.
The simplified assumptions that have bedevilled the industry can go
Help in achieving this will come through the use of the Pfaroe modelling software by its trustees and company directors.
The fund is closed to new members but open to future accrual, with the proviso that current member pensionable salaries are frozen.
William McGrath, chief executive officer of Aga Rangemaster and a trustee of its pension fund, explained how the use of modelling software has transformed decision-making.
“At the moment the impact has been on the quality of the discussion,” he said. “Everybody knows pretty clearly where things are in a very timely fashion, so you can spot the trend lines quicker.
“It is good for a company like ourselves to know quickly where the position actually is, rather than waiting another 12 months before the debate really clicks in.
“That enables you to manage that cash flow in a rather more sophisticated way. Having that data, it is then up to the trustees and the company to say ‘how can that impact our decision-making on investment?’.
“The simplified assumptions that have bedevilled the industry can go. All the parties to the discussion will be much better placed to raise the quality of debate. That has been the problem for many years; there have been too many errors where the level of analysis has not been there.”
