Tyne and Wear Pension Fund has considered changing the way it sets the discount rate used to calculate its liabilities, to prevent its funding level falling and large increases in employer contributions.
Monitoring by the fund’s pension committee between valuations has shown that during the 2013 valuation, a straightforward application of the strategy used during the 2010 valuation could result in the funding level falling to 76 per cent from 79 per cent, according to the fund’s 2013 annual report.
Where things haven’t changed is where people are looking at affordability around recovery plans
Monitoring by the fund’s pension committee between valuations has shown that during the 2013 valuation, a straightforward application of the strategy used in 2010 could result in the funding level falling to 76 per cent from 79 per cent, according to the fund’s 2013 annual report.
Tyne and Wear is in discussions with its actuary over using a more appropriate discount rate that does not just focus on gilts, said head of pensions Steven Moore.
“We’re still looking to put a prudent valuation process in place,” he added.
This could involve setting the rate by taking into account the return on the fund’s assets, according to the report.
However, Moore said the fund would take into account gilt yields when considering which method to use to set the fund’s discount rate.
Low gilt yields have stirred up the debate around appropriate methods for calculating discount rates, said Colin Richardson, senior corporate consulting actuary at Buck Consultants.
“[Gilt yields] have been the most common benchmark, but because yields have been so low for the past two to three years, that means that if your method starts with gilt yields, the value of your liabilities has risen a lot because of the method you have used,” said Richardson.
Some schemes are starting to derive their discount rates using alternative methods such as expected return on assets, said Sarah Brown, head of scheme funding research at Punter Southall.
One method is the neutral rate, which takes into account what a scheme holds in assets and the likely expected return. The discount rate is set at the margin from the best-estimate position.
“Where things haven’t changed is where people are looking at affordability around recovery plans,” Brown said.
Employer growth objective
The Pensions Regulator’s employment growth objective means the sustainability of the employer’s growth will need to be taken into consideration when setting employer contributions. However, public sector pensions will not be covered by this objective.
If trustees request contributions to be paid back too quickly to return the scheme to full funding, it may mean the employer is unable to invest in growth areas and it may therefore not be in the best interests of the scheme, said Richardson.
A spokesperson for The Pensions Regulator said: “In our last annual funding statement we set out the flexibilities that are available to schemes including adopting an approach that best suits the individual characteristics of their scheme and employer.”
“We would like trustees to approach discount rates in the context of the overall risk-management of their schemes, including covenant strength, funding and investment,” the spokesperson added.
