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What to do if you
have a valuation right now

Our viewpoint

As of 31 March 2020, the world is upside down. So it’s a tough time to be making decisions. Particularly long-term decisions about pension schemes.

There is turmoil in financial markets, it’s hardly possible to judge the long-term covenant of most sponsors, and the pension rules and regulator guidance seem to shift from week to week. So what should you do, and what should you not do, if an actuarial valuation is currently on the go – for either funding or accounting purposes?

Starting with the – much easier – question of what not to do. As Douglas Adams wrote: Don’t Panic! Of course, with an overload of information shooting at you from volatile markets, hyper-active consultants, and an excited media, that may be easier said than done. But we all know that “panic” and “worry” are counterproductive. So keep calm, and focus on those decisions that can reasonably be made.

Firstly, ensure that pension administration teams are continuing to pay members’ benefits, and consider communicating with employees and other members about what they should and should not be doing. Only then, begin to think about the long-term funding and accounting implications.

Friday evening is swiftly becoming the weekly slot for a significant announcement from the Pensions Regulator – not ideal, but it does give the pensions industry something to read at the week-end during lockdown! This weeks’ release was covered well in an excellent blog by my colleague Jonathan Camfield. Until then, I was most concerned about funding valuations as at 1 January 2019, which had yet to be signed off; as the deadline of 31 March 2020 to agree sensible long-term decisions hardly seemed fair. As such, everyone breathed a sigh of relief when an extended period was effectively granted.

This leniency from the Pensions Regulator gives some space to calmly consider two things: the short-term, and the long-term. In the short-term, sponsors may need some relief from deficit repair contributions, so as to keep their businesses going. The Regulator acknowledges this and – subject to jumping through the appropriate hoops – has given trustees the nod that immediate short-term reductions in deficit contributions can indeed be appropriate in many cases (for schemes at any point in the valuation cycle). Further, looking to the long-term, the valuation can be re-assessed on the other side of the crisis. That means the valuation can be signed off once sensible long-term decisions can be taken in the light of developments over the summer.

This is a very sensible approach from the Pensions Regulator, and in my view shows a more nuanced approach to understanding companies than that seen before. This reasonableness seems to have been contagious: even the PPF have said that they will be understanding if signing off company accounts has been delayed by the crisis!

But what about valuations as at 31 March 2020?

The two key questions still remain: “If I have a funding actuarial valuation in the first quarter of 2020, what should I do?”, and “My company accounting date is 31 March 2020, how does it look?

Considering funding valuations first, the legislation already gives a full 15 months before the valuation needs to be signed off. Whilst markets do not look at all pleasant today, the valuation process is permitted to take account of experience after the valuation date. Another alternative would be for the valuation date to be moved to an earlier date – say 31 December 2019; in some circumstances this could be advantageous, but for others it might simply serve to bring forward the effective deadline.

From a funding perspective, the place to focus right now is on the shorter term. Look at what money is expected to flow in and out of the pension scheme over the next 3 to 6 months. Company contributions might temporarily cease, and member requests to transfer out, or retire and take a lump sum, might increase significantly. As such, liquidity will be key. None of this should be too challenging to handle, but monitoring the situation regularly and having trigger points for escalating decision making might be warranted. This might, for example, help to flag when transfer values quotations - or indeed payments - ought to be suspended from the scheme.

Finally, it’s worth considering the accounting position as at 31 March 2020. For most pension schemes, over the last quarter both the assets and the accounting liabilities will have decreased; unfortunately, the specifics of how much and – most importantly – which has moved more, will vary considerably from scheme to scheme. The asset impact will depend on the proportion allocated to equities, and the amount of interest rate hedging, amongst other factors. Those that have carefully considered the exposure of their accounting position, and correspondingly moved to a de-risked position, will have fared much better.

The liability side of the pension scheme, in company accounts, is however likely to have moved favourably. The big three variables are typically discount rate, inflation and longevity. Discount rates are linked to corporate spreads, which have shot up, inflation is linked to the outlook for the economy, which has shot down, and no one yet knows the long-term impact of Covid-19 on longevity. However, there seems little doubt that, taking these impacts together, pension liabilities as measured for company accounts will have reduced. Given the unusual market conditions, it should not be expected that accounting as at 31 March 2020 will simply be “turning the handle”. Indeed there are several innovative approaches that can help, as covered by my colleague Phil Cuddeford in his recent blog, and so I’m expecting plenty of companies to be fundamentally re-assessing how they go about setting their actuarial assumptions in the weeks and months ahead.

What does all this mean for those facing an actuarial valuation at the current time?

Focus on what matters: in the short term defer long-term decisions until there is sufficient time and information to make sensible long-term choices. Use that time to gather information, in line with the Regulator’s guidance, to resolve any practical issues around paying benefits and communication, and to carefully consider any potential liquidity issues.

We are on a roller coaster ride – that’s why the world seems upside down – but it will pass and long-term decisions are best kept for when your feet are back firmly on the ground.