Pension Fund Valuations and Market Values

Head, S.J.; Adkins, D.R.; Cairns, Andrew J. G.; Corvesor, A.J.; Cule, D.O.; Exley, C.J.; Johnson, I.S.; Spain, Judith; Wise, A. J.

doi:10.1017/s1357321700002117

Cited by 9 publications

(11 citation statements)

References 13 publications

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“…Regulators then have to design a process regarding when trustees and firms need to take action and what action. Head et al (2001) suggested that trustees and members would not find it easy to accept the psychology of a target solvency ratio under 100%. So, with a starting point of the current solvency ratio, the regulator would also consider how far below 100% it is; the risks being taken, risk disclosures and risk margin (excess of buyout cost over liabilities); the employer covenant; and the solvency projected for the future.…”

Section: Discussionmentioning

confidence: 99%

“…The discounted income valuation smoothed asset values when markets were volatile (Head et al, 2001). However, achieving this by constant parameters (income growth and discount rates) is questionable when economic conditions change, as Exley et al (1997) pointed out in relation to the assumptions hard-coded into the MFR requirements.…”

Section: Valuation Of Assetsmentioning

confidence: 99%

“…Exley et al (1997) argued that scheme solvency should be assessed with discounting based on the matched, not actual assets (i.e. cash and bonds);• Head et al (2000) found that an economic valuation using gilts is entirely objective and most satisfies (compared with other valuation types) targeting security as it targets the defined benefit in the event of scheme wind-up as well as at projected retirement age;• Chapman et al (2001) proposed discounting liabilities at bond rates to produce a marketconsistent valuation; • Cowling et al (2005) recommended solvency be assessed by reference to a notional investment strategy with assets providing defined benefits with a high degree of certainty such as gilts, AAA debt or collateralised swaps; • Cowling et al (2012)'s paper indicated that solvency measurement should use the discount rate on matching assets, which for DB liabilities were gilts; • Hatchett et al (2013) concluded that a valuation based on financial economics has several…”

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confidence: 99%

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Actuarial valuations to monitor defined benefit pension funding

O’Brien¹

2020

Br. Actuar. J.

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This paper is motivated by The Pensions Regulator (TPR)’s review of its Code of Practice on funding for defined benefit schemes and aims to suggest how trustees and regulators should monitor the extent to which scheme assets are adequate to cover liabilities. It concludes that current practice is inadequate and needs to change. A review is carried out of papers on not only this subject but also (to collect ideas rather than automatically apply them to pensions solvency valuations) pensions and insurance accounting and regulation. Current practice is “scheme-specific funding” which permits discretion on choice of discount rates and other assumptions; the paper is concerned that this can lead to bias, and that trends in a scheme’s solvency can be obscured by changing assumptions. This also leads to the funding ratio communicated to scheme members having little meaning. The paper suggests that regulators should require a valuation that is based on sound principles, objective, fair, neutral, transparent and feasible. A prescribed methodology would replace discretion. It concludes that the benefits to be valued are those arising on discontinuance of the scheme, without allowing for future salary-related benefit increases, which are felt to no longer be a constructive obligation of employers. The valuation should, it is suggested, use market values of assets, which is largely current practice. Liabilities should reflect the trustees fulfilling their liabilities, rather than transferring them to an insurer (which may introduce artificialities). The discount rate should follow the “matching” approach, being a market-consistent risk-free rate: this is consistent with several papers to the profession in recent years. It avoids the problems of the “budgeting” approach, where the discount rate is based on the expected return on assets – this can be used to help set contribution levels but is not suitable for determining the value of liabilities, which depends on salary, service, longevity, etc and (very largely) not on the assets held. In principle, the liability value can be adjusted for illiquidity. Credit risk of the employer should not be allowed for. Liabilities should reflect the (probability-weighted) expected value of future cash flows and should not be increased by prudent margins or risk margins (which would lead to a non-neutral figure). Risk disclosures are needed to understand and manage risks. The resulting funding ratio is a consistent measure, to be disclosed to members, which can be used to manage the scheme, and by regulators as the basis for requiring action. Scheme-specific management using data such as the employer covenant means that immediate action to ensure 100% solvency on the proposed basis would not necessarily be appropriate. The author encourages the profession to advise TPR on the above lines.

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Section: Discussionmentioning

confidence: 99%

Section: Valuation Of Assetsmentioning

confidence: 99%

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confidence: 99%

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Actuarial valuations to monitor defined benefit pension funding

O’Brien¹

2020

Br. Actuar. J.

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“…At the same time as the theoretical developments, regulatory and consumer pressures constrained actuarial discretion in pensions and insurance (Needleman & Roff, 1995;Shelley et al, 2002) so that payouts from long-term funds were more mechanically linked to investment performance. There followed a series of papers applying option pricing theories (also called market-consistent valuation) to many areas of actuarial work: pensions (Exley et al, 1997;Head et al, 2000;Chapman et al, 2001), life insurance (Hare et al, 2000;Hibbert & Turnbull, 2003;Sheldon & Smith, 2004) and general insurance (Cumberworth et al, 2000;Dreksler et al, 2015).…”

Section: What a Difference 20 Years Makesmentioning

confidence: 99%

British Actuarial Journal celebrates its 20^th anniversary

2015

Br. Actuar. J.

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“…One actuarial method of determining the bonus is to begin with a calculation of a smoothed value of assets. Head et al (2000) provide a description of their development and justification in the context of DB funds. One common approach is for the value of shares to be determined by discounting future dividends at the actuarial valuation rate.…”

Section: Smoothed Bonusesmentioning

confidence: 99%

Retirement Provision in Scary Markets

Bateman¹

2007

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A catalogue record for this book is available from the British Library Library of Congress Cataloguing-in-Publication Data Retirement provision in scary markets / [edited by] Hazel Bateman. p. cm. Retirement provision in scary markets : introduction / Hazel Bateman-Who's afraid of the big bad bear? or, why investment in equities for retirement is not scary and why investing without equities is scary / Ronald Bewley, Nick Ingram, Veronica Livera and Sheridan Thompson-Assessing the risks in global fixed interest portfolios / Geoffrey Brianton-The role of index funds in retirement asset allocation / David R. Gallagher-Retirement wealth and lifetime earnings variability /

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Pension Fund Valuations and Market Values

Cited by 9 publications

References 13 publications

Actuarial valuations to monitor defined benefit pension funding

Actuarial valuations to monitor defined benefit pension funding

British Actuarial Journal celebrates its 20^th anniversary

Retirement Provision in Scary Markets

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Pension Fund Valuations and Market Values

Cited by 9 publications

References 13 publications

Actuarial valuations to monitor defined benefit pension funding

Actuarial valuations to monitor defined benefit pension funding

British Actuarial Journal celebrates its 20th anniversary

Retirement Provision in Scary Markets

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Product

Resources

About

British Actuarial Journal celebrates its 20^th anniversary