Current market conditions mean companies are being forced to put their pension liability management plans on hold, Xafinity said today.
The latest wave of quantitative easing by the Bank of England has driven the current level of government bond yields down, the pensions consultants explained. This has made both offers to members and the purchase of matching assets increasingly unattractive.
In light of this, Xafinity urged scheme sponsors to ensure their scheme valuations are placing an appropriate value on their liabilities. Currently, most schemes use an approach where discount rates are set with reference to government bond yields.
But, Xafinity said that while this may be appropriate for schemes with a weak employer covenant that have to be mindful of the security of their members' benefits, those with a stronger covenant should consider how they can take advantage of future expected investment returns.
To ensure liabilities are being assessed correctly, schemes should also understand the impact of CPI, it said. Using historical differences of around 0.7% a year could underestimate future differences between RPI and CPI, resulting in schemes overstating their liabilities by up to 10%.
They should also ensure soft assumptions like proportions married and take up of free cash are right and ensure scheme data is 'clean'. Sample testing can be a cost-effective way of checking the reliability of data, Xafinity said.
Chris Fletcher, the company's consulting actuary, said: 'It is essential that sponsors and trustees work together in the current environment to place the right value on pension scheme liabilities. 'Utilising sponsor covenant may allow sponsors to make longer term assumptions that will avoid the pressure to make large contributions in the short term. Getting the secondary assumptions right can also have a significant impact on the calculation of scheme liabilities.'
