Actuarial valuations take a bizarrely long time to complete and the process distracts defined benefit pension schemes from real strategic issues, a major consultancy firm warned today.
PricewaterhouseCoopers Pension Group also said the actuarial valuations process carried out by pension schemes takes too-long and costs too much to complete. Raj Mody head of the PwC's pensions practice group suggested that this exercise could be cut by two thirds.
According to the firm, the statutory time period for completing an actuarial valuation should take five months instead of 15 months as it does currently. This would make the pensions industry's management of pension schemes more efficient, give earlier clarity to trustees and sponsors of the financing arrangements and free up time to focus on other risk management issues, PwC said.
'When you think that a corporate plc signs off its audited accounts within a few months of its year-end, it's bizarre to see pension scheme actuarial valuations take as long as 15-months to complete after their effective date,' Mody continued.
'Of course, the negotiation between parties does require some time, but the process could easily be condensed to a third of the time it currently takes even allowing for this.
'The pensions industry should be striving for efficiency where possible as this will benefit trustees, sponsoring companies and their members.'
PwC has drawn up a five-point plan to change the traditional process in the pensions industry.
It said: data should be prepared in readiness for use at valuation date; the strategy for financing and risk management shouldn't be included in the valuation's timetable; initial analysis of the asset and liability position should be made available within a week of the valuation date; up-to-date technology platforms should be used so that variations to results are explored in real time; and duplication should be avoided, with advisers operating from one calculation platform.
PwC also said a more proactive approach to formulating an integrated risk management strategy would simplify the actuarial valuation process.
Mody added: 'The [Pensions] Regulator's focus on integrated risk management plans is absolutely a move in the right direction. Many schemes are currently approaching valuations the wrong way round by considering how much needs to be paid into the pension scheme and when, trying to use a budgeting process to formulate your whole pension scheme strategy.
'Instead, the strategy should come first, and then you can manage all the consequences, including the funding approach, in a way which is consistent with the strategy.'
Agreeing with PwC, Calum Cooper, head of Trustee DB at Hymans Robertson said the traditional approach takes too long to help trustees capture opportunities.
Cooper said: 'The answer is to evolve the process rather than relegate it to the scrap heap and still pay for the privilege. Valuations should embrace technology and evolve the focus to cover all risks to member outcomes: covenant, cash and investments.
'The valuation can and should be used to improve member outcomes. Yes it needs to be quicker - and with technology today it can be. And yes it needs to be risk based rather than simply a one dimensional budgeting exercise.'