Atkin trustees, actuaries, consultants & administrators

Pension Scheme Funding: a well thought out process can save you money

We find that we are often appointed to advise schemes following a drawn out (and ultimately expensive) valuation process has been completed. This usually stems from the Trustees and Company taking entrenched positions as to what assumptions should be used and what should be paid into the scheme.

We believe that sponsor covenant is key to the funding of a scheme and that, by working together to evaluate the covenant the sponsor and Trustees can start the process with a clear idea of the affordability of contributions and the main risks that the company faces. The valuation process should focus on managing those risks from the perspective of the scheme and the ability of the company to cover the downside investment risk. The process should not focus solely on the assumptions which will usually only impact the length of the recovery plan.

The process: Key to any valuation is for all parties to work collaboratively and not adopt entrenched positions. The trustees’ and sponsor’s interests should be aligned as the best support a scheme can have is a strong, supportive employer.

Sponsor covenant is key: The starting point should always be the affordability of the deficit contributions and the ability of the sponsor to cover any investment losses. We believe that, in many cases, schemes can avoid expensive independent covenant reviews and instead work through a structured process with the sponsor so they gain an in-depth understanding of the covenant and how it should be allowed for in the valuation.

Less focus on liabilities: The focus should not be on tweaking the assumptions, which will usually only move the length of the recovery plan back and forth.

Investment strategy should form part of the review: Investment strategy should be reviewed as part of the valuation process with a focus on asset allocation, removing any unrewarded risks and managing the transition from risk seeking to matching assets.

Recovery Plans can be flexible: In the current environment, the Pensions Regulator is more flexible over the length of the recovery plan. There are also alternative funding mechanisms that the trustees and sponsor may want to consider.

Costs need to be tightly controlled and benchmarked: As valuations have become more complex, many schemes have experienced spiralling costs. It is therefore important that trustees understand what is being covered under their actuarial fee agreement and benchmark this cost against other providers before the process begins. For instance, we believe for a typical £50m scheme a valuation should cost no more than £15k - £20k (depending on complexity).

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We believe that Atkin & Co take the burden of administration away from the trustees and feel confident that the work is completed by competent and knowledgeable staff. We would recommend them as an excellent service provider.

Abigail Watts, Pitman Trustees