Reassessing how contributions and investment returns are balanced
Valuations are important pit-stops along your pension scheme’s journey, giving you a chance to check you have enough gas left in your tank to easily reach your destination. For your pension scheme this means balancing the risk capacity and affordability of your sponsor with your scheme’s investment strategy and funding needs — making sure your journey stays on track.
In keeping with current TPR guidance, here, we set out a risk-centric approach to a funding valuation – it’s a natural evolution of the traditional funding-focused approach.
Establish the regulatory backdrop for the valuation.
A valuation is a big project – make sure all the basics are covered.
Covenant is one of the key drivers of your scheme’s investment strategy, and affordability is often a key factor in funding negotiations – it is therefore a natural starting point for valuation discussions.
With a firm understanding of your covenant, ask yourself whether your current investment strategy remains supported and appropriate.
Your funding (or Technical Provisions) assumptions should then be set with your end-game target in mind, and only require slight rebalancing following the outcome of your covenant review and any subsequent changes to your investment strategy.
Without a formally agreed journey plan, valuation discussions between trustees and the sponsor can sometimes be tricky, especially when it comes to the bottom line: cash contributions.
Addressing your funding deficit in a manner that is both affordable to the sponsor and in line with your end-game target requires careful balancing of key factors such as:
Beyond the considerations outlined above, there are a wide variety of levers that can be pulled to develop a funding and security package acceptable to all parties.
Before closing the file on your valuation, you should revisit your journey plan.