Crisis forces pensions measures back to gilts

Related images

  • Crisis forces pensions measures back to gilts

UK - Hewitt Associates has conducted a study of 50 pension fund clients which suggests all will in future base their defined benefit funding assumptions on a gilts-based measure, even though it could increase liabilities by up to 30%.

The survey of schemes - which looked at a cross-section of scheme longevity, sizes and with different sponsor backgrounds - suggests trustees who currently measure a scheme’s funding based on corporate bonds rates are likely to opt for a more cautious approach as a result of widening spreads in the corporate bonds market and in future price funding on a gilts-based measure.

With many pension funds now approaching the end of their accounting period on 31 March, - when second round valuations are completed at least for local authority pension funds - it is possible many trustees will adjust their funding strategies to ensure they meet the regulator’s call for prudence and flexible affordability to be given priority, even though it could massively increase liabilities.

“There is a significant minority [of pension funds] who still use the corporate bond funding measure,” said Russell Agius, principal consultant at Hewitt Associates.

“When you look at the first round of scheme funding, the corporate bond approach was much stronger. Now we have significant divergence between the two measures, trustees have been questioning since mid-2007 whether it does contain the prudence required. With their second round valuations they are now questioning whether measuring under corporate bonds has gone too far out of their risk band and are asking whether they are still comfortable,” said Agius.

He continued: “The widening of credit spreads has largely eradicated any prudence when funding using a corporate bond-based discount rate. Prudence is a strict legal requirement under the scheme-specific funding regime. Schemes continuing to use a pure corporate bond-based discount rate, without making adjustments to the method, risk greater scrutiny from the Regulator as part of their second scheme funding valuations.”

The study follows earlier comments from the Pension Regulator, reminding trustees they had a duty to ensure the systems and funding measure they used were as robust as possible, but did not place undue demands on sponsors should deficits be uncovered during the difficult economic climate.

“The results show they are all taking different action on behalf of their members. They are making sure they have the strongest technical provisions and are dealing with the affordability in recovery plans, but being more flexible in the process.”

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email

Have your say

You must sign in to make a comment


Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2511

    Asset class: Commodities.
    Asset region: Global.
    Size: $10m.
    Closing date: 2019-02-25.

Begin Your Search Here