Under the traditional approach, approximations exist in both the full actuarial valuations and roll-forward estimates between full valuations. These can lead to errors of up to 3% per annum – resulting in poor decision-making and economic inefficiencies for the trustees and scheme sponsor.
As large transactions become more and more commonplace for pension schemes, it is clear that a more dynamic approach to pension risk management is needed...
- Executive summary
Traditionally, pension scheme liabilities in the UK have not been valued as frequently or to the same level of accuracy as market instruments or insurance liabilities.
- A short history of scheme valuations
In the main, UK pension scheme liabilities are fully investigated and valued once every three years, with the valuation results only becoming available many months after the effective date of the valuation.
- A closer look at the extent of the
PensionsFirst has observed some significant discrepancies between accurate valuations prepared using PFaroe and approximate roll-forward estimates. These discrepancies have been up to 3% per annum.
- Impact of inaccuracy on schemes and sponsors
While this analysis highlights that discrepancies between accurate and up-to-date valuations made possible by modern technology and traditional approximate valuations can be significant, does this in turn have serious ramifications for pension schemes and sponsoring employers?
As large transactions become more and more commonplace for pension schemes, it is clear that a more dynamic approach to pension risk management is needed.