The UK’s spiralling pension deficits are not being calculated appropriately, professionals have said while being left bamboozled about what methodology to use instead.
Deficits have edged back from all-time record highs last summer. But they remain a huge headache for some of the UK’s largest companies.
Royal Mail is facing industrial action by its 160,000-strong workforce after announcing plans to shut its final salary scheme. The closure plans came as the firm revealed the annual bill of servicing it had sky-rocketed to £1.3bn.
But according to one of the world’s largest actuarial firms, research suggests the way in which schemes are calculated may no longer be appropriate.
More than half of respondents (56 per cent) to a poll by Aon Hewitt said the popular “gilts plus” method for valuing pension schemes is “not helpful” in the current lower-for-longer interest rate environment. A further eight per cent said the method was “broken and should not be used”.
The gilts plus method references the yield from a UK government bond and adds a spread. It is the most common method, used in around 90 per cent of cases.
While research suggested gilts plus was not popular, professionals have been left scratching their heads as to what should replace it.
“It’s very very easy to throw mud at something and say ‘Oh, that is rubbish’,” said Aon Hewitt retirement and investment partner Paul McGlone.
But a lot of the mud thrown at the gilts plus method really doesn't stick because all the other methods have the same sort of characteristics.
McGlone added that expected returns have fallen across all asset classes. This means whichever calculation method is used, the cost of paying benefits to pensioners will have risen in recent years.
Last week the Pensions Regulator said scheme trustees should be less “prescriptive” in valuation methodologies. Where the gilt plus methodology worked for some pension plans, it may not for others.
A more flexible approach was supported by McGlone. He urged trustees not to “slavishly follow” one method but consider which was most appropriate given the needs of both the company and pension scheme members.