Valuations

The Pensions Regulator actively oversees a three-yearly round of valuations to determine whether pension schemes will be able to meet their commitments. It does this on the basis of its statutory objectives. A description of different approaches to valuation is provided by the Pensions Protection Fund: www.pensionprotectionfund.org.uk/TechnicalGuidance/Pages/ValuationGuidance.aspx.

An actuarial valuation is a comparison, by an actuary, of the value placed on scheme assets (things it has invested in). Schemes are required to undertake a full actuarial valuation every three years, but also commission actuarial reports to provide an approximate update on the funding position annually.

The statutory funding objective for a scheme is to have sufficient and appropriate assets to cover its “technical provisions” — that is a calculation by the actuary of the assets needed at any particular time to make provision for benefits accrued by members under the scheme.

The Pensions Regulator says trustees need clear processes on preparing for actuarial valuations, for dealing with advisers, and for making data that they are confident about available to the actuary (draft DB funding Code).

A full employer “covenant assessment” (looking at issues like the employer’s position within any group structure and its industry, its trading and balance sheet, financing, forecast profits and insolvency value) should be undertaken as part of each actuarial valuation (Draft Code of Practice 3). The principle of “proportionality” is important throughout.