Newspaper article The Evening Standard (London, England)

Figuring out Pensions Puzzle

Newspaper article The Evening Standard (London, England)

Figuring out Pensions Puzzle

Article excerpt


IT has often seemed to me that the cheapest way for a company to solve a pension fund deficit is to change the actuary, and employ a different firm with a different approach to valuation.

It was not a view that found much favour last night at the actuaries' Christmas reception, where their thoughts were on higher things. It is, however, the theme of a paper by John Rolfe- who put the Boots pension scheme into bonds, and just published by RBC Capital markets - which highlights what an inexact science pension fund valuation is.

The actuarial method chosen can make a huge difference to the outcome, says Rolfe. For example, BT declares that it has a deficit of [pounds sterling]2.1 billion.

However, if it applied the same calculation technique as Invensys, its deficit would be [pounds sterling]7.5 billion - more than three times as large, and double its market capitalisation. If British Airways used the Invensys approach, the deficit in one of its two funds would rise from [pounds sterling]900 million to [pounds sterling]1.6 billion - and, thanks to BA's recent share price surge, rather below its [pounds sterling]2.5 billion capitalisation. Applying the maths the other way, the Invensys deficit, which it calculates to be [pounds sterling]415 million, would shrink to [pounds sterling]100 million using the approach favoured by BT and BA.

These things matter because of their implications for profits - and for the balance-sheet strength of the sponsoring company. The boards with the big deficits have committed to making additional contributions to their pension schemes to help improve matters. But were they on the less optimistic valuation bases, they might well be under pressure to commit rather more.

The valuation methods produce widely different results because they use a different rate of interest to chart the growth in pension assets and liabilities between now and the year some time in the future when the fund matures. …

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