Pensions Strategy: Charles Cowling Asks Why More Firms Don't Encourage Members of Their Pension Schemes to Transfer out to New Ones

By Cowling, Charles | Financial Management (UK), May 2008 | Go to article overview

Pensions Strategy: Charles Cowling Asks Why More Firms Don't Encourage Members of Their Pension Schemes to Transfer out to New Ones


Cowling, Charles, Financial Management (UK)


Whatever the state of the economy, issues surrounding the management and funding of pension schemes persist unabated. The Pensions Regulator's consultation on mortality assumptions as a funding-plan trigger represents another shot across the bows of those firms that have ignored the growing body of evidence to show that we're living longer (see previous article, page 37).

Mortality assumptions still vary greatly across schemes, but these variations cannot be accounted for solely by the real differences in their workforces' life expectancies. Clearly, more conservative assumptions hit the bottom line, which may explain the reluctance of many companies to update theirs. But, when you compare the mortality assumptions used in pension schemes with those used by insurance companies for their annuity businesses, there is a big difference. (Perhaps this is not surprising, because insurers are under greater pressure to ensure that their assumptions are up to date, since their continued profitability depends on it.)

Until recently, the differences have gone largely unchallenged. But, as there has been a massive increase in the disclosure of pension scheme mortality assumptions over the past year or so, auditors as well as the Pensions Regulator have become much more interested in the issue. I expect that firms will come under increasing pressure to adopt more realistic assumptions.

The UK Accounting Standards Board (ASB) recently published a discussion paper "The financial reporting of pensions", which will have struck fear into boardrooms up and down the country. Most dramatically, the paper proposes that the current method of putting a value on pension liabilities under IAS19 by using a AA-bond discount rate should be replaced by the use of a risk-free discount rate. This could add up to 40 per cent or more to pension liabilities--for FTSE-100 firms that could be more than 150bn [pounds sterling].

What surprises me is that many companies are missing the most obvious trick when it comes to managing their ever-increasing liabilities. Transfer values (when schemes pay members an agreed amount to move all their pension liability out) offer them one of the most attractive options. But many employers persist in offering miserly transfer values that are of no use at all. As a result, they are missing opportunities to generate significant shareholder value. Strange as it may seem, a lot of companies and trustees still offer transfer values that are worth less than half of the IAS19 value--some are as low as a quarter. It's no wonder, therefore, that they see little or no transfer activity.

If you look at the transfer values for FTSE-100 directors, the same patterns still emerge. …

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