by James Mushin, Director of Professional Services, PensionsFirst Analytics
Defined benefit (DB) pension scheme sponsors are waking up to the need to be able to calculate their scheme’s risk position more precisely in order to carry out risk-transfer solutions. Yet their ability to do so effectively is hindered by the traditional methods used to value their scheme’s liabilities.
The topic of DB pension risk has fast moved to the forefront of treasury debate. Stricter accounting and funding rules, low interest rates and volatile stock markets have been key drivers of this, as has the much-reported increasing life expectancy in the western world and the associated longevity risk that this poses.
The potential impact that these key risks can have upon the funding status of a DB pension scheme and the financial viability of its sponsoring company should not be underestimated. As such, more and more scheme sponsors are entering into discussions with third parties – such as insurance companies or banks – in search of ways to remove or hedge as much risk as possible. When considering these potential de-risking solutions, however, many sponsors – as well as pension scheme trustees – still rely on imprecise actuarial valuation information.