Why are valuations controversial? Paul McGlone

The funding and investment debate

Valuation methods and Risk implications Gilts plus a margin Best Estimate less a margin Full stochastic Cashflow driven

TPR’s 2017 annual funding statement

Gilt Yields Source: Aon Hewitt

Gilt Yields “plus” – a proxy for a prudent assumed return? Source: Aon Hewitt

Best estimate returns Source: Aon Hewitt

Best estimate “minus” Source: Aon Hewitt

Increase in Liability using “Gilts plus” and “Best Estimate minus” Source: Aon Hewitt

Why is the “plus” so resistant to change? Negotiation Documentation Regulatory Submission Monitoring Extract from Green Paper The Government is not convinced that there is strong evidence for a systemic issue with a lack of flexibility with the setting of the discount rate.

TPR’s views on constant addition to gilt yield “Simply assuming gilts plus a fixed amount for each actuarial valuation is fundamentally wrong.” Andrew Young OBE Actuary The Pensions Regulator

Green Paper – changes in outperformance over gilts

Full Stochastic Valuation – throw away the discount rate … Principle Using economic models, project the assets, to determine whether they are likely to be sufficient to pay all of the benefits Source: Aon Hewitt

Cashflow-based Valuation (and links to Cashflow Driven Investment, or CDI) Principle Invest in income-generating assets that generate cashflows which closely match the liabilities Set the discount rate based on the implied yield on those assets Source: Aon Hewitt

Do the alternative valuation methods: Reduce the liability and deficit? Put less pressure on Scheme to invest in gilts? Reduce the risks that a scheme is exposed to?

TPR’s 2017 Annual Funding Statement Green Paper It is difficult to reach a firm conclusion from the data about whether discount rates are overly pessimistic. The most important element of this is whether the discount rate is arrived at in an informed way and is fit for purpose, and that decisions are taken rationally. TPR’s 2017 Annual Funding Statement

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