The sponsor’s covenant is being factored into the existing prudent actuarial models.  But how?  The easiest way to test that is by discussing a strengthening of the covenant.

Actuaries trade off prudence.  How much impact does a parent, bank or insurance guarantee have on the actuarial model?  Guarantees are good news - diversifying risk and adding to member security, bolstering a sponsor’s covenant.  So, what does that mean for discount rate and investment return expectation in a recovery plan and what about its length?  Well, just ask.

Mind you, any details are likely to come with acres of disclaimers, ‘in the round’ protestations and sideways passes to covenant assessors.  With the arrival of Technical Advisory Standard 300 it’s time for specifics not broad brushes.  But don’t be put off.  The Financial Reporting Council says you’re entitled to answers.  So, show me the numbers. Finance directors should be gathering data points, considering the logic and assessing what can be done to help all stakeholders that is both economic and prudent.  Comparing the cost of a guarantee with the impact on the cash demands from the pension scheme can provide the opportunity for a simple arbitrage.

Note:
The Financial Reporting Council’s Technical Actuarial Standard 300 came into force on 1st July 2017.

Paragraph 6 says, “Communications shall include sufficient information to enable the user to understand the level of prudence in the assumptions and the resulting actuarial information.”
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Paragraph 10 says, “Where relevant, communications shall state if and how the assumptions used, or proposed for use, take account of employer covenant.”

When it comes to parental back-up, how do actuaries factor it into their numbers?  Now, under new disclosure rules, actuaries have to explain what they’ve done to take into account the value of the sponsor’s covenant.  So, what if you change it?

There is a great opportunity for UK companies with strong overseas parents to seek a recount.  Where the parent is not a participating employer:

• What change comes to the length of the recovery plan or the investment returns expected should the parent now guarantee payments?
• What for limited or total parent guarantees pension funding requirements?
• What about bank or insurance guarantees organised by the parent to cover various contingent short-falls?

As time goes by and pensions become more of an historical factor that requires ever larger cash contributions, the time is right for a new look.  C-Suite Pension Strategies has the heavy-hitting resource of executives with corporate and pensions knowledge able to question whether the standard actuarial thinking is relevant.  Parents keeping their distance from adult children may usually be a good thing, but not corporately when subsidiaries end up paying away large sums quite unnecessarily to reach objectives which are not in the wider family’s interests.

“The financial support – both actual and possible – of parents for subsidiaries with pension obligations is often underestimated in covenant assessments.  It is in everybody’s interest for that to change and new actuarial disclosure rules can be the trigger.  Pension payment guarantees from the investment bank of mum and dad.”  William McGrath, Founder C-Suite Pension Strategies