How do payment guarantees impact the prudent model?

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.”