UNDERSTANDING PENSIONS PART 3

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UNDERSTANDING PENSIONS PART 3

Actuarial Valuation – How healthy is the pension scheme?

How do the trustees and sponsoring employers of defined benefit pension schemes, such as the BBC Pension Scheme, know how healthy the scheme is and whether it is solvent? The answer is that every three years these schemes must, by law, carry out a full actuarial valuation. Some schemes also choose to carry out an interim valuation for each intervening year.

The actuarial valuation gives a snapshot of the cost of providing benefits to be paid to members (the liabilities) and how that compares with the value of the assets.

The actuary uses a variety of techniques to value the assets and liabilities of the scheme and in so doing makes a number of assumptions as to inflation, future salary increases, investment returns and mortality. The actuary would then discount, by obtaining the present value of the stream of assumed future income (e.g. dividends, rents and other income) and outgoings (e.g. payment of pensions etc). If the assets exceed the liabilities then the scheme is in surplus, but If the liabilities exceed the value of the assets, then the scheme is in deficit. Most defined benefit pension schemes currently show substantial deficits.

As a result of the valuation process, the actuary would recommend a contribute rate to pay for the cost of future service benefits accruing after the date of the valuation. The cost of pensions is expensive and over the years the future service cost for most schemes has increased substantially, mainly because of low interest rates, and members living longer (with pensions being paid for longer than anticipated). An ongoing contribution rate in excess of 40% of pensionable salaries for future service benefits is not uncommon.

With regard to the benefits already built up (past service benefits), the scheme needs to meet a certain statutory level of funding. The actuary would check that the scheme is appropriately funded. If the scheme doesn’t meet this funding level the trustees must put in place a recovery or journey plan with the aim of eliminating the deficit over a given number of years. The employer would then pay additional deficit recovery contributions aimed at eliminating the deficit by the end of that period.

The results of the 2019 actuarial valuation of the BBC Pension Scheme are due to be published next month. Our September edition of this newsletter will look at the results of that valuation.

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