Improving the pensions accounting 'experience'

Clearly no-one is a fan of bad surprises, but good surprises can be just as annoying in certain circumstances.  For example, let’s assume you have used all your contacts to get tickets to the latest big comedy performance or concert, and then you find out that someone has already bought you them as a surprise.  All that effort is now wasted (and you’ve got to send an e-mail around the office trying to get someone to take the other tickets off your hands).

In recent years it has felt like all news is bad news in terms of pension deficits, with discount rates in particular falling to ever new lows.  However, I have seen an increasing trend of ‘experience gains’ coming through IAS 19 figures, with deficits reducing due to salaries, pensions or life expectancies not increasing as much as expected.  This reflects lower than expected inflation during recent years, as well as evidence that the pace of longevity improvements may have slowed.

Historically ‘experience’ gains or losses have been accurately captured (and thus recognised on the balance sheet) every three years, when the IAS 19 figures reflect a new triennial valuation which allows for every single member movement and benefit change.

However, as schemes become ever more material due to low bond yields pushing up liabilities, and with benefits being taken by members in ever more flexible ways, companies should generally be spending more time analysing their scheme members’ behaviour in the intervening period, in order to avoid significant experience gains or losses arising every three years.

Quite often - although it is not always the case - allowing for actual member experience can lead to actuarial gains arising, reducing the liabilities. While any reduction in their IAS 19 deficit will be welcome news for companies, it may be frustrating for those who have spent significant management time and cost reducing their deficits in other ways (such as increasing employer contributions).  

So what can companies do?  Data on actual salary and pension increases should be readily available to employers and administrators and updating for this each year (where this is not done already) should not cause actuaries significant extra work.  With more members taking transfer values in the current environment, known membership movements should be tracked more accurately, particularly where they involve high earners or are expected to be material.

Finally, increasingly sophisticated data analysis tools can provide greater insight on demographic profile where data is scarce, which is often the case for smaller schemes in particular. This could involve, for example, looking at socioeconomic status to support mortality or proportion married assumptions.  Using such an approach should lead to a better matching of future experience.

The other option is to use new pensions technology such as Skyval to produce more accurate IAS 19 figures at each reporting date.  This technology uses actual membership data to calculate IAS 19 valuations, and can do this within days of the balance sheet date. Linking this to demographic modelling tools can give a much more accurate forecast of the ultimate best estimate cost of the liabilities, reducing experience variation.

Even if market conditions change leading to experience losses, it is better that companies are aware of these as soon as possible, rather than storing up bad news for the future.

Surprises may be the spice of life, but when it comes to pensions, I’ll take boring accuracy every time.

For more information please contact Rick Watts or your usual PwC contact.

Rick Watts

Rick Watts | Financial Reporting for Pensions Regional Leader
Profile | Email | +44 (0)7595 850 825

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