Roll forwards

When I was growing up, a roll forward (or was it a forward roll?) was something we were required to do in PE and I wasn’t very good at them, or cartwheels, for that matter. Roll forwards have re-entered my consciousness in a completely different but equalling confusing way, being a methodology to somehow get to an up to date, but good enough, estimate of pension accounting obligations without going through all the messy business of getting hold of member records and doing the numbers for each member accurately.

Roll forwards first became necessary about 20 years ago when the accounting standard setters demanded that companies produce an estimate of their pension accounting liabilities at the balance sheet date.  With companies reporting sometimes as often as quarterly, it was impossible for most actuaries to do the numbers with sufficient accuracy in the time required with the technology available at the time. Instead actuaries would take the last full actuarial valuation and then make a series of adjustments based on known information such as changes in data and movements in markets and interest rates to get to a good enough approximation of the liabilities.

There is no single correct way of doing a roll forward.  As time has moved on the adjustments and approximations in the calculation are themselves becoming under greater scrutiny especially where the pension scheme is material to the financial statements.  Those who love detail quickly become embroiled in debates about a number of seemingly technical but quite important questions, such as whether actual inflation was different from expected, whether there was a higher than expected level of transfer values and whether the ages when people retired were different from assumed.  There is almost no end to the list of adjustments that could be made, short of doing member-by-member calculations.

It is also difficult to say reliably that the number produced by a roll forward is not materially different from the calculation done on a member-by-member basis without actually doing the numbers on a member-by-member basis.  Making this type of assertion is also almost impossible to make if the roll forward is from an actuarial valuation three years ago. A different standard would of course apply for immaterial pension schemes.

Given the scrutiny being placed on pension accounting numbers, companies with material pension schemes should be reviewing their approach here.  Unlike 20 years ago, technology does now exist that enables companies to do these calculations accurately with greater regularity without costing a fortune.  Indeed doing a roll forward with sufficient accuracy is starting to become expensive itself for a material scheme. If there is insufficient time between the year end and and the reporting date then the calculations could be done using census data that might be three to six months old, with a final check at the year end to ensure that no significant events have occurred to render the calculation inappropriate.   

So is it time for a roll forward to return to its original meaning of something I’m not very good at doing in the gym?

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Brian Peters

Brian Peters | Financial Reporting Pensions Leader
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