1. Why are valuations controversial?
Paul McGlone

2. The funding and investment debate

3. Valuation methods and Risk implications
Gilts plus a margin
Best Estimate less a margin
Full stochastic
Cashflow driven

4. TPR’s 2017 annual funding statement

5. Gilt Yields
Source: Aon Hewitt

6. Gilt Yields “plus” – a proxy for a prudent assumed return?
Source: Aon Hewitt

7. Best estimate returns
Source: Aon Hewitt

8. Best estimate “minus”
Source: Aon Hewitt

9. Increase in Liability using “Gilts plus” and “Best Estimate minus”
Source: Aon Hewitt

10. Why is the “plus” so resistant to change?
Negotiation
Documentation
Regulatory Submission
Monitoring
Extract from Green Paper
The Government is not convinced that there is strong evidence for a systemic issue with a lack of flexibility with the setting of the discount rate.

11. TPR’s views on constant addition to gilt yield
“Simply assuming gilts plus a fixed amount for each actuarial valuation is fundamentally wrong.”
Andrew Young OBE Actuary The Pensions Regulator

12. Green Paper – changes in outperformance over gilts

13. Full Stochastic Valuation – throw away the discount rate …
Principle Using economic models, project the assets, to determine whether they are likely to be sufficient to pay all of the benefits
Source: Aon Hewitt

14. Cashflow-based Valuation (and links to Cashflow Driven Investment, or CDI)
Principle Invest in income-generating assets that generate cashflows which closely match the liabilities
Set the discount rate based on the implied yield on those assets
Source: Aon Hewitt

15. Do the alternative valuation methods:
Reduce the liability and deficit?
Put less pressure on Scheme to invest in gilts?
Reduce the risks that a scheme is exposed to?

16. TPR’s 2017 Annual Funding Statement
Green Paper
It is difficult to reach a firm conclusion from the data about whether discount rates are overly pessimistic. The most important element of this is whether the discount rate is arrived at in an informed way and is fit for purpose, and that decisions are taken rationally.
TPR’s 2017 Annual Funding Statement

17. Questions ?

18. Aon Hewitt Limited
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