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Finally, some pensions jargon that’s actually useful

Trustees who have had actuarial valuation reports in the last year will have been confronted with some brand new jargon, much to their annoyance no doubt! As with most new pensions jargon there are a few variants, just to add to the confusion.

Image of a dictionary focusing on the word Jargon

by
Bob Campion

in Fiduciary news

04.03.2021

Trustees who have had actuarial valuation reports in the last year will have been confronted with some brand new jargon, much to their annoyance no doubt! As with most new pensions jargon there are a few variants, just to add to the confusion. The version favoured by The Pensions Regulator is ‘LTO’ which is supposed to stand for ‘Long-Term Funding Objective’. Yes it clearly should be LTFO but that doesn’t make it a TLA - three letter acronym – which is evidently a cast-iron requirement for all pensions jargon.

If you have heard about an LTO it was probably because your actuary mentioned it. An LTO is a new way of valuing liabilities (which is of course what every trustee wants!) It assumes a very low risk investment strategy - as would most likely be the case for a very well funded scheme. So now we have an assortment of valuation measures; technical provisions (TP, the normal one), PPF basis (seems a bit higher), buy-out (much, much lower), accounting basis (bit like TP, sometimes) and now the latest addition - LTO.

Great – so presumably this is like a tube of smarties with five flavours; trustees get to pick the one they like best? I mean, if valuations can be so varied and still, in theory all of them are ‘right’, how do trustees know which one to choose? If reaching 100% funded is the trustees’ goal, which 100% is it? Or are they all as arbitrary as each other?

The irony is that while an LTO might be the newest flavour, for most schemes it’s probably the best one; arguably the only one that really makes sense. It’s the cleanest, simplest method that gives the most accurate and useful information to the trustees. A pension scheme that has hit its LTO has completed it’s mission; no more deficit and no need to take any risk to keep up with the liabilities. Job done! Time to either batten down the hatches or set off on a new mission towards a buyout.

That’s why Charles Stanley has been using an LTO to monitor our clients ever since we launched our Fiduciary Service. No two actuaries have the same way of valuing a scheme’s liabilities – and we have seen some weird and wonderful methods over the years – but an LTO is almost the same for everyone. That means it’s a useful, objective measure that tells the trustees exactly where they stand.

Precisely how the LTO is defined (that is to say, the formula your actuary will use) is still in debate. The Regulator is busy scratching it’s collective head in Brighton after a record 130 responses to a consultation on the subject. There’s a second round consultation due later this year. Then maybe we’ll eventually get the answer in 2022.

In the meantime, the direction of travel is clear. And even if it changes I have no doubt that an LTO is the only way to sensibly measure progress for a defined benefit pension scheme, particularly those which are closed and not aiming to buyout to an insurance company. Whatever the Regulator concludes we’ll continue working with our existing clients to achieve their long-term objective – and encouraging all our new ones to do the same.

You can hear from Bob Campion and the Charles Stanley Fiduciary Team at The Challenges for Pension Funds in 2021 at 4pm on March 11th.

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