DB Pension Scheme: The Sponsor's Request to Omit a Sensitivity
A UK defined-benefit pension scheme has a funding deficit of £62m on a technical provisions basis, and the next triennial valuation is due in four months. The trustee board has nine members: four member-nominated, four employer-appointed and one independent chair. The employer sponsor, a mid-sized manufacturer whose covenant the scheme actuary assesses as weak, has proposed a 15-year recovery plan with contributions capped at £4m a year. The sponsor has also asked that the report to trustees exclude the downside sensitivity in which the sponsor enters administration. The member-nominated trustees have separately asked for a plain-English summary of what the deficit means for their pensions. The scheme is 68% pensioner members and has an average liability duration of 14 years. The actuary has 18 working days to produce the funding report and will present it at a trustee meeting where a vote will be taken.
1. The sponsor has asked that the downside sensitivity assuming sponsor administration be excluded from the trustee report. How should the scheme actuary respond?
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Reasoning. The sensitivity is not a technical appendix: a weak sponsor covenant is the central risk to members' benefits. Excluding it would present trustees with a misleadingly favourable picture and would conflict with professional standards on integrity, transparency and completeness. The actuary's primary duty is to the trustees, not the sponsor.
Action. Decline the request in writing and explain why. Offer a private meeting with the sponsor to explain that the sensitivity will be presented as a clearly labelled scenario, not a prediction, and that it will sit alongside the central estimate and any covenant-strengthening plans. Record the request and the response in the scheme's governance records.
Communication to trustees. Present the sensitivity alongside the recovery-plan options so trustees can see the trade-off: lower contributions now increase the risk of entry to the Pension Protection Fund later. Make clear that the actuary is not predicting administration, but that trustees must understand the consequence. If the sponsor persists, tell the trustees that a request was made to omit material information.
2. Set out how you would structure the funding report so that it serves the trustees' decision and the members' need for a plain-English explanation.
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Structure. (1) Cover and purpose; (2) executive summary with the funding position, key risks and recommended recovery plan; (3) central estimate and cash-flow projections; (4) covenant assessment and downside sensitivity; (5) recovery-plan options with contribution levels, length and security; (6) risks and uncertainties; (7) technical appendices covering assumptions, data and methodology; (8) a plain-English member summary as a separate annex.
Meeting both needs. The executive summary and the member annex must use consistent figures: never two different deficits for different audiences. The member annex should explain what a deficit means (assets minus liabilities), what the sponsor has agreed to pay, what happens if the sponsor fails, and where members can get guidance. Avoid technical terms or define them in a glossary. The trustees' decision sections should state the actuary's recommendation and the reasons, so trustees can challenge it. Separate factual statements from professional judgement and identify who is responsible for each decision. Keep the member annex short and free of caveats that obscure the key message.
3. What are the key judgement calls in recommending the length of the recovery plan and the level of contributions?
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Judgement calls. (1) Balance affordability against security: a 15-year plan at £4m may be affordable, but it leaves members exposed for longer given the weak covenant and pensioner-heavy membership. (2) Consider security enhancements: contingent assets, a parent guarantee, or a shorter plan with step-up contributions. (3) Stress-test: what happens if the sponsor's cash flow falls by 20% or investment returns are 1% lower? (4) Regulatory expectations: the regulator will expect the recovery plan to be appropriate to the covenant and may press for a shorter period if the covenant is weak.
Recommendation. I would recommend a shorter plan, for example 10 years, with contributions starting at £5m and a clear review trigger, or a 15-year plan only if backed by a contingent asset that materially improves member security. I would not present a single point estimate as certainty: show the trade-offs and state that the recommendation reflects professional judgement. Document the rationale so that trustees and the regulator can see why the balance was struck. The decision itself rests with the trustees.