Snapshot of Sector Pensions Shows Wide Divergence

(July 12, 2012) — Pension funds with broadly similar demographics are using widely different assumptions – and it is hitting their funding levels, a survey has revealed.

The report on 36 pension funds for non-academic university staff in the United Kingdom revealed a range of longevity, investment risk measurements, and discount rates being used across the sector, despite the demographics of their members being broadly the same.

The survey could be used as an indication that across many other sectors, there may be this diverse range of assumptions that could potentially affect sponsoring employers.

Mercer, the consultant that carried out the study, said the pension figures in the universities’ accounts were created under the UK accounting standard FRS 17, which in theory should lead to consistency and comparability across the sector. In practice, however, there was a wide range of different assumptions that could have a material impact on universities’ balance sheets and expense disclosures.

Mike Harrison, a principal in the Higher Education Pensions Group at Mercer, said the discrepancy with the longevity measurements was due to some funds carrying out mortality studies, whereas others had not.

Harrison said: “You would expect to see some variety in the assumptions as life expectancy varies across the country. However, a lot of that difference is due to different mixes of socio-economic groups, so a seven year gap between the shortest and longest life expectancy for employees working in similar roles in the same sector is a bit higher than we’d expect.”

The range of discount rates used to measure liabilities was also wide – from 5.2% per annum to 5.65%. This, Mercer said, could amount to a double digit increase in liabilities, depending on fund size.

Some universities had moved from measuring inflation using the Retail Price Index to the usually lower Consumer Price Index – as per government allowances – whereas others were still using a the higher gauge.

The assumptions for future salary increases ranged from zero to 1.5% per annum, despite all staff being linked to national bargaining powers in the sector.

Investment strategies also varied widely: some funds were 100% invested in growth assets whereas others had 50:50 splits between equities and fixed-income, Mercer found.

All these varying assumptions led to a wide dispersion of funding levels – between 61% and 98% across the sector.

Harrison said: “Finance directors should be concerned if this variety in assumptions is reflected in the assumptions used for determining cash contributions to their schemes without any supporting evidence. Different schemes use different assumptions for a variety of good reasons. There is nothing wrong at all with being either at the most cautious or the least cautious edge of the spectrum. However, you should at least know where you are and why you’re there when there’s a multi-million pound issue at stake.”