This is a letter published by Con Keating in the Financial Times.
Sir, I am surprised that John Ralfe is baffled by my proposal for a more accurate evaluation of defined benefit pension liabilities (Letters, October 28). Not only have I published a number of articles explaining the method, I have also engaged with him directly on the subject.
Contrary to his assertions, there is no “jiggery-pokery” involved; nor any smoothing or subjective judgment. At its most elementary level, all I am suggesting is that the contributions made to a pension fund by the employer and employee, together with the projected or expected pension benefits that are to be paid in future, fully define a pension contract. It is unnecessary to invoke or introduce any external discount rate in its valuation. Indeed to do so is to expose the analysis and reporting to the near certainty of error in quantification, one that can induce perverse behaviour and management practice.
One way of describing the valuations under my proposed method would be that they show the degree of progress the fund has made towards achieving the levels necessary for it to be able to discharge in a full and timely manner the promised benefits. That is the value expected by both sponsor and scheme member, under the terms and conditions of the award.
The religious fervour with which Mr Ralfe persists in defending the use of market discount rates to value pension liabilities is impressive. It is interesting that his fervour is not shared in many other jurisdictions, among which are Germany, Sweden, Denmark and Quebec.
Con Keating
Chairman, European Bond Commission,
European Federation of Financial Analysts’ Societies