Overall, S&P will hand out star ratings from one to five as an indicator of how likely a company’s pension fund is to remain in deficit if the firm should fail. A five star rating would only be awarded to pension funds that are in surplus, whereas a four-star rating would denote that a particular fund has a contribution rate that would ensure it was fully funded to meet requirements, according to news sources.
Pension funds in the UK will be awarded stars based on a number of factors, such as:
- the financial strength of the company, the solvency of its pension program and the adequacy of the contributions being made to the program (the first level, or “strand” of the service);
- whether the investments made by the pension fund are likely to meet its obligations;
- the institutional asset managers employed by the pension plan.
The new service will be offered to trustees to provide a “second opinion” on their pension fund and the advice they receive from investment consultants and fund managers. Additionally, separate fund management ratings will be offered to fund managers for use in promoting their business as investment consultants.
Companies that purchase a Defined Benefit Assessment Service, the first strand of the S&P service, will be awarded up to five stars based on the strength of their pension scheme. The star rating system enables trustees to communicate S&P’s findings easily to employees.
S&P’s star rating system was developed in conjunction with performance measurement firm WM Company. Jim Maclachlan, head of the European pension services division, will run the service, according to the Financial Times.