The Department for Work and Pensions (DWP) has called for evidence on the impact of funding defined benefit (DB) pension schemes on investment and growth.
The DWP has asked two questions:
- Should employers undergoing valuations of DB pension deficits be allowed to smooth the calculations of their asset and liabilities?
- Should The Pensions Regulator be given a new statutory objective to consider the long-term affordability of deficit-recovery plans to sponsoring employers.
The call for evidence was issued following Chancellor George Osbourne’s announcement in December’s Autumn Statement, in which he said: “The government is determined to ensure that defined benefit pension regulation does not act as a brake on investment and growth.”
Steve Webb, minister for pensions, said: “We need to know the current regulatory framework is sufficiently flexible for employers with defined benefit pension [schemes] or whether there is more we could reasonably do.”
The call for evidence will close on 21 February.
While it is good that the government has recognised the damaging impacts of QE and the low interest rate environment on pension funds, we are worried that this is all too little, too late.
Pension schemes that have been going through their valuations over the past 12 months need the most help as they will be most affected by record low returns on gilts. We are worried that these proposals would sideline this issue and do nothing to help these schemes.
The smoothing approach being suggested risks making matters worse for schemes once interest rates start picking up, and could cause greater confusion for trustees, actuaries and employers when agreeing a discount rate.
We need a quick, simple and temporary approach that gives trustees and employers more wriggle room. We need something that schemes can benefit from quickly, which is why we think the best way forward is reassurance from the regulator that a simple and transparent adjustment can be made to the discount rates being used by schemes now.
We welcome the government consulting on a new objective for the regulator. We have long argued that the regulator needs to take into account the longer term sustainability of workplace pensions.
Today’s consultation on smoothing assets and liabilities has been eagerly awaited by many scheme sponsors who are facing large scheme deficits due to the historically low level of gilt yields currently being experienced. These employers may be hoping to use smoothing to help negotiate lower contributions to their schemes in the short term, enabling them to invest more into their business.
However, the consultation raises more questions than answers and smoothing may not be the hoped-for panacea for those facing large scheme deficits. The government has indicated that assets are likely to need to be smoothed as well as liabilities, which may dampen any reduction in deficits. The consultation also suggests that if smoothing is adopted for one valuation, then it may be required for future assessments of the scheme’s funding, which might in turn mean that the effects of any future recovery in gilt yields would not be felt as quickly.
An alternative solution to the current issues faced by scheme sponsors may be for more consideration to be given to what constitutes affordability when setting recovery plans and to the extent to which the sponsor’s wish to invest in their business may be taken into account by trustees. The government is also consulting on an additional statutory objective for The Pensions Regulator to consider the long-term affordability to sponsors of recovery plans and this may be a good opportunity to debate what factors should be taken into account when setting recovery plan contributions.
Trustees and employers approaching valuations in 2013 continue to face uncertainty over when any changes may be implemented and whether they will be retrospective. For those carrying out valuations this year, smoothing will be one more consideration to account for and this uncertainty makes it all the more important for trustees and sponsors to engage in funding discussions early.
There remains flexibility within the current funding regime to help trustees and employers agree an affordable recovery plan, and those in the process of agreeing valuations at the moment should continue to explore ways of ensuring that they use these.”