Muted Welcome for UK Pension ‘Smoothing’ Proposals

(December 6, 2012) – Industry experts have given a subdued reception to an announcement by the Chancellor of the United Kingdom that company pension funds may be allowed to use ‘smoothing’ methods when measuring their assets and liabilities.

George Osborne announced in the annual Autumn Statement to the House of Commons yesterday that the Department for Work and Pensions would begin a consultation to examine the benefits of allowing companies to smooth asset and liability values in scheme funding valuations from 2013.

The Statement said: “The government also recognises that volatility in measures of pension scheme deficits can make it hard for companies to manage their investment plans and attract external funding.”

Should the move be agreed, companies striking the funding position of a defined benefit pension fund could potentially avoid spikes in either direction. Many pension funds in the UK were hurt in March 2009 when they had to undergo a required triennial valuation as global stock markets hit very low levels, pulling down asset prices. Panic in financial markets took its toll on the rest of pension fund portfolios more broadly.

However, the news was not greeted with excitement by pension professionals.

Consultants and actuaries Barnett Waddingham welcomed any move that could help pension fund sponsors more easily manage the volatility in their pension funds, but added that “the Pensions Regulator has pointed out on several occasions that the existing regime is both robust and flexible enough to deal with changing economic conditions.”

Consultants and actuaries Punter Southall said it was encouraging that the government was listening to pleas from employers who were battling with volatility, but said companies would “need to scrutinise the wording of this proposed objective very carefully to see whether it provides them with any additional protection in practice.”

Punter Southall added: “It would also lead to a divergence between scheme funding valuations and other pension scheme valuations (including company accounts, Pension Protection Fund (PPF) levy, members’ individual transfer value calculations and even the proposed European holistic balance sheet) under all of which market-based assumptions are currently used.”

The UK’s National Association of Pension Funds (NAPF) was more upbeat about the Chancellor’s announcement. Darren Philp, NAPF director of policy, said the organisation would work with the DWP and regulator to “help find a solution to the volatility in funding deficits that companies are currently experiencing. But time is of the essence. It is important that any change is implemented quickly, and helps companies currently going through their funding valuations. These firms are the most affected by the current low gilt yields, and any support should be extended to them too.”

The Pensions Regulator may also see a change in its objective, the Chancellor said today. The Statement said: “The DWP will consult on providing the Pensions Regulator with a new statutory objective to consider the long-term affordability of deficit recovery plans to sponsoring employers.”

Philip at the NAPF said a new statutory objective for the regulator could ultimately deliver a more proportionate regulatory regime that recognises wider economic factors. He said: “We have long held concerns that the regulator is more focused on keeping funds out of the PPF, without due regard to the pressures on companies and the impact on workplace pensions.”

To read the full Autumn Statement, click here.