UK - The Confederation of British Industry (CBI) has claimed pure marked-to-market valuations "doesn't work for pensions schemes" and an "element of smoothing" should be introduced to protect balance sheets from extreme volatility.
In a report entitled 'Redressing the balance: Boosting the economy and protecting pensions', the CBI outlined an eight-point action plan for "urgent short-term steps" which it believes should be taken to help preserve pension schemes and protect sponsors.
Among four key areas of concern, the CBI claimed the use of marked-to-market valuations of a pension fund's position fails to recognise the long-term nature of pensions and "makes the problem worse than it needs to be".
The CBI pointed out that the effect can be seen by looking at the volatility of bond and equity prices and its impact on pension funding levels, and is demonstrated by the PPF 7800 Index which showed a swing in the aggregate deficit from £204.7bn (€233.7bn) in March to £242bn in April and then back to under £200bn in May, even though the underlying position of most schemes "changed little from month to month". (See earlier IPE article: Improved equity returns cut DB deficit by £50bn)
The employers' representative body argued these wild swings "encourage short-term reactions when in fact little has changed" and instead claimed measures should be introduced to ensure the figures in pension reporting and funding plans "are based on the true underlying position of the scheme".
The report stated: "Pure marked-to-market accounting simply doesn't work for pension schemes. Over the 100 years or more of a scheme's life, we cannot have a perfect view of the risks a scheme faces. It would be far better to allow greater smoothing of the balance sheet liability over time, giving users of accounts a more trustworthy picture of the scheme's real position."
It revealed CBI members "would like to see FRS17 changed to ensure that an element of smoothing can be inserted. This will protect balance sheets from the worst excesses of marked-to-market".
The organisation meanwhile suggested TPR should temporarily extend the trigger point for investigating proposed deficit recovery plans from 10 years to 15 years and delay the introduction of a more stringent approach to mortality until "after the recession".
The CBI also criticised increasing regulation around defined benefit (DB) schemes which stop employers from raising retirement ages to combat longevity, and warned it is "essential" that the government takes action this year on reforms to the Section 75 debt rules that are triggered by company restructuring.
The full CBI Pension Action Plan is:
John Cridland, deputy director-general of the CBI, said: "Firms who are fighting to preserve final salary pensions find themselves punished by regulation and much worse off than firms who offer no pension at all. We cannot allow sound businesses to be dragged down by these pensions, particularly during a recession.
"We need much clearer signs of support from the government and from TPR. Businesses are badly winded by the recession and, when it comes to their long-term pensions issues, they need a bit more time to catch their breath. We cannot rule out large scale closures of these schemes in the longer term, but these short term measures will help," he added.
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