As Paul Marsh of the London Business School mocks proposals to change liability calculation to improve deficits, Jonathan Williams wonders where this will leave the UK government.
The smoothing of liabilities, first proposed by the UK government in last year’s Autumn Statement, could either be seen as a way to dampen the impact of quantitative easing and the low-yield environment, or simply akin to sticking your head in the sand.
The National Association of Pension Funds (NAPF) has criticised the measure as “too little, too late”, while others have pointed to the risk that, depending on how liabilities were smoothed, it could even prolong the current problem.
Paul Marsh, professor at London Business School, has now weighed in on the debate with his own, rather colourful metaphor.
“I think urging to calculate liabilities in a different way is quite a different thing from urging that more time be provided to work out the difficulties, in particular the deficit,” he told the audience at the NAPF’s Investment Conference in Edinburgh last week. “I think it’s a bit like barometer-tampering.”
He continued: “It’s a bit like you see hurricane Sandy approaching you, and you decide the action you are going to take – rather than boarding up your house – is that you smash the barometer.”
The Society of Pension Consultants’ own response on smoothing to the Department for Work & Pensions touched on precisely this issue, stressing that if smoothing was applied using a period of longer than five years it could “give rise to an unacceptable risk that smoothing would lead to economic and financial realities being ignored”.
Also speaking at the NAPF, Keith Ambachtsheer of Rotman International Centre for Pension Management said that “permissive” regulatory frameworks in several countries had led to problems for DB funds once double-digit returns faltered.
The NAPF’s own response to the government consultation, released last week, did acknowledge these problems and its director of policy Darren Philp said that smoothing could not only make matters worse when interest rates improved, but also result in “greater confusion for trustees, actuaries and employers when agreeing a discount rate”.
He instead argued that it was important to allow the full flexibility of the current regulatory system to be employed.
“To do that, pension funds need greater reassurance from the government and the Pensions Regulator that they can adjust the discount rates they use where they have been pegged to Gilt yields,” he said.
Philp added that the approach would need to strike a balance between the needs of the plan sponsor and the requirement of trustees, tasked with ensuring benefits are secure.
While most responses to the consultation acknowledge that smashing the barometer is not the solution, they do not yet seem completely convinced that the best way to weather Sandy is to board up the house.
It remains to be seen if the DWP sends Steve Webb along wielding a hammer and nails, or just a hammer.
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