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Low interest rates a 'nightmare' for pension funds, minister says

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  • Low interest rates a 'nightmare' for pension funds, minister says

UK - The current low interest rate environment is a "complete nightmare" for pension funds, and governments should not stand "idly by" if accountancy standards are causing unnecessary volatility on scheme balance sheets, the UK pensions minister has said.

Speaking at an event organised by the National Association of Pension Funds, Steve Webb was asked whether the UK should follow the example set by Denmark and modify the applicable discount rate to relieve pressure felt by pension funds - with the Scandinavian country's 10-year sovereign bond yield hovering around 1% the past few weeks and falling briefly below 1% at the beginning of the month.

Webb, who this week visited Denmark and the Netherlands in an effort to learn about their approaches to risk-sharing, said many in Denmark had remarked on how low interest rates were "a killer" and that the current situation, where schemes were hardly able to discount future liabilities, was "a complete nightmare".

He said it was important for realistic discounting of future liabilities to occur and discussed the role played here by international accounting standards.

"The advice I've always had in the past is that governments don't do accountancy standards because they are pure, professional and non-political, and we should just keep out," he said. "But of course the way liabilities are measured on balance sheets has massive, real implications."

Webb concluded that governments could no longer stand idly by when accountancy standards were changed due to the "massive" impact such changes would have on a country's economy.

He said the effect also extended to pension fund liabilities being "unnecessarily volatile", which in turn had consequences across schemes.

However, he declined to take action immediately, following in the footsteps of both Denmark's government and Sweden's Finansinspektionen, which recently announced a voluntary floor that could be used by the country's pension providers.

"I'm not going to change Britain's policy on how we discount future pension liabilities overnight, but it was clearly everywhere we went an issue," he told delegates.

The Liberal Democrat minister also touched on a number of other issues, most notably those of the importance of risk-sharing in the UK's pension provision.

Discussing his proposal for a third-way pension option - branded 'defined ambition' (DA) - he said: "To understand defined ambition, you need to understand it as a destination from two separate origins, DB and DC."

He said some former DB providers might still wish to offer an element of protection, be it through safeguarding against longevity or offering protection against investment risk, with DA making this a possibility.

Webb also said one option under consideration regarding the merger of pension pots was the possibility of a "virtual" pension pot - a service whereby an aggregate figure of all pension savings could be calculated, without the need for an actual merger, mirroring plans for a website in the Netherlands.

Addressing regulatory changes coming from the European Commission, he said the government remained "absolutely resolute" in opposing the application of solvency-based regulation for pension funds.

"We are convinced a proper impact assessment will show this is wholly unnecessary, deeply damaging and not even the answer to a question anybody should be asking," he said.

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