UK - The Pensions Regulator should be "empowered" to allow alternative discount rates in an effort to reduce artificially high deficits caused by quantitative easing (QE), the National Association of Pension Funds (NAPF) has said.

Publishing a detailed analysis of alternative discount rates - including one 1.5% above the Gilt yield and a smoothed discount rate, as introduced in the Netherlands - the organisation argued in favour of an alternative approach ahead of pension funds submitting their recovery plans to the regulator next summer.

However, in contrast to employer lobby group CBI, which has repeatedly spoken out in favour of smoothing, the NAPF noted that while it would "serve to almost eliminate any deficits in the short term", the technique would quickly reverse any gains made as the lower yields of past years fed into the calculation.

Examining the impact of the alternative discount rates, the NAPF estimated that a rate 1.5% above the Gilt yield would more than halve deficits.

Increasing the measure to 2% above yields, deficits would decline by an estimated 85% based on March figures.

Three-year smoothing had a similar impact, cutting deficits by 86%.

If these alternative rates were applied to defined benefit schemes currently in talks with the regulator over recovery plans, they could cut the funding shortfall from an estimated £41bn (€51bn) to just £5.7bn, the NAPF said.

Speaking at the NAPF's annual conference in Liverpool today, the organisation's chairman Mark Hyde Harrison told delegates the current discount rate approach risked "undermining [the UK's] faltering economy".

"Businesses are very worried about channelling cash away from jobs and investment and into pension deficits," he added.

"This could damage the wider economy, which is the opposite of what QE is meant to do."

Hyde Harrison stressed that he was not opposed to the use of QE, but said he simply asked for a better way of dealing with its "adverse" effects on pension funds.

The NAPF further argued that any change to the discount rate should come at the same time as a change in the Pensions Regulator's guidelines, saying it should have a more "explicit objective" to consider the longer-term health of any sponsoring company.

The CBI had previously seen its call for revised statutory objectives rebuffed by TPR chief executive Bill Galvin.

In its paper, 'DB funding: A call for action', the NAPF said any changes to the discount rate would be a "political judgement", balancing the country's growth agenda versus the regulator's own goals required "firm" direction.

It suggested that any announcement that would not require any changes to the country's legal framework could occur as part of chancellor George Osborne's Autumn Statement in early December.

Pensions minister Steve Webb has previously acknowledged the "nightmare" caused by low interest rates.

But the Pensions Regulator's executive director for defined benefit funding Stephen Soper appeared to dismiss out of hand any change to the discount rate.

"No valuation measure is an entirely accurate guide to the future, but adjusting discount rates for liabilities alone risks simply picking the answer you want, and ignoring the reality of the situation," he said.

"Our recent analysis and engagement with industry specialists has confirmed there's no need for schemes to make significant adjustments to assumptions to achieve a sustainable recovery plan."

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