UK – The smoothing of discount rates should be applicable to more than just pensions about to undergo valuations, the National Association of Pension Funds (NAPF) chairman has argued.
Mark Hyde Harrison also called for the UK government to allow for an "explicit" increase in the current discount rate, raising the rate by 0.5 percentage points to account for the impact of the Bank of England's (BoE) £375bn (€439bn) quantitative easing (QE) policy.
Giving evidence on QE to the parliament's Treasury select committee, Hyde Harrison said the proposed increase – first suggested by the NAPF in October last year – could be lowered and finally removed as the country's central bank sold off its Gilt holdings.
He said he hoped the BoE's holdings would be unwound over time rather than cancelled, as this would allow for the "necessary" inflation expectations.
Asked directly by the committee his views on cancelling all Gilts held by the bank, he said: "That would be very strong medicine indeed and would need very extreme conditions at the time to reach that judgement."
The former chief executive of the Barclays UK Retirement Fund said he welcomed the government's consultation on smoothing discount rates, but that it needed to go further than only smoothing the rates of funds currently undergoing valuation.
"If you didn't have a requirement that it will only come into effect for schemes that are about to undertake valuations over the next 15 months, then smoothing might be more attractive to some schemes," he said.
He said the problem with its introduction for the current cycle would be its reliance on the present low yield, already lower due to QE.
"You could look at the way in which it's implemented, and it might become more attractive to certain schemes," he added.
"But, at the current position, there is a danger it will be too little, too late," he added, echoing previous comments by the NAPF's chief executive.
The committee's chairman, Conservative MP Andrew Tyrie, said that Hyde Harrison's response acknowledged that "a good deal of caution" was needed in implementing smoothing.
Ruston Smith, group pensions director at supermarket Tesco, said that the impact of smoothing could be "detrimental".
Smith, also chairman of the NAPF's retirement policy council, added there were other options, in addition to smoothing, that should be examined as a way of assisting DB funds – a view shared by the Pension Insurance Corporation's joint head of asset and liability management Mark Gull.
"I think what we want is to maintain the integrity of the pension system," he argued, saying that smoothing had both "pros and cons".
"Particularly if you start smoothing at low rates, as we would now, you would run the risk of just deferring some of the difficult decisions," Gull, a member of the NAPF's investment council, said.
However, Hyde Harrison at the beginning of the hearing argued that the problem was not with QE as such, but rather how it impacted funds in the current regulatory environment.
Referring back to figures that the policy increased pension deficits by £90bn, the chairman said that the NAPF accepted QE "may be the necessary economic medicine", but that the under the current regulatory framework, companies were required to fill it.
He said that recent figures had shown a resulting increase in deficit contribution payments – funds, he said, that companies could have otherwise spent elsewhere, impacting the country's economy.