UK – Smoothing of liabilities could be introduced in the UK to offset the “disproportionate” financial strain low bond yields are causing pension fund sponsors, the Department for Work & Pensions (DWP) has said.

The National Association of Pension Funds (NAPF) welcomed the recognition of the damage caused by low interest rates, but said it was “too little, too late”.

Launching the consultation promised by the Treasury in last year’s Autumn Statement, pensions minister Steve Webb said the department needed to know if current regulation was “sufficiently flexible for employers with defined benefit (DB) pensions”.

The consultation said government was concerned that falling yields should not place “disproportionate financial strain on prudent employers”, but added that it needed to be careful it would not “inadvertently reward imprudent or reckless” investment.

While the consultation seemed to accept the premise that increased deficits – mandating higher deficit reduction payments – could divert funds away from investment and job growth, the department was less inclined to accept that large deficits hindered a company’s ability to raise finance, saying there was “little firm evidence” to support the claim.

The NAPF’s director of policy Darren Philp commented that the consultation might come too late for some funds.

“Pension schemes that have been going through their valuations over the past 12 months need the most help, as they will be most affected by record low returns on Gilts,” he said.

“We are worried these proposals would sideline this issue and do nothing to help these schemes.”

He added that the suggested approach to smoothing could exacerbate deficits once rates began improving again, echoing a point raised by Towers Watson in December last year.

The point was one accepted by the DWP, which noted that some employers might not wish to adopt smoothing precisely because it would not allow them to “benefit as quickly from a future rise in yields”.

It said the impact on funds of a consistent shift to smoothing would be “neutral”.

The consultation comes shortly after Dutch regulator hailed its own approach to smoothing, the introduction of the ultimate forward rate, as allowing fewer and shallower rights cuts to occur in April this year, as a result of improved coverage ratios.

Separately, the consultation will also examine if the Pensions Regulator’s should be given a new objective to take account of the impact of recovery plans and their affordability to sponsors.

The NAPF also welcomed this additional consideration for the regulator, which the DWP said would redress a “perceived imbalance” in how the members, the Pension Protection Fund and the employers are considered by the body.

As a result, the consultation asked respondents to comment by 21 February on what the advantages or disadvantages of a new statutory objective would be.

Feedback on the introduction of smoothing should be sent to the department slightly later, by 7 March.