UK – Plans to allow a smoothing of the discount rate used by UK pension funds has received a mixed reaction, with Towers Watson warning that any changes could result in a "less flexible and more rigidly prescribed" regulatory approach.
In yesterday's Autumn Statement, the Treasury announced that the Department for Work & Pensions (DWP) would soon consult on using smoothing of liabilities for pension funds set to undergo valuation in 2013 or later.
John Ball, head of UK pensions at consultancy Towers Watson, said it was a "myth" that UK schemes used the Gilt yield plus a fixed margin to calculate liabilities, instead pointing to the use of an expected return on assets with a built-in prudence margin.
"Where the government could help pension funds significantly would be to encourage the regulator to present this as an acceptable approach," he said.
Ball added that it would not be right to adjust pension liabilities by "looking in the rear-view mirror" to what past Gilt yields have been.
"Any smoothing approach could result in a less flexible and more rigidly prescribed regime, which could have undesirable consequences when market conditions change," he said.
Barnett Waddingham also struck a note of caution about the use of smoothing, with associate Tyron Potts saying that such an approach was not "necessarily appropriate".
Tracy Blackwell, co-head of asset liability management at Pension Corporation, also argued against any form of smoothing.
"If the contribution burden implied by the market-based deficit calculation is too great, then this should be dealt with in a transparent manner through extending recovery plans and/or allowing an element of the recovery plan to be based on explicit adjustment for a rise in interest rates," she said.
The National Association of Pension Funds (NAPF) had previously warned against the use of smoothing, saying it could "carry with it cliff-edge effects".
Reacting to news of the consultation, the organisation's director of policy Darren Philp said he was pleased to see chancellor George Osborne recognise the impact of quantitative easing on pension fund liabilities.
"We will work closely with the government and the regulator to help find a solution to the volatility in funding deficits that companies are currently experiencing," Philp said, urging swift action so occupational pension funds currently completing valuations could benefit from the changes.
In a related announcement, the Treasury also said it would consult on an additional statutory objective for the Pensions Regulator (TPR) – forcing the body to take account of the impact of any recovery plan payments on scheme sponsors.
Zoe Lynch, partner at law firm Sackers, argued that the regulator's existing objectives of protecting member security and the Pension Protection Fund (PPF) had been "narrow".
"Reading between the lines," she said, "it appears the government feels existing objectives relating to security of benefits may be preventing TPR offering the flexibility to extend recovery plans that companies in financial difficulties may require."
Lynch referenced that TPR chairman Michael O'Higgins' response to the proposed new objective – in which he called on trustees to continue to act according to their fiduciary duties until the consultation concluded – would be interpreted as a call for "business as usual" until any changes were implemented.
"In doing so," she said, "We suspect they are anticipating a barrage of requests – which they are understandably trying to head off at the pass."
Mercer's Deborah Cooper meanwhile predicted that, if the regulator's objectives were to be amended, allowing for a "more balanced view", then the discussion around smoothing would become "redundant".
The NAPF's Philp concluded that changed statutory objectives could deliver a "more proportionate regulatory regime".
"We have long-held concerns that the regulator is more focused on keeping funds out of the Pension Protection Fund, without due regard to the pressures on companies and the impact on workplace pensions," he said.
A new statutory objective was first suggested by business lobby CBI earlier in the year.
At the time, TPR chief executive Bill Galvin seemingly dismissed the suggestion, saying the current framework already required it and trustees to "balance the interests of business, the pension schemes and the PPF".