Move to ease pension shortfalls rejected

Actuaries have taken the unusual step of opposing measures to ease pension scheme funding pressures, which have been proposed by the body representing their biggest clients.

Earlier this week, the National Association of Pension Funds called on George Osborne, chancellor, to force the UK Pensions Regulator to use a higher discount rate than the prevailing gilt yield when calculating schemes’ liabilities.

A switch away from a market basis for determining discount rates would make pension fund shortfalls appear smaller than they are currently, and allow companies to pare back the cash injections they make into their schemes.

“The Institute and Faculty of Actuaries welcomed the shift to market-related valuation methodologies and would not wish to see a return to a regulatory environment that permits arbitrary discount rates, as these allow the true cost of pension promises to be hidden,” said Jane Curtis, immediate past president, speaking on behalf of the actuaries’ professional body.

The mathematics of scheme valuation give rise to larger calculations of liabilities – and scheme deficits – as interest rates fall.

The NAPF argued that the Bank of England’s quantitative easing programme, under which it has so far purchased £375bn of gilts, has artificially driven down the gilt yields that form the basis of scheme valuations.

It calculated that even a relatively cautious rise in the discount rate of half a percentage point would reduce the pension fund deficits of FTSE 350 companies by 40-50 per cent – or more than £20bn.

But Ms Curtis said that the use of realistic, market-based rates has allowed scheme trustees – as well as employers and their shareholders – to have a better understanding of what retirement promises actually cost.

The Pensions Regulator also hit back against the NAPF proposal, noting that it offers employers considerable flexibility in the time they have to make up scheme shortfalls, even without resorting to alternative methodologies.

Stephen Soper, the regulator’s executive director for defined benefit funding, said: “Our view is that adjusting discount rates for liabilities alone risks simply picking the answer you want, and ignoring the reality of the situation.”

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.