UK - The UK's largest business lobby has called for pension liabilities to be discounted against a smoothed discount rate in an effort to buffer against rising deficits, pointing towards the use of similar tactics in continental Europe.

CBI director general John Cridland called for a number of significant changes to UK regulation, including a new statutory duty for the Pensions Regulator (TPR) to consider the solvency of companies in the work it undertakes.

The business group also called for the new Pension Protection Fund (PPF) levy - predicted to be as much as a 25% increase over the current rate due to the risk-based method of calculation - to be put on hold.

"We're urging the government to act to address this important issue by taking three steps," Cridland said.

"Stop the rollercoaster deficits by smoothing the measure of the gilt yield for businesses, halt a possible 25% rise in PPF levies next March and ensure the Pensions Regulator takes account of businesses' ability to grow."

Cridland added that the "artificially high" deficits - caused by low gilt yields as a result of the UK's safe haven status, as well as quantitative easing - were stopping business from being able to invest and that the increased deficit "made no sense" if, apart from the discount rate, none of the scheme or company fundamentals had changed.

"Introducing smoothing - over a number of years - in the discount rate would better reflect the long-term nature of pensions and allow for counter-cyclicality," the director general argued, pointing towards its use elsewhere.

Denmark agreed to amend the long end of its discount yield curve last month after 10-year sovereign bond yields briefly fell below 1%. 

When asked about the problems caused by low yields later that month, the UK's pensions minister admitted they were a "complete nightmare".

Cridland further argued that while the UK regulator had offered some flexibility on funding plans, the best way to guarantee that it would always be flexible would be to make concerns about the employer's solvency part of its statutory objectives.

Addressing the calls for new duties to safeguard companies, the regulator's chief executive Bill Galvin said it already had a requirement to balance the needs of schemes, businesses and the PPF, but added that any such changes would be a matter for the government.

Galvin also rebuffed claims that higher deficits would automatically trigger higher contributions from companies, saying the regulator's existing framework offered "considerable" flexibility.

He also questioned the CBI's approach of comparing the UK with the regulatory approach taken in other countries.

"Direct comparisons with systems in other countries can be misleading since they generally have more rigid rules on repaying deficits quickly," he said.

"The UK system is notable in allowing flexibility where it most matters - on the actual payments that go into the scheme."

Discussing the potential for a 25% increase in the PPF levy, Cridland said it was "simply not sustainable" and would cause problems for many small and medium-sized companies.

However, the PPF's executive director for financial risk Martin Clarke was quick to note that the new risk-based levy calculation had initially been welcomed by levy payers, as it resulted in a reduced levy.

"Clearly," he added, "conditions for defined benefit pension schemes have deteriorated significantly since then, and, as a result, we have seen funding levels fall to record levels, resulting in a six-fold increase in risk."

He said there should therefore be "no surprise" that there was an expectation the levy would increase, although the final cost would not be announced until September.

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