UK – The introduction of smoothing will only serve to impose a “narrower rules-based approach” on pension trustees and should be dismissed, Mercer has said.
The consultancy said there was no need for the introduction of a further statutory objective for the UK Pensions Regulator (TPR), instead arguing it was more important for it to allow greater flexibility to existing rules.
Detailing its response to the Department for Work & Pensions (DWP), partner Deborah Cooper praised the regulator for its work to date, but stressed the current regime did not require trustees to remove risk “entirely”.
“Ultimately, any system that is applied too rigidly will from time to time result in outcomes that are unsatisfactory, she said. “The current regime is perceived as unsatisfactory because TPR is adhering to its strategy of reducing risk as the overarching aim for all trustees.”
She said this was despite the approach potentially having an adverse affect on companies and bringing about a scheme’s entry into the Pension Protection Fund (PPF) – pointing out that de-risked schemes were less able to address ever-growing deficits in a low interest rate environment.
Cooper also argued that there was no need to introduce a new statutory objective, which would force it to explicitly consider the solvency of a sponsor when agreeing deficit reduction plans.
“Following a strategy that supports continued employer solvency, including measuring the affordability of contributions in the context of other demands on the employer’s discretionary spend, is already implicit in the regulator’s statutory objectives,” she said.
The consultancy said if smoothing of liabilities were introduced, it would lead to a “narrower rules-based approach” being forced on trustees.
Consultancy Redington added its voice to those opposing smoothing, with its vice-president of investment consulting Karen Heaven noting that if the approach reduced the volatility of additional contributions, there would be “less incentive to reduce risk economically”, such as through hedging of liabilities.
“Worse,” she added, “smoothing could potentially introduce additional volatility into the funding positions of well-hedged schemes, driving schemes to adopt riskier investment strategies than they otherwise would.”
In other news, the latest PPF 7800 index has seen funding levels at UK defined benefit schemes increase over the past month, rising by nearly 1 percentage point to 84.6%.
The deficit at the end of February was down year on year and from the previous month, standing at £201bn (€230bn), while assets rose 1.9% in February.
Since last February, the PPF said assets had risen by 7.1%, outpacing liability increases of 4.2%, also leading to a slight increase in the number of schemes reporting a surplus – to 1,343 – accounting for 21.3% of the index.
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