The UK government should ignore calls to change the way defined benefit (DB) pension deficits are calculated, the country’s former pensions minister has said, after the impact of the UK’s vote to leave the European Union damaged funding.

Steve Webb, responsible for pensions policy for five years until 2015, said the temptation to “fiddle the numbers” should be resisted after the most authoritative deficit figures for UK DB funds saw a £89bn (€105bn) increase in underfunding in the immediate aftermath of the vote.

Since the referendum, his successor, Ros Altmann, has repeatedly warned of the economic impact of increasing deficits and said it must not be allowed damage the economy. 

Webb noted that, during his tenure, the Pensions Regulator (TPR) was granted a further objective to consider the growth prospects of sponsoring companies when agreeing deficit-reduction payments – a decision reached at the same time the government rejected a call to allow for smoothing of pension liabilities.

Webb, now director of policy at Royal London Asset Management, dismissed a renewed consideration of smoothing out of hand.

“If it turns out that low interest rates really are the new normal, then pretending they are not low to ease short-term funding pressures is pretty risky,” he said.

He also defended the flexibility granted TPR during his tenure and emphasised that valuations were not rigid but tailored to an individual DB fund’s needs.

“The argument is still ‘you don’t kill the goose that lays the golden egg’,” he said.

“And you don’t expect such high pension contributions that it would actually reduce the chance of the company’s being there in 10 years’ time to pay the pension liabilities.”

Consultancy PwC noted that many sponsors and trustees had constructed the most recent valuations around a scenario anticipating improved Gilt yields.

Instead, the UK Debt Management Office this week issued £1.25bn of 10-year Gilts at a yield of -1.58%.

Jeremy May, pensions partner at PwC, said the challenge now facing trustees was weathering continued investment volatility.

“An alternative strategy would be to recognise that repairing the deficit needs to be done over a longer time frame,” he said.

“This would allow trustees to reduce the investment risk within the scheme by moving to more cash-generative assets while increasing liability hedging with the sponsor, thereby benefiting from the reduced volatility in future contribution calculations.”

While TPR no longer limits recovery plans to 10-year timeframes, it has recently come in for criticism for the 23-year recovery period set out by trustees at the pension fund for insolvent retailer BHS, now set to enter the Pension Protection Fund.

Topics