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Pensions regulator eases DB funding demands

The Pensions Regulator has confirmed it plans to give employers with defined-benefit pension schemes “greater breathing space” to fill deficits.

Over the past year, the eurozone crisis and the Government’s quantitative easing programme have caused a spike in demand for UK gilts. As a result, gilts are becoming more expensive, depressing interest rates and reducing the return on pension fund investments.

In an interview with Money Marketing in February, TPR chief executive Bill Galvin (pictured) vowed to ease the funding requirements on DB pension schemes.

In a statement published today, the regulator confirms it will allow some employers to pay back pension deficits over a longer period of time.

Galvin says: “Employers that are struggling have greater breathing space to fill deficits over a longer period.

“However, we will draw a distinction between this group and those cases where schemes are substantially underfunded and employers are able to afford higher contributions. In such cases we will expect pension trustees to be taking steps to put their scheme on a more stable footing.”

National Association of Pension Funds chief executive Joanne Segars says: “It is good that the Regulator will look sympathetically on employers that have experienced significant deficit increases by allowing extensions in recovery periods.

“However, as the negative growth figures this week have shown, the outlook for the economy remains highly uncertain and there is the possibility that more QE will unfold.”

Confederation of British Industry director of employment and skills policy Neil Carberry says: “This statement provides some useful clarity about what is expected of pension funds and employers when they come to repair deficits in their schemes.

“However, the Bank of England’s quantitative easing programme has exposed a fundamental problem with the way pension scheme funding is calculated, which the regulator fails to address.

“It cannot be right that pension schemes with very long-term liabilities, which make them less vulnerable to short-term market fluctuations, have to fund against spot valuations.”


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  1. Writing in a purely personal capacity, I can only express my disappointment at the Pension Regulator’s statement on scheme funding today, which is the latest in a series of frankly catastrophic regulatory, legislative, and fiscal decisions taken notably over the past 15 years, which have and been and still are simultaneously severely damaging corporate Britain and going to create penury for millions of ordinary workers in the future.

    Clearly, there are long terms demographic factors such as greater longevity which are huge upward drivers in the costs of pensions, but a framework that includes the 1997 tax on dividends (still ticking away inexorably year by year reducing fund values), record low bond rates (made substantially worse by QE: few weeks ago they reached levels not seen since the start of the 18th century – yes 18th!), and a frankly insane requirement to value long term liabilities spread over decades via volatile short term measurements (the 15 year gilt rate), is doing great harm. It is the latter two points which are the cause of the immediate acute distress to funds and ironically the very things the authorities could do something about, but seemingly refuse to.

    The Regulator seems to have taken the view that any break from the “real” market” to a “model” is a slippery slope, which would weaken pension security. I could buy into that if we all believed that gilt rates were going to remain at record low levels for the lifetime of current pension liabilities, however, that seems to stretch all credulity well beyond breaking point. The current gilt rate is perfectly fine for valuing annuities to be purchased this year, and clearly has some relevance to likely rates a year or two out, beyond that it becomes increasingly academic, and in the case of a say, 40 year old, frankly 99% irrelevant, as their liabilities will not coalesce till 2037. Do we really believe 15 year gilt rates will not be higher than today’s 2.74% in 2037? Thought not. However, we as a company are forced to value the 40 year old’s pension as if 2.74% will be the case in 2037, and put in hard cash now to remedy a problem which in all likelihood doesn’t exist, and is certainly made worse by the authorities’ policy of QE. Bear in mind this is cash that is not going into new plant and equipment thereby weakening the company long term in world markets, (and of course a weak company equals a weak pension scheme long term). Want a reason why corporate Britain is hoarding cash, not investing, and thereby stalling the recovery – well there you have one. Talk about not joined up government!

    So what to do? Short term (a year?) I would have allowed pension funds to discount QE by an agreed percentage, by allowing the adding of a small amount (0.75%?) to 15 year gilt rates for the purposes of fund valuation for anyone not retiring within say 5 years. That would have reduced notional liabilities taking the pressure off whilst a less volatile measurement of fund values is worked out.

    My proposal on that would be to smooth the discount rate used for calculation of liabilities for those not within 5 years of retirement to an average of the past 10/15 years gilt rates (or better still the average of gilt rates over the period of time an individual in the scheme has to go until retirement or maybe 60). In this way the market would not be dodged indefinitely (the Regulator is right that ultimately it is what it is) but, crucially, there would not be the violent swings in fund values that happen now on a weekly basis.

    It is this volatility as much as the size of any debts which is the killer fact. To put this in context our company is a successful SME, doing perfectly fine at present, with growing sales and good profitability, however, since February this year as the 15 year gilt rate has fluctuated from 2.58 to 3.03% I calculate that our notional pension deficit has probably also fluctuated by an amount equivalent to 5 years profits before intrest and tax! I would liken it to trying to fly a Cessna with two tonnes of lead in the tail moving around. This also makes company valuations for perfectly normal transactions with banks (or indeed any sale or orderly generational change – again vital for a company’s long term heath), nigh on impossible. Would the Regulator, or anyone who designed the 2003 Pension Act like to explain to me how to run a business for the long term with that kind of financial movement? Presently all we are getting is “interest rates will rise eventually closing the liability gap”, very very true, but how many of us will have been killed off corporately by the finacial stress of having to wait for this, while the authorities continue to QE with gusto and tell us to get on with it. Extending catch back plans to 15 years is a small sticking plaster at best, and does nothing address the long term corrosive effects of volatility and forced under investment.

    There is a final point, which is a social one. The present disastrous state of private sector pensions has been made worse by over taxation, and over zealous regulation over many years. To be fair the regulation has probably largely been driven by the desire (perfectly correctly) to right the wrongs of Maxwell and Allied Steel and Wire, and it is probably true that prior to 2003 the law was too lax and things needed to be tightened up, to improve the security of people in their old age and make sure they have dignity and something financially secure to look forward to as they get older. Fair enough, nobody would want to argue with the aims. However, like it or not excess taxation, and the present bizarre valuation regime forced on the Regulator by the law and his present interpretation of it, has created a situation which in broad terms is exactly the opposite of what was intended.

    The point of the 2003 Act was to protect fund members, as stated above, from suffering another Allied Steel and Wire/Maxwell situation, however, the costs and risks to companies of ensuring that safety are so burdensome, that industry has reacted in the only logical way by closing schemes down totally (if it can afford it) or not allowing new members to join. All fine, if you are a one of the ever dwindling numbers of members of a final salary pension scheme and never leave it till you retire. However, if you are made redundant, resign, or are young you now have virtually no hope of ever joining a final salary scheme again, condemning millions to a poor old age in the coming decades, as most simply have no idea of the amounts, needed to be saved or if they do, few have the means to do it.

    Major reform all round is needed, and needed quickly, to ensure a balance between security for pension fund members, and not crippling UK plc. Presently we have a situation which is harming UK plc, and providing insecurity for the many.

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