On Friday, the Department for Work and Pensions (DWP) launched its consultation, “Pensions and growth – a call for evidence”. The consultation calls for evidence as to whether to smooth assets and liabilities in scheme funding valuations and whether to introduce a new statutory objective for the pensions regulator.
In reviewing the consultation document, it got me wondering how the Citizen’s Advice Bureau (CAB) might respond. Their website is pretty clear. Step 1: “Sort out how much money you owe”. Step 7: “work out your options if you don’t have enough money to pay off all your debts.”
The idea of actuarial smoothing seems directly contradictory to the first piece of advice. taking the industry backwards to a world of smoothed actuarial valuations will not help to resolve the challenges pension funds and their sponsoring companies face. Disguising the problem will not produce better solutions to the funding of pensions liabilities. Similarly, adding a further distortion to the economy will not not serve to aid economic growth.
Many schemes are already recognising the magnitude of the challenges they face and designing appropriate deficit recovery plans. The TPR in April last year (check date) gave guidance to support schemes and employers in meeting deficit recovery obligations. This included allowing greater flexibility in the time horizon over which payments could be made.
The consultation document recognises the illogicality of smoothing only liabilities and any smoothing methodology would cover both assets and liabilities. While it may feel comforting to artificially inflate funding positions today, if market conditions change, a smoothed valuation could in the future serve to drag down the funding ratio. Presumably at that point, the essence of the ‘scheme specific actuarial valuation’ will prevail and trustees will call on their actuaries to revert to a mark to market valuation methodology.
The pressure on companies providing or supporting defined benefit pension schemes cannot be ignored and its impact on the wider economy and efficacy of government policy to stimulate growth is crucially important. There remains considerable flexibility in the UK approach to allow schemes and their actuaries to take account for their view of market valuation anomalies. The current system is less prescriptive than some other regimes around the world and as such is better able to cope with all market conditions. The industry should heed the CAB’s advice to “sort out how much money you owe” not bury its head in the sand.