Current Issues in Pensions (1 November, Leeds): Review of session on 'Funding regime - fit for purpose?'

Arguing against the current regime - Kevin Wesbroom

tPR’s interpretation of the current funding regime makes it unfit for purpose. tPR focuses too much on gilts. As yields are currently distorted due to quantitative easing, this increases liabilities resulting in sponsors having to pay higher contributions. This in turn results in restrictions on the funds available to finance future self-investment, having the exact opposite effect of that desired from quantitative easing.

Although distorted market conditions can be allowed for within the recovery plan by assuming asset outperformance under the current regime, it results in the wrong starting point in the assessment of technical provisions.

Failure to adjust the discount rate methodology from that used for previous valuations results in additional (unwarranted) prudence when compared to a neutral basis.

In the US, Sweden, Netherlands and Denmark changes have been made to adjust pension scheme interest rates, for example using temporary floors or long-term rates. The US changes have resulted in an expected 30% decrease in pension contributions, so the US economy could increase its competitiveness against the UK.

We should, as others are, start with a sensible outcome of the funding position of the scheme, rather than valuations showing large deficits without a corresponding increase in contributions “since everything will come good in the end”.

Arguing for the current regime – Charles Cowling

We can’t ignore current market conditions just because everyone else is. Smoothing discount rates would not help; take Holland as an example where an initial temporary smoothing period has had to be repeatedly extended.

We shouldn’t take the US approach as a good example; there have been a number of fiscal disasters over the last two years in the US where pensions represented the largest debt.

tPRs recent review of the deficit contributions payable by schemes in Tranche 7 suggested that only 20% of schemes fell into the category where the contribution requirements are expected to increase above 10%, with the remainder of schemes being expected to able to retain similar contribution levels (possibly by increasing the recovery plan by 3 years and/or weakening the recovery plan assumptions).

As schemes move to a self-sufficiency basis, which is largely driven by gilts, it is sensible to consider gilts when funding. In addition, as the buy-out position of schemes is likely to have deteriorated, the additional prudence when considered against the neutral basis is warranted.

The current funding regime is based on sound actuarial principles with sufficient flexibility. We need to recognise the reality of current market conditions, rather than pretend they don’t exist.

Audience experiences

Smoothing was not being adopted for current funding valuations, with the technical provisions basis being revised in a number of cases. Only a small proportion had experienced difficult discussions with the sponsor following the initial results of the valuation.

Conclusion

When put to the vote, the majority of the audience were in support of the current funding regime, with only a handful against.

The speakers both agreed that the focus needed to be on affordability and the likelihood of paying out benefits, not just on the deficit.