Pensions and Growth – A call for evidence

Introduction

On 25 January 2013, the Government took the first steps along the road to making possible changes to the DB scheme funding regime by issuing “A call for evidence” relating to the “smoothing” of assets and liabilities in funding valuations and a possible new objective for TPR.

Key points

The Government is considering whether there is a need for:
legislation explicitly allowing the “smoothing” of asset values and liabilities in funding valuations (i.e. averaging asset prices and discount rates1 over a longer period of time, instead of using current market spot rates) in order to counter the effects of the current economic situation; and
a new objective for TPR to consider the long-term affordability of deficit recovery plans to sponsoring employers to add to the current recognition of this in Code of Practice No.3, (the “scheme funding code”).

The deadline for evidence in relation to smoothing asset values and liabilities is 7 March 2013, but the deadline for evidence regarding TPR’s statutory objective is earlier, 21 February 2013.

Background

In the wake of industry lobbying, the Chancellor first announced in his Autumn Statement2 that the DWP would be consulting on whether to allow companies undergoing valuations in 2013 to use smoothed discount rates, in recognition of the fact that “volatility in measures of pension scheme deficits can make it hard for companies to manage their investment plans and attract external funding.” He also announced that the Government would consult on providing TPR with a new statutory objective, with a view to ensuring that DB regulation does not inhibit investment and growth.

In its response to the Chancellor’s comments, TPR confirmed that it remains “business as usual” until the new objective is in place.

Smoothing

The current scheme funding regime is flexible. Trustees of DB schemes are able to choose the actuarial method and assumptions used to value their scheme and to agree with the sponsoring employer (with the advice of the scheme actuary) the length of any recovery plan. However, there is no explicit ability for them to “smooth” assets and liabilities.

This call for evidence seeks views on the extent to which smoothing should be explicitly allowed for in pension scheme valuations, appropriate methods of smoothing, and how best to apply a consistent approach across assets and liabilities.

TPR’s objectives

TPR currently has the following five statutory objectives:

to protect the benefits under occupational pension schemes of, or in respect of, members of such schemes;
to protect the benefits under personal pension schemes, where direct payment arrangements exist or the scheme is a stakeholder pension;
to reduce the risk of situations arising which may lead to compensation being payable from the PPF;
to maximise compliance with the duties of automatic enrolment; and
to promote, and to improve understanding of, the good administration of work-based pension schemes.

The argument for a new statutory objective is that TPR is currently required to focus explicitly on protecting members and the PPF, but not to consider the long term affordability of deficit repair contributions for sponsoring employers of the pension schemes. However, the alternative view is that “implicitly” in TPR’s scheme funding code (which states that trustees should consider the affordability for the employer) and through its operational practice, this factor is already taken into account.

The Government’s balancing act

In considering whether to introduce the above changes, the Government intends to weigh up the following factors:

members – recognising that DB pension rights are obligations which cannot be altered once rights have accrued, the Government is committed to ensuring that members’ interests are protected;
sponsoring employers – accepting that the best security for a DB pension scheme and its members is a properly funded scheme backed by a solvent, profitable sponsor, the Government acknowledges that for each scheme a balance needs to be struck between these two elements;
the PPF – the Government wants to ensure that it understands the potential impacts on the levy of any smoothing of assets and liabilities; and
the wider economy – the Government wants to make sure that the protections in place for members within the DB pensions regulation system do not act as a brake on investment and growth.

Conclusion

Given the technical nature of the evidence required, the Government is, unsurprisingly, particularly keen to hear from trustees, sponsoring employers, actuaries and other pensions professionals. If the call for evidence ultimately prompts legislative change, the Government will “bring forward more detailed proposals and implement changes…as soon as practicable in 2013”.

1 The rate used to discount future liabilities of a DB pension scheme in order to calculate the present value of the liabilities
2 See our Alert: “Autumn Statement 2012” dated 6 December 2012