The vast majority of UK pension funds believe the industry’s regulator must do more to reduce the impact of quantitative easing (QE) on deficits, research has found.
A survey by fiduciary manager SEI shows 80% of the trustees, finance directors, and pension fund executives polled felt The Pensions Regulator (TPR) should provide greater flexibility on how scheme liabilities are calculated in light of the Bank of England’s QE programme.
Half of those calling for greater flexibility said liabilities should be based on an average of the bond yields from the last three years rather than a snapshot of yields at the time of valuation.
Some 38% called for the period for meeting funding objectives to be extended and 12% felt the Pension Protection Fund levy should be decreased.
In April this year, the regulator announced it would provide flexibility in recovery plans where sponsors were struggling to pay, but ruled out any more far-reaching allowances around assumptions or other rules.
At the time TPR’s funding statement said: “The regulator does not believe in allowing schemes to make an allowance for low gilt yields and the effect of QE in the assumptions they use.”
The Bank of England Monetary Policy Committee confirmed in July it would extend QE by a further £50bn of bond purchases, taking the overall total of QE to £375bn, with more expected in November.
Following the announcement, 10-year gilt yields fell to record lows of 1.4%, representing an increase of approximately £40bn in liabilities.
SEI director of European institutional advice Charles Marandu said: “The results demonstrate that pension scheme trustees remain concerned that QE is distorting market interest rates and pushing up scheme deficits. “The Pensions Regulator’s statement that flexibility exists within recovery plans seems to have given trustees little comfort, as there was no relief for headline scheme deficits.
“Most trustees polled favoured smoothing the volatility in funding positions by using an average of historical interest rates to determine the funding liabilities, but, as yet, these measures have been resisted by the authorities. One possible relief measure could be to allow a degree of extra flexibility in the setting of discount rates which explicitly adjusts for QE without necessarily requiring the scheme investment policy to be re-risked in order to support it.”
The precedent for smoothing the discount rate has recently been set by several countries including the Netherlands and Denmark, he added.
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