The Pensions Regulator’s (TPR) latest funding agreement has disappointed pension schemes expecting leeway on the liability discount rate given such low current bond yields following quantitative easing (QE).
Many pension funds had hoped for flexibility from the watchdog on technical provision discount rates, with schemes potentially being able to smooth away some of the impact of lower yields.
However, while TPR accepted the current economic conditions increased pressure on scheme funding, it ruled greater flexibility out as not a “prudent” approach.
According to TPR’s funding statement: “The regulator does not believe allowing schemes to make an allowance for low gilt yields and the effect of QE in the assumptions they use, thereby reducing their funding target (liabilities) is a prudent approach as it seeks to second guess future market conditions.”
However, it added: “We will consider additional flexibility in recovery plans where employers are genuinely struggling to support their scheme.”
TPR chief executive Bill Galvin explained: “We have been in a low interest climate for some time. Yields have fallen further in the last nine months, and it is unclear when and to what extent there will be a market correction. The net effect across defined benefit schemes is not uniform and will vary greatly depending on the extent their risk management, investment and contribution strategies have insulated them from the effects.”
But KPMG said the regulator had given the pensions industry a new set of rules and constraints which offered no “olive branch” for employers, rather than the easements to current market conditions and QE that the industry was “crying out for”.
KPMG pensions partner Mike Smedley added: “The regulator seems to be taking a step change in approach, raising the bar for trustees and employers and laying down some clear markers of what it expects to see in valuations – and as importantly what it does not expect to see. The message comes through loud and clear that the regulator expects strong companies to meet deficits while they are in good financial health, and will be less tolerant of long recovery plans.”
Meanwhile, Schroders said while QE and the UK’s safe haven status may be considered ‘short term’, broader issues such as supply and demand have existed for a number of years and are likely to persist for some time to come.
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