25 January 2013

IPE: UK consultation on liabilities smoothing comes too little, too late

Smoothing of liabilities could be introduced in the UK to offset the "disproportionate" financial strain low bond yields are causing pension fund sponsors, the Department for Work & Pensions (DWP) has said.

The National Association of Pension Funds (NAPF) welcomed the recognition of the damage caused by low interest rates, but said it was "too little, too late".

The consultation said government was concerned that falling yields should not place "disproportionate financial strain on prudent employers", but added that it needed to be careful it would not "inadvertently reward imprudent or reckless" investment.

While the consultation seemed to accept the premise that increased deficits – mandating higher deficit reduction payments – could divert funds away from investment and job growth, the department was less inclined to accept that large deficits hindered a company's ability to raise finance, saying there was "little firm evidence" to support the claim.

The NAPF's director of policy Darren Philp commented that the consultation might come too late for some funds. "Pension schemes that have been going through their valuations over the past 12 months need the most help, as they will be most affected by record low returns on Gilts", he said.

The point was one accepted by the DWP, which noted that some employers might not wish to adopt smoothing precisely because it would not allow them to "benefit as quickly from a future rise in yields".

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