25 January 2013

DWP publishes call for evidence on impact of Defined Benefit pensions on growth

The Department of Work and Pensions has published a call for evidence: 'Pensions and Growth: Whether to smooth assets and liabilities in scheme funding valuations and whether to introduce a new statutory objective for the Pensions Regulator'.

Private sector defined-benefit occupational pensions remain a prominent feature  in the United Kingdom’s pension landscape, providing members with a much  valued layer of financial security in later life. However, the cost of funding these  pension promises is substantial as longevity continues to increase; returns on  assets remain volatile; and the economic environment remains weak. 

 Of particular concern to some sponsoring employers and trustees alike is the  recent period of historically low gilt yields which has affected the discounting  applied in the calculation of long-term pension liabilities. Some commentators  have stated that rising deficits are forcing some employers to make substantial  additional contributions to schemes, which is diverting funds away from business  investment and ultimately, economic growth.

 Against this background, the Government is considering whether there is a need  for:

• legislation explicitly to allow the ‘smoothing’ of asset values and liabilities in  funding valuations (i.e. averaging asset prices and discount rates over a longer period of time, instead of using current market spot rates) in order to counter the effects of the current economic situation;
• a new objective for the Pensions Regulator to consider the long-term affordability of deficit recovery plans to sponsoring employers to add to the current recognition of this in the Pensions Regulator’s Code of Practice

In considering whether changes to the funding regime are appropriate, the  Government needs to weigh up impacts on:

• Members - defined-benefit 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 – the best security for a defined-benefit pension  scheme and its members is a properly-funded scheme backed by a solvent,  profitable sponsor. The Government recognises that for each scheme a  balance needs to be struck between these two elements.
• The Pension Protection Fund, which provides a safety net for members of  pension schemes and is funded by a levy. The Government wants to ensure  that it understands the potential impacts on the levy of any smoothing of  assets and liabilities.
• The wider economy - the Government wants to ensure that the protections in place for members within the defined-benefit pensions regulation system do not act as a brake on investment and growth.

Whilst the Government recognises that for sponsoring employers of defined benefit pension schemes the current economic situation is a challenging one, it also recognises that opinions within the pensions industry differ on whether there is a case for change. This document is seeking therefore to gather views on:

• whether the smoothing of assets and liabilities would be appropriate in schemes undertaking technical provisions valuations, considering impacts on members, sponsoring employers and the Pension Protection Fund;
• how smoothing might be applied;
• whether a new statutory objective for the Pensions Regulator is necessary, or whether the appropriate considerations can be delivered under existing objectives, or alternatively whether other changes to the legislation are required.

The responses to this document will be used to inform whether there should be a new objective or duty for the Pensions Regulator. Any such changes will require primary legislation. The responses in relation to smoothing will be used to determine whether any change to legislation is appropriate and if so would form the basis for the options to be consulted on in a further consultation.

Due to the complexity of the issues involved, the Government has decided to  launch this initial call for evidence to gather views on whether change is appropriate. The call for evidence is in two parts. The call for evidence on the new  objective closes on 21 February, 2013. The call for evidence in relation to smoothing closes on 7 March, 2013.

Press release

Call for Evidence

© Department for Work and Pensions