Mercer comment on 2012 Autumn Statement: Pension Deficits and ‘Smoothing’ from Dr Deborah Cooper, Partner at Mercer on the proposals to consult on Defined Benefit pension scheme regulation outlined in the 2012 Autumn Statement:
“What is most important is that this uncertainty about how financing pension scheme should operate in the future is resolved as quickly as possible, because it makes it difficult for trustees and employers to take informed decisions about how they run the scheme and manage risk and could create an uneven playing field between different 'tranches' of scheme valuations.
We agree that the Pension Regulator's objectives needs to be reviewed, and that employer affordability could be a key consideration in doing so, since valuations are long term planning exercises. But just adding a new, employer related objective might not in itself be a solution. The proposed new objective to consider employer affordability needs to be considered against the Regulator's existing objectives, which already conflict since it has to balance trustee actions, which are driven by trustee objectives and responsibilities, with protecting the PPF. The proposed objective, whilst sensible in isolation, could send the regulator's head spinning and result in a very confused set of regulatory actions.
The current valuation regime implicitly permits 'smoothing' but via recovery plans rather than smoothed measures of asset and liability values. Whilst market based measures are not necessarily realistic, the apparent comfort provided by stable measures can be misleading and hide a lot of information. It the regulator's objectives overall can be amended so that it must take a more balanced view of where risk should sit in the statutory funding system, then we think that the arguments about smoothing could become redundant.“
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