Comment from Graham McLean, a senior consultant at Towers Watson.
“As today’s document highlights, proposals for smoothing have more than a few rough edges.
“Schemes could find themselves being ‘punished for the past’ if markets turn but smoothing means they can’t forget about today’s low interest rates. Employers tempted to support smoothing should therefore be careful what they wish for. This is especially the case as the Government appears reluctant to bring the higher gilt yields seen in past decades into play by sanctioning smoothing over long periods.
“It’s also hard to see how any calculation prescribed from on high could take account of the very different circumstances that schemes find themselves in – for example, when it comes to the strength of the sponsoring employer or the amount of prudence built into other assumptions.
“The Government is aware of these drawbacks. However, today’s GDP numbers are a reminder that it needs to be seen to be doing things to remove brakes on economic growth. Hopefully that will not lead to pension changes with serious unintended consequences.
“The Government has been careful not to commit itself to anything and a lot of things are still on the table, but a few details have been clarified. The DWP has distanced itself from the nonsensical idea of smoothing only the liability side of the equation and suggests that, if smoothing is only an option, trustees will not be cut out of the decision on which approach to use. However, making smoothing mandatory has not yet been completely ruled out. This would require a much more prescriptive one-size-fits-all approach to scheme funding.
“Helpfully, today’s document contains a reminder that the scheme funding regime ‘does not require trustees to choose discount rates based on gilts’, a myth that lies behind some of the support for smoothing. Many large schemes do not operate in this way. It would be odd if the Government set out to ease pressure on sponsoring employers and did so only for the subset who choose to use gilts-based discount rates.”
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