Regulator ‘fails to address’ side effects of QE

Neil Carberry, CBI Director of Employment & Skills policy, said: “This statement provides some useful clarity about what’s expected of pension funds and employers when they come to repair deficits in their schemes. The Regulator’s assurance that the majority of schemes will not have to change their existing funding plans will help reassure trustees that they should focus on the long-term health of the scheme, rather than day-to-day market fluctuations.

“But the Bank of England’s quantitative easing (QE) programme has exposed a fundamental problem with the way pension scheme funding is calculated, which the Regulator fails to address. Although QE has been necessary to support the economy, one side effect has been to make pension scheme deficits look artificially big by lowering gilt yields at the very moment when firms are also doing their three-yearly valuation.
“While the Pensions Regulator acknowledges this side effect of QE in its first annual statement, its advice to trustees fails to deal with the problem – how ‘technical provisions’, the amount required to cover a scheme’s liabilities, are calculated. We need to take more account of the effects of QE when making the calculation.

“Increases in deficits distorted by QE lead to demands for even more money from hard-pressed employers. They divert money away from investment in growth and job creation and lock it away unproductively. This can have serious implications for firms’ credit ratings, as well as their ability to raise finance and their market outlook. The best form of protection for members’ employment benefits is a healthy, solvent employer and the Regulator and DWP should put this first.

“To help the private sector provide both the growth we need and the pensions firms have promised to employees, the current method of valuing a pension fund must change. It cannot be right that pension schemes with very long-term liabilities, which make them less vulnerable to short-term market fluctuations, have to fund against spot valuations. Greater smoothing is required using data over many months rather on a single day.”

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