Broadstone comments on growing pressure to smooth pension scheme liability valuations


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Yesterday, the CBI became the latest voice to argue that changes to defined benefit pension scheme funding rules should be made, in the light of ballooning scheme deficits.

Current low gilt yields, at least in part due to the Bank of England’s continuing programme of quantitative easing, mean that the value of pension scheme liabilities has increased significantly. This leads to larger deficits, and thus the need for sponsors to increase contributions to ensure that those deficits are paid off. The CBI has called for the introduction of a mechanism that would smooth the discount rate used to measure liabilities, to reduce the overall volatility of scheme deficits.

John Broome Saunders, Actuarial Director at BROADSTONE, said "Smoothing always sounds rather alluring, but in practice is rather harder to implement. If we are going to ignore financial markets when placing a value on obligations, then the art of valuation becomes far more subjective and judgemental – with the clear risk that the necessary judgements are not made in an independent and unbiased way. Moreover, if we are going to smooth liability values, we should – for consistency – also smooth asset values. If we go down this route, the valuation of pension obligations might turn into nothing more substantial than an elegant conjuring trick."

John Broome Saunders

Actuarial Director