Rethinking pensions liabilities could lead to growth

nest golden egg 410The UK government should smooth the discount rate used in pension scheme liability calculations to free up company cash to spend on growth.

Pension schemes currently estimate their liabilities based on gilt prices on a single day, an approach that is “pro-cyclical”, according to the Confederation of British Industry (CBI).

Gilt yields are at low levels due to factors such as quantitative easing and this has distorted deficit figures, said the CBI. Companies have been forced to pump money into their schemes at precisely the time when investment in growth is needed, it said.

The approach is faulty because pension schemes can, in fact, survive a low-yield environment with long-term planning, added the CBI.

“Pension schemes, which run over periods of up to a century, have the capacity to adapt over time to changes in the gilt yield, and to ride out economic storms,” said Neil Carberry, CBI director for employment and skills.

Carberry said the government should smooth the discount rate to allow schemes to take a longer-term view of their liabilities.

“This is one of the few steps the Government can take to boost growth without spending a penny,” he said.

The average funding ratio for pension schemes in the Pension Protection Fund 7800 index, which tracks 6,432 UK defined benefit schemes, was 82.3% at the end of September. The combined deficit was £280 billion (€348 billion).

©2012 funds europe