Pensions minister Steve Webb returned from Denmark inspired by the Danes' stance on discount rates - but the UK industry has been less impressed, Michael Bow reports.
Steve Webb spent most of last week on a fact-finding mission in Denmark.
Judging by his appearance on stage at the National Association of Pension Funds conference last Thursday, he had undergone something of a Damascene conversion on the Scandinavian peninsular.
Webb returned with the belief that discount rates should be amended to reflect difficult financial market conditions.
The discount rate used to value liabilities, based on the assumed investment return to calculate assets, has dominated debate ever since quantitative easing splurged billions into the economy and gilt yields fell through the floor.
The NAPF has claimed the Bank of England’s £325bn spending spree, buying short-term and long-term gilts, has caused yields to plunge, knocking about £90bn off the value of UK schemes.
The Pensions Regulator has acknowledged the problems but has ruled out a change in discount rates.
In April it said the majority of schemes and employers “will be able to manage their deficits within current plans”, adding that “for these schemes the question of needing to rely on increases to gilt yields beyond those implied by the market does not arise.”
Speaking last week, Webb said he had received advice in the past that “government does not do accountancy standards” and “we should just keep out”.
But he decided to step in anyway.
Framing the debate in terms of wider issues facing the UK economy, Webb said the way liabilities are measured on balance sheets have “massive real implications”.
“Governments cannot stand idly by while accountancy standards change, causing massive real economic impacts for us and potentially results in pension fund liabilities being unnecessarily volatile on balance sheets,” he added.
With Webb seemingly undermining TPR’s position, where does this leave the discount rate debate?
Nordic discount rates
The Danish regulator has proposed to use the market rate for valuing short-term duration bonds but for bonds with a duration of over 20 years a so-called ‘Ultimate Forward Rate’, fixed at 4.2%, will be used.
Deutsche Bank has noted that the Dutch pension funds are also expected to undergo a shift in their liability discount curve with, “a clear bias” towards the UFR or bonds over 20 years: the same approach as the Danes.
With the Danes, the Swedes and the Dutch all using fixed discount rates rather than relying on the market, Webb’s intervention seems a legitimate point.
However, leading industry figures say Webb has made an uncharacteristic mis-step in getting involved in the debate, firstly because the countries Webb references have different regulatory environments, and secondly because TPR is constrained by its obligation to guard the Pension Protection Fund.
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