Yesterday, the NAPF called for the Government and the Pensions Regulator to allow defined benefit pension schemes to use higher discount rates – which would reduce the value placed on scheme liabilities. Current practice is to link discount rates to gilt yields, which at present are at an all-time low.
Commenting on the issue, BROADSTONE Actuarial Director John Broome Saunders said "This is nonsensical. We have an established, objective, mark-to-market methodology for measuring deficits and determining deficit funding rates. To tinker with the methodology just because the results look a little unpalatable will seriously undermine the entire UK framework for the financial management of DB schemes."
BROADSTONE believes an adjustment to the discount rate would also be inconsistent. "If you really want to say 'let's pretend gilt yields are higher than they actually are' when measuring liabilities, you should also adopt the same pretence when valuing assets – which, in particular, means valuing gilts and bonds at materially less than their current market value. Only a deluded actuary could attempt to claim that a gilt that can be sold today for £100 cash is actually only worth £80."
John Broome Saunders