BREXIT: government 'reviewing' pension deficit calculation methods, minister says

This is part of Out-Law's series of news and insights from Pinsent Masons experts on the impact of the UK's EU referendum. Watch our video on the issues facing businesses and sign up to receive our 'What next?' checklist. 

Pensions expert Alastair Meeks of Pinsent Masons, the law firm behind Out-Law.com, said that "apparently technical changes" could be of immense value to employers, provided that this was not done in such a way as to allow those with genuine funding problems to mask their schemes' financial difficulties.

"If funding levels are to be stated on a more forgiving basis, the risk arises of schemes subsequently winding up with an unexpectedly large deficit when it comes to securing those pension scheme benefits with an insurer," he said. "Taking a practical approach to scheme funding in times of unusual market stress is one thing, but the government must take care not to indulge employers with very real pension scheme funding problems."

Ros Altmann, the pensions minister, told the Financial Times that there was "a case for considering how pension liabilities are currently valued for regulatory purposes". She is also keen to review why employers were not making greater use of the existing flexibilities that they have when calculating the cost of their future payments to members, according to the report.

"We need to bear in mind that the effect of quantitative easing, or the stimulus to respond to the economic shock of Brexit, is not undermined by companies who are running DB schemes seeing an increase in their deficits," she said.

DB schemes promise a set level of pension once an employee reaches retirement age, no matter what happens to the stock market or the value of the pension investment. For this reason, the extent to which a scheme is funded by the sponsoring employers at any one time is heavily regulated.

Quantitative easing (QE) and other measures that can be taken by the Bank of England to boost the economy can effectively push up the price of bonds; which will result in the 'yield', or return, on those bonds falling as a percentage of the price. As many DB schemes switched from equity investments to investments in gilts and bonds, which are seen as more secure, following the 2008 financial crisis they are now much more sensitive to the impact of monetary policy decisions.

Lower gilt yields and long-term interest rates also affect a formula known as the 'discount rate', which is used by pension scheme actuaries to calculate schemes' liabilities during their regular valuations. However, trustees are now encouraged by the Pensions Regulator to adopt an 'integrated' approach to managing the funding risks to their schemes, rather than the regulator referring to discount rates or recovery plan lengths as discrete 'triggers' for regulatory intervention.