The Department for Work and Pensions has launched a consultation on whether companies undergoing valuations of their DB pension deficits should be allowed to smooth the calculation of their asset and liabilities.

The consultation highlighted the concerns of employers and pension groups that a recent period of historically low gilt yields has affected the discounting applied in the calculation of long-term pension liabilities.

“The government is concerned that this fall in gilt yields should not put a disproportionate financial strain on prudent sponsoring employers of DB schemes, who find themselves facing increased pension deficits and deficit repair contributions in order to meet their statutory funding objectives. At the same time, the government wants to be careful that it does not inadvertently reward imprudent or reckless investment strategies,” the consultation said.

However, The Pensions Regulator’s April statement emphasised the flexibility in the current pension funding system and said employers should make use of these flexibilities when agreeing recovery plans.

Some industry experts have warned against the implications of smoothing. Towers Watson senior consultant Graham McLean said: “Schemes could find themselves being ‘punished for the past’ if markets turn but smoothing means they can’t forget about today’s low interest rates. Employers tempted to support smoothing should therefore be careful what they wish for. This is especially the case as the government appears reluctant to bring the higher gilt yields seen in past decades into play by sanctioning smoothing over long periods.

“The government is aware of these drawbacks. However, today’s GDP numbers are a reminder that it needs to be seen to be doing things to remove brakes on economic growth. Hopefully that will not lead to pension changes with serious unintended consequences.

The National Association of Pension Funds policy director Darren Philp added: “The smoothing approach being suggested risks making matters worse for schemes once interest rates start picking up, and could cause greater confusion for trustees, actuaries and employers when agreeing a discount rate.”

The consultation will close on 7 March.

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