Aon Hewitt has responded to the Department for Work & Pensions' (DWP) call for evidence on smoothing assets and liabilities in scheme funding valuations and whether to introduce a new statutory objective for the Pensions Regulator.
As part of its response, Aon Hewitt has conducted an extensive analysis of smoothing and its implications for funding and presented this to the DWP.
Kevin Wesbroom, partner at Aon Hewitt said:
"Our clear conclusion is that we do not favour a mechanical approach such as smoothing. Our experience has demonstrated that any rigid application of a funding methodology – gilts plus, inflation plus, even the minimum funding requirement (MFR) - is bound to fail at some stage. What is needed is the exercise of judgement by all parties – trustees, sponsors, advisers and regulators.
"While we know there is sufficient flexibility within the current system, we believe it would be a good signal to all parties if the Pensions Regulator is required to give consideration to the longer-term health of sponsoring employers and the future sustainability of pension provision."
On the detailed modelling and analysis of potential smoothing mechanics carried out by Aon Hewitt, Jonathan Wicks, chair of the Aon Hewitt Pensions Policy Group said:
"Smoothing can only be made to 'work' – in the sense of delivering smaller disclosed deficits – if one adopts illogical approaches, such as smoothing liabilities only, or by smoothing over very long time-frames. In the latter case, this poses a whole series of questions about how the calculations would reflect the changing nature of a pension scheme, as well as causing significant disruptions to current actions for controlling investment risk.
"The reality is that paying lower contributions is not consistent with the flight plans that many of our clients have put in place to reach a low risk, self-sufficient future."
Kevin Wesbroom continued:
"Excessive anchoring to previous assumptions, methods or approaches can lead to challenges when market conditions are subjected to pressure from the effects of polices designed to keep interest rates low and to stimulate growth.
"The Pension Regulator should give a clear signal that changes may be made, without fear of regulatory rebuke. It is then down to the parties to reach a suitable compromise that reflects the circumstances of each scheme - balancing the need for member security with the viability of the sponsor's business."
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