“The Autumn Statement 2012 contains plans for a consultation on allowing sponsors to smooth pension scheme volatility and a new statutory objective for the pensions regulator to consider the long term affordability of recovery plans for sponsors. Pension Insurance Corporation welcomes this consultation which could help lessen the burden on corporate sponsors by reducing the annual amount they have to pay in deficit reduction contributions and should ensure the Pensions Regulator will not effectively force them into insolvency due to essential investment in the business being diverted into pension contributions.
The consultation on volatility is in part a recognition of the impact that Quantitative Easing has had on pension schemes and their corporate sponsors. Lower contributions to pension funds will benefit the Government by increasing corporation tax revenues. We estimate that this has cost the Chancellor £37bn in lost tax revenues to date, and could be as much as £10 billion a year in future years, equivalent to around 10% of the annual deficit.
However, there are options other than asset and liability smoothing which may be a better way to achieve this. The danger is that using anything other than market values is simply obfuscating the underlying position. If the contribution burden implied by the market based deficit calculation is too great then this should be dealt with in an transparent manner through extending recovery plans and/or allowing an element of the recovery plan to be based on explicit adjustment for a rise in interest rates – and this seems to be recognised in a new statutory objective for TPR.
It is vital for the overall health of the pension system that pension scheme liabilities are properly recognised and the consultation on volatility should ensure there is no blurring of the true figures, which will only increase insecurity for pension scheme members by creating a false image of security.
Over the past three and a half years, since the start of the Quantitative Easing Programme, companies have contributed more than £130 billion (according to the PPF) to their pension schemes in an effort to plug the hole created by plummeting gilt yields. Corporates are obliged to plug these holes under deficit funding plans with their pension funds. These contributions are pre-tax, thereby reducing the taxable income on which Corporation Tax is assessed. There is currently a deficit of over £229 billion in UK corporate pension schemes; this has risen in recent years as a result of lower gilt yields caused in part by QE’s effect on increasing liabilities and partly by safe haven buying.
This is money that could otherwise have been invested in jobs and growth, but could also have gone in part to HMRC as tax revenues. So what the Government saves itself on the one hand by reducing the interest rate on UK national debt, it takes from the other by reducing the amount of corporate tax it receives.
These consultations are an important, first, acknowledgement of the transmission mechanism by which the Government has been undermining its own deficit reduction efforts, but they should not result in any sleight of hand.”
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