CBI calls on regulators to change the way pension scheme liabilities are calculated

Employers' body the Confederation of British Industry (CBI) told the Financial Times that low yields on gilts, or government bonds, were unfairly affecting the 'discount rate' used by actuaries to calculate the cost of providing all the benefits promised under a pension scheme during its regular valuations.

"We don't know what will happen to gilt yields but the assumption is that things will return to normal," said the CBI's head of labour market policy Jim Bligh, who wants to see the Pensions Regulator use a higher discount rate when calculating liabilities while yields remain low. The CBI is also calling for the introduction of a statutory duty for the regulator to "promote growth".

The group is also calling on the Pension Protection Fund (PPF), which pays compensation to scheme members whose employers have become insolvent and cannot afford to pay the pensions they promised, to change the way it is funded by solvent eligible defined benefit pension schemes. The PPF uses a rate based on the average of gilt yields over the previous five years to calculate how much each scheme must pay in premiums. These could rise by as much as 25% from 2013/14 when the period before the drop took effect falls out of the calculation, the CBI said.

The call comes as new research reported by Professional Pensions showed that the "overwhelming majority" of trustees, finance directors and pension fund executives called for greater flexibility on how scheme liabilities to reduce the impact of the Bank of England's quantitative easing (QE) programme on their scheme deficits.

The Pensions Regulator has the power under the Pensions Act to make companies pay more money to underfunded pension schemes in certain circumstances. In funding guidance (7-page / 85KB PDF) issued in April, it said that it expected employers to carry on funding schemes in accordance with plans already in place unless there had been a "demonstrable change" in the employer's ability to meet these commitments.

"Employers that are struggling have greater breathing space to fill deficits over a longer period," Bill Galvin' the regulator's chief executive, said at the time. "However, we will draw a distinction between this group and those cases where schemes are substantially underfunded and employers are able to afford higher contributions. In such cases we will expect pension trustees to be taking steps to put their schemes on a more stable footing."

Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that regulators in other countries with large defined benefit pension schemes were beginning to take a "more lenient" approach to calculating scheme liabilities.

"Historically very low bond yields have inflated pension deficits and companies with defined benefit pension schemes are desperate for a helping hand," he said. "Although the Pensions Regulator is sticking to its tough stance, given the more lenient approach taken in other countries and the increasing pressure from lobby groups, there is just a chance that the it could be persuaded to be more lenient."