U.K. Seeks Views on Pension-Deficit Calculation Rules

The U.K. government asked for industry views on changing the rules about how companies running pension funds that guarantee a fixed payout should calculate whether they’re in deficit.

So-called defined-benefit plans have been closing in the U.K. as increasing longevity and low gilt yields have made them unaffordable. The government is considering whether companies should be able to “smooth” their valuations over long periods, rather than using spot prices. Chancellor of the Exchequer George Osborne said in December the government was concerned that the valuation rules deterred investment.

Ministers are also consulting on whether the Pensions Regulator should judge whether companies are able to bring pension plans out of deficit.

“We need to know whether the current regulatory framework is sufficiently flexible for employers with defined-benefit pensions or whether there is more we could reasonably do,” Pensions Minister Steve Webb said in a statement published in London today.

The call for testimony on the regulator closes on Feb. 21, and for that on smoothing valuations on March 7.

The defined-benefit pension deficit decreased to 244.7 billion pounds ($387 billion) at the end of last month from 252.2 billion pounds in November, according to data published by the Pension Protection Fund on Jan. 8. The PPF was established to pay compensation to members of such plans in an event of insolvency.

Gilt Yields

Thirty-year gilts fell, pushing yields up seven basis points to 3.33 percent today, the most since Jan. 4, on speculation that any change in regulations will reduce demand for long-dated bonds. The yield on the inflation-protected bond maturing in 2042 was little changed at minus 0.10 percent.

Further sell-offs in long-maturity government bonds may be limited, said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London.

“The nature of this consultation is presented pretty much in terms of tweaks to the existing pension-scheme valuation framework rather than wholesale change,” Hill wrote in an e-mailed note. “This looks only to be about evolution of policy rather than the revolution of policy. In this sense the risks posed to demand for long-dated fixed income assets appear to be much more limited than initially thought.”

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