Pensions regulator extends shortfall deadline

http://www.guardian.co.uk/money/2012/apr/27/pensions-regulator-extends-shortfall-deadline

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The pensions regulator will relax the rules governing approximately 300 final salary retirement schemes to give them more time to repair the damage caused by low interest rates and volatile stock markets.

The watchdog said schemes with about 600,000 members could breach the 10-year deadline for ending the shortfalls in their schemes following a torrid couple of years that have seen assets stagnate while life expectancy soars.

Some pension experts said the guidelines from the regulator offered a degree of flexibility for 15% of the 7,000 hard-pressed firms that have seen the costs of providing a pension jump in recent years.

But one employers' group said the regulator's insistence that the other 85% of employers stick to the previous timetable for closing deficits would mean them cutting investment and reducing dividends, and in some cases cutting jobs.

Neil Carberry, CBI director of employment and skills policy, said the regulator had failed to address a fundamental flaw in the way pension scheme funding is calculated.

He said the Bank of England's policy of printing money under its quantitative easing programme reduced the returns on government bonds, which are used to calculate scheme assets.

"Although QE has been necessary to support the economy, one side effect has been to make pension scheme deficits look artificially big by lowering gilt yields at the very moment when firms are also doing their three-yearly valuation," he said.

"Increases in deficits distorted by QE lead to demands for even more money from hard-pressed employers. They divert money away from investment in growth and job creation and lock it away unproductively."

Carberry's view was echoed by Ros Altmann, head of over-50s group Saga. She said: "QE has put UK defined benefit pensions in an even more difficult position than they were before, as it has led to a sharp rise in liabilities and many firms are struggling to manage their deficits."

The regulator said QE also offered positive benefits for pension schemes, including keeping asset prices higher than they would otherwise have been and lowering borrowing rates for companies.

The chief executive of the pensions regulator, Bill Gemmell, said: "Most schemes will be able to carry on with only modest adjustments, but clearly others will have real challenges and in these cases the timetable can be more lenient."

Pensions advisory firm Aon Hewitt warned that deficits were higher than the regulator's estimate, and more firms were in trouble than it realised. Kevin Wesbroom, the firm's managing principal, said: "Unlike the regulator, we think that deficits in this cycle of valuations will be materially higher – after all, liabilities are typically one-third higher than three years ago."

Independent pensions consultant John Ralfe said the regulator was talking tough for most schemes, but its bark was worse than its bite. He said a recent deal to allow German airline Lufthansa to sell its subsidiary BMI, the old British Midland group, to BA without the pension scheme highlighted its weak position when threatened by corporates.

The BMI scheme has been allowed to enter the pensions industry lifeboat fund, the Pension Protection Fund (PPF), with a large deficit in return for what Ralfe calls a modest payment from the German airline.

"It's a case where the PPF loses because it gets a scheme in bad shape and the members lose because the PPF pays 90% of benefits, when the regulator, if it really is tough, could have made sure the deficit was closed.