TPR AND THE CIRCULAR GILT YIELD ARGUMENT

The Pensions Regulator published its eagerly awaited statement on funding last Friday.  In amongst the reminders on prudence, affordability etc, there was quite a bit of expectation around what they would say about the current “low” level of gilt yields.
 
Here are some of my initial thoughts:
 
The statement says that even if you have a strong view on “reversion” of gilt yields, you cannot allow for it in the calculation of Technical Provisions.  But paragraph 20 (implicitly, if not explicitly) says that you could allow for such a view in the recovery plan.
 
But what does this mean?  For equities and other risk assets, many funding valuations already allow for a higher expected return in the recovery plan, but if you allow for higher gilt yields in your recovery plan, then you’re also placing a lower current value on your gilts (which anyway goes against paragraph 18 on mark-to-market).  Therefore it would only make sense to do this if you could also apply the accompanying effect on your liabilities, which then impacts on Technical Provisions.
 
Paragraph 28 suggests this will only be by exception anyway – and that if “reversion” doesn’t occur, there needs to be a contingency plan.
 
It will be interesting to see how thoughts develop in this area and whether it is really a viable option.  For example, this might be the first time trustees have the opportunity to take positive action to demonstrate/state the strength of any view on reversion – as opposed to the more passive inaction of not hedging “at these levels”.

[Please note that all opinions expressed in this blog are the author’s own and do not constitute investment advice.  Click here for full disclaimer]