Smoothing pension fund asset and liability values is not the answer to solving the pensions problem in the UK, says Cardano, an investment adviser and fiduciary manager.

Contrary to the argument that a smoothed approach gives a more realistic reflection of a pension fund's long-term health, Kerrin Rosenberg, CEO of Cardano UK said: "Introducing smoothing into the UK regulatory framework would be a backwards step."

He added: "It is impossible to know, other than with the benefit of hindsight, whether an improvement or deterioration in funding is short-term 'noise' or part of a long-term trend."

Instead, Rosenberg said that a more flexible legislative framework would provide a solution for many schemes who are struggling to afford the pensions promised.

"Volatility in the market does not have to lead to volatility in funding ratios and deficits," said Rosenberg. "There are tried and tested risk management techniques that allow trustees to avoid being exposed to unwelcome falls in equity markets or bond yields."

Rosenberg argued that smoothing delays bad and good news and it makes it harder for trustees and sponsors to take intelligent decisions.

He added: "It also leads to an obscured picture of the health of the pension fund in both deteriorating and improving economic circumstances. This is akin to adjusting the thermometer when it produces an unwelcome reading, rather than trying to identify and combat the underlying fever.

"It has no impact on the total payments made to a defined benefit scheme, but delays the ability to recognise trends in the funding level and react with revised payment agreements and changes to investment strategy."

First published 11.03.2013

monique_simpson@wilmington.co.uk