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How low can you go…part 4
According to Pension Capital Strategies and Numis Securities, the collective pensions deficit of the FTSE 100 has fallen to £20bn, with 16 schemes recording a surplus. Aon meanwhile believes that almost one third of the UK’s largest 200 pension schemes are now in surplus. However…
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Hedging your bets…part 2
Financial services group Alliance & Leicester has added a £260m inflation and interest rate swap to its £1.3bn DB scheme to hedge against falling interest rates and rising inflation.
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Grey area
A recurring theme in Pensions Watch has been the extent to which most DB schemes have underestimated the post-retirement life expectancy of their members. Indeed, late last year Lane Clark and Peacock found that, of those 33 UK scheme sponsors that disclosed their mortality assumptions (very few do), only two were in line with the industry benchmark 2002 medium cohort projection, which itself is considered to lag projected longevity improvements. In fact, some of the UK’s largest schemes were up to 5 years off the pace. Remember, every year of underestimation on average adds about 4% to liabilities. Against collective UK DB scheme liabilities of around £800bn, this equates to £32bn for each year underestimated. What was that about scheme surpluses? However…
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Matchmaking
In an attempt to find ways of better meeting and matching their liabilities, UK pension schemes, local authority pension funds in particular, have started to explore the virtues of infrastructure funds. Offering the prospect of double digit returns, long dated inflation linked cash flows and the potential to diversify away from bond and equity returns, the London Boroughs of Newham and Enfield have each committed £30m and £15m respectively to this alternative asset class, whilst department store John Lewis has allocated £25m.
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Hedging your bets
Larger DB scheme sponsors, in an attempt to provide additional security for their deficit-hit schemes and as a means of accessing any future scheme surplus, are setting up escrow accounts. Telent (Marconi) was the first to do so in 2005 following its takeover by Eriksson, with sponsors such as AstraZeneca and WH Smith recently following suit. With Aon forecasting a better than 60% probability that the UK’s top 200 DB schemes will be in IAS19 surplus within 3 years and trust law preventing sponsors recovering surpluses directly from the sponsored scheme, Pensions Watch anticipates a surge in the popularity of these so-called contingent assets.
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Barbarians kept waiting at the gate
As an implicit endorsement of the recent actions taken by the trustees of the Sainsbury’s pension scheme, the Pensions Regulator has called on trustees to seek “clearance” from the Regulator and demand substantial assets up front if the scheme’s sponsoring company is subject to a private equity bid. In so doing, not only is the sponsor’s covenant strengthened, at a time when the sponsor’s ability to make cash contributions to the scheme is somewhat weakened, but the act of seeking clearance relieves the trustees of personal liability in the event of the company subsequently becoming insolvent. Although in practice the Regulator can only require that the deficit is funded to the IAS19 level, this endorsement of a more aggressive stance towards private equity firms further strengthens trustees’ ability to scupper leveraged bids.
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