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Alternatives yet to enter the mainstream
According to Mercer Investment Consulting, whilst nearly 20% of UK pension schemes have exposure to property, by comparison investment in other alternative assets (if property can be classed as an alternative) lags behind somewhat. This is despite the lead taken by some of the UK’s largest schemes such as BT and Railpen, both of whom have moved aggressively into a broad range of alternatives in recent years, on the premise that they offer the prospect of equity-type returns, without equity-type volatility allied to superior diversification. For instance, the proportion of UK funds investing in hedge funds is estimated to be 6.3%, private equity 3.3%, GTAA 4.7%, infrastructure 0.6% and active currency overlays 8%. Pensions Watch suggests that the words of the legendary economist and investor John Maynard Keynes, “it is better to fail conventionally than succeed unconventionally” ring as true today as they did 70 years ago. Meanwhile…
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Stamp it out
Whilst the London Stock Exchange’s CEO, Clara Furse, continues to battle with the Treasury over the abolition of stamp duty on share trading in the UK, research suggests that UK pension funds alone pay £574m in stamp duty annually. This is, of course, in addition to the £5bn per annum that pension funds lose from the abolition, since 1997, of the dividend tax credit. Pensions Watch suggests that the sooner this tax, which amongst other things inflates the cost of capital to UK companies by about 2% per annum, is abolished the better.
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In tune with the market?
Florian Leonard, a London-based violin dealer and restorer, is setting up shop as a hedge fund manager, investing in, yes, you guessed it, violins. According to Mr Leonard, “Financially, [the Fine Violins Fund] is a dead secure long term investment…it’s much better than wine…wine can go off…” Pensions Watch wonders what the manager of the Wine Investment Fund (yes it does exist) thinks about that.
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Happy Birthday
As the nascent market for scheme buyouts from solvent scheme sponsors approaches its first birthday, UBS and Aegon are teaming up as the latest new entrant eager to persuade sponsors to pay a premium to offload their DB scheme liabilities. However, despite recent intense price competition having seen premiums decline by some 10% and average deal sizes gradually increase, the market still has some way to go to fulfil its potential.
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Hedging your bets….part 3
Last month, Pensions Watch highlighted the increased popularity amongst sponsors of using contingent assets as a means of providing greater security for their DB schemes, whilst ensuring that they can access any scheme surpluses that arise. Historically, pension scheme surpluses have been used to fund improvements in mandatory and discretionary benefits and justify a more conservative investment policy. According to Aon Consulting, 17% of defined benefit schemes already hold contingent assets, such as placing cash in escrow accounts, providing charges over sponsor assets and letters of credit, whilst an estimated 20% are looking follow suit. It has also been suggested that escrow accounts may be an ideal medium by which a sponsor could adopt an aggressive equity based investment policy, as unlike implementing such a strategy within the scheme itself, the upside and downside risks to the sponsor are totally symmetric. Pensions Watch will be keeping an eye on developments.
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