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How low can you go…part 6
Despite the market turbulence of the past month, Aon Consulting reported that at the end of August the aggregate deficit of the UK’s largest 200 pension schemes had marginally improved to £10bn, from £13bn at the end of July. With the recent uptick in AA corporate bond yields, which have reduced the accounting value of scheme liabilities and more than offset the effect of equity market declines on asset values, one might suspect that the de-risking of portfolios – moving from equities to bonds or adopting an LDI solution – may well be on the agenda of many Trustee Boards. However, there are two reasons to believe that this may not be the case. Firstly, the recent credit market turmoil has (at the time of writing) pushed LIBOR (the London Interbank Offered Rate – the key money market rate) to a shade under 7%, or 1.25% higher than UK base rate. LIBOR is the floating rate paid by a pension fund to an investment bank in exchange for a pre-determined fixed rate when adopting an LDI strategy to mitigate interest rate risk. Secondly, a recent Watson Wyatt poll found that over two-thirds of schemes, with a collective value of more than £70bn, were targeting a 60% to 90% allocation of their assets to return seeking, rather than de-risking, strategies. Local authority schemes seem to be leading the charge with most holding less than 20% of their assets in bonds as they move into alternative assets and overseas equity.
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FAS schemes to pool resources
Trustees of those schemes that have qualified for help under the Financial Assistance Scheme (FAS) are to be prevented from unilaterally using any remaining scheme assets to purchase annuities for their scheme members. Instead, they have been instructed to pool their resources to bulk buy annuities in the hope of securing a better long term outcome for those who have lost out from their sponsoring companies going bust. It is hoped that this initiative allied to a further contribution from the government will mean the FAS can provide those affected with closer to 90% of their core pension benefits rather than the 80% currently promised.
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Kingfisher targets 130/30 funds
After a gargantuan manager search and interview process, the Kingfisher pension scheme has invested £80m of its £1.3bn of assets into two 130/30 equity funds. Although yet to enter the investment mainstream in the UK, 130/30 funds invest (“go long”) 130% of their assets in an unconstrained manner, financing the additional 30% exposure by “short selling” stocks they do not own, in the expectation they will decline in value. Why 130/30 and not some other combination of long/short exposures? Academic studies point to this ratio as being the optimum to generate superior risk adjusted returns though, as with all actively managed equity funds, everything hinges on the stock picking abilities of the fund manager.
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Going down the tubes
The recent London tube strike had its desired effect in forcing Transport for London (TfL) to guarantee the pensions of 2,300 Metronet maintenance workers after Metronet went bust and the PPF looked as if it would be called upon. However, in the midst of the strike, buyout specialist Paternoster estimated that if beleaguered tube passengers were continually forced to walk to work, their life expectancy could increase by up to 3 years, albeit at an additional cost to sponsoring employers of defined benefit schemes of £90bn.
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Trustees happy…it’s official
Contrary to the widely held perception that trustees are unhappy with their lot, a recent Engaged Investor/Hymans Robertson poll of trustees reported that 74% of trustees, the vast majority of whom are male and over 50, are happy in their role, whilst 60% would stand for reappointment. However, with only 18% of trustees being women and less than 2% of trustees being aged between 20 and 30, the question has been raised as to whether trustees adequately represent the composition of the British workforce.
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Pensions Regulator seeks comments
The Pensions Regulator has published a review of how better to clarify its corporate actions clearance procedure and when clearance should be sought. This voluntary procedure is jointly undertaken by the defined benefit scheme sponsor and Trustee Board whenever there is the potential weakening of the sponsor’s covenant resulting from corporate transactions such as merger and acquisition activity, share buybacks and the like. The issuing of a clearance statement by the Regulator, which invariably results in the sponsoring company being required to provide the scheme with cash and/or contingent assets to make good the cash flow and/or assets that have been potentially deflected away from the scheme, means that neither a contribution notice or financial support direction can subsequently be issued in respect of that transaction. To date, only a handful of clearance applications have been rejected. The Regulator’s consultation period ends on 2 November.
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