News

Surpluses return…at least on an IAS 19 basis
According to Watson Wyatt, despite tumbling equity markets, FTSE 100 defined benefit (DB) schemes collectively recorded an IAS 19 surplus of £40bn at the end of March, as the credit crunch continued to push up AA corporate bond yields, so depressing the accounting value of scheme
liabilities. Obviously, scheme finances would not look as rosy if liabilities reflected the Regulator’s proposed longevity assumptions and were discounted by the Accounting Standard Board’s (ASB’s) proposed risk-free discount rate. Indeed, Pension Capital Strategies found that 44% of investment analysts believe that the IAS 19 value of DB scheme liabilities are understated.

Buyouts continue to monopolise the headlines
The year of the buyout continues unabated as Paternoster secured an additional £520m of DB scheme assets in the first quarter, bringing its total assets under management to £2.1bn. In addition, Paternoster recently took over the near 7,000 member DB scheme of UK Engineer, Powell Duffryn, from Citigroup, which only last year made public its ambition to compete in the buyout market.

Employer contributions fall
The Office for National Statistics (ONS) reported that employer contributions to DB schemes in 2007 at £33.6bn were slightly down on the £34.6bn of contributions made in 2006. One-off deficit reducing contributions also fell yearon- year from £13.2bn to £12.6bn. However, when it came to defined contribution (DC) schemes, employers dipped their hands in their pockets to the tune of £1.03bn, a 25% increase on the £821m of DC contributions made in 2006.

Bonds usurp equities
According to BNY Mellon Asset Servicing, the average DB scheme allocation to UK equities in 2007 at 28.7% was exceeded by the 37.2% of scheme assets allocated to bonds. These allocations compare to 34.4% and 31.7% respectively in 2006. Against the backdrop of overall equity exposure declining from 62.7% to 55.1%, the allocation to index linked gilts, widely considered to be the best match for DB scheme liabilities, rose from 7.8% to 9.6%. And finally…

Regulator to act on takeovers
Proposed new legislation could grant The Pensions Regulator (TPR) the power to issue Contribution Notices without having to prove any intent by the sponsor to underfund the scheme. This will force new owners of companies whose DB schemes go into the red to inject cash into the scheme up to a year after takeover or face a fine. Whilst this initiative is principally aimed at those non-FSA regulated buyout firms that buy ailing businesses so as to manage the pension scheme rather than the operational business, the British Venture Capital Association (BVCA) has advised the private equity community (whose primary objective is to restructure operational businesses) to avoid those companies with DB schemes until the extent of these powers become clearer. A consultation document is to be published shortly with an eight week feedback period.

Myners principles to get an airing
Six and a bit years on from Paul Myners’ review of Institutional Investment and following hard on the heals of last year’s recommendation by the NAPF that the industry should take more responsibility for them, the future shape and form of the Myners principles is to be formally consulted upon. The Treasury, Department for Work and Pensions (DWP) and The Pensions Regulator (TPR) propose establishing a joint Government-industry Investment Governance Group to co-own the principles, which have already done much to help improve pension trustees’ investment decision-making. The consultation period ends on 23 June 2008.

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