News

In the Red

First the bad news. Pensions consultancy, Redington Partners, reported that a collective FTSE 100 defined benefit (DB) scheme IAS 19 surplus of £21bn recorded at the end of March, turned into a £9bn deficit at the end of the second quarter. A combination of gyrating equity markets and rising inflation expectations were to blame. Redington separately calculated a 1 in 20 chance (95% Value at Risk in investment speak) of these schemes collectively losing £5bn in a day. Meanwhile, Punter Southall calculated that if the more conservative pensions accounting regime, as proposed by the Accounting Standards Board (ASB), of valuing scheme liabilities at a risk free, rather than the current AA corporate bond, discount rate, had been applied at the end of 2007, reported pension scheme liabilities for an immature scheme would have doubled and for a mature scheme risen by a quarter. And this is before accounting for longevity improvements.

Going global

Royal Dutch Shell will shortly follow in the footsteps of Nestle and Unilever by pooling its global pensions assets and outsourcing the collective administration, fund accounting, safe custody and stock lending to JPMorgan. By putting everything into one place, not only will the administrative and accounting burdens be eased but the overall funding position may be more readily established. Moreover, the arrangement will facilitate better asset diversification and enable the greater use of derivatives to better manage the asset and risk exposures within the schemes.

Better Times

Now for some good news. The BT Pension Scheme – the UK’s largest DB scheme at £39.6bn and with nearly 350,000 members – returned 6.4% from its assets in 2007, principally through its significant investment in alternative assets. The scheme also improved its IAS 19 funding position to 97%. Moreover, since January the scheme has set up monthly investment committee meetings to more closely monitor the scheme’s Value at Risk
and has put a 30-strong team in place to better capitalise upon opportunities and guard against threats to the fund on a daily basis.

What a difference a year makes

According to research from Baring Asset Management, just over a quarter of those 3.2 million people who last April planned to rely solely on property for their retirement nest egg, continue to do
so. Quite worryingly, the research also revealed that a staggering 12.2 million people, out of a working population of just under 30 million, have no retirement provision whatsoever.

Buoyant buyouts

A recurrent theme this year has been the strong growth in the market for taking on the assets and open-ended liabilities of mature occupational pension schemes, as longevity improvements, increased regulation and the prospect of more conservative accounting rules weigh heavily on scheme sponsors’ minds. Indeed, buyout specialist Paternoster reported assets under management having grown more than six-fold to £2.4bn over the year to 30 June. However, the company’s market share more than halved to
about 20% as the market has become more competitively priced – some would say too competitively priced given the inherent risks in assuming this type of business. There are also concerns that, despite the number of firms operating in this market, the market can’t accommodate every one of those schemes seeking to offload their liabilities. Firms have, therefore, tended to concentrate on particular segments of the market, typically avoiding the very smallest schemes. Another concern is the proposed Solvency II legislation, which could, if implemented, require buyout firms to back their businesses with more capital reserves. A similar threat also hangs over DB scheme sponsors.

And finally…

… a comforting thought if you’re in the prime of life but perhaps not if you’re a DB plan sponsor. According to Mark Wood, CEO of Paternoster, “50% of 30-year olds are now expected to live to 100.” Just think how many more Glastonbury Festivals you will be able to enjoy.

Getting into debt

Despite recent survey evidence suggesting that pension schemes still have a way to go in diversifying their portfolios away from traditional asset classes, some have begun to put their slide rules over senior and secured leveraged loans, as many hedge funds and banks have become forced sellers of this asset class. Typically ranking over investment grade and non-investment grade unsecured loans and equity in the event of the issuer’s liquidation, pension funds have become attracted to this asset class by virtue of these loans being priced at a significant discount to face value against the backdrop of default rates still being comfortably below historical averages.

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