News
Pensions Watch - Issue 20
29 October 2008
Pension schemes balance their books
If evidence was ever needed that International Accounting Standard 19 (IAS 19) has been discredited, then the fact that as at 30 September FTSE 350 sponsored defined benefit (DB) schemes had a collective surplus of £1bn, is it. Despite the 13.4% decline in the FTSE All Share index during September, pension scheme finances were saved by the steep rise in AA corporate bond yields, against which pension scheme liabilities are valued. (As bond yields rise, so reported liability values fall). This was principally attributable to the large number of financial institutions with AA-rated debt in issue. Mercers, who compiled the data, even suggested that despite the FTSE All Share index having plunged an additional 18.9% by 10 October, DB pension scheme finances in an IAS 19 world remained in rude health.
Market turmoil slows buyouts
With both Paternoster and Legal & General having each assumed the management of over £1bn of DB pension scheme assets and liabilities during 2007, 2008 was confidently touted as being the year of the buyout. Indeed, with so much stacked up against corporate sponsors, in March Towers Perrin found that nearly two thirds of sponsoring employers would consider the buyout route if the price was right and all the key stakeholders were on board.
However, whilst robust buyout activity continued unabated until the end of September, Paternoster has since warned that the recent financial market turbulence has meant a number of transactions in the late stages of negotiation are unlikely to be completed until the New Year, as trustees, quite understandably, wait for the wild swings in bond and equity markets to moderate. Not only has the unprecedented market volatility of late negatively impacted scheme funding levels when valued on a, more aggressive, buyout, rather than IAS19, basis, but have made buyouts near impossible to accurately price. Consequently, expectations for new business growth in 2008 from the 15 or so UK buyout firms, have been scaled back from £15bn to below £10bn.
CalPERS succumbs to the credit crunch
If recent events impacting the mighty CalPERS are anything to go by, then the credit crunch is proving not to be a respecter of size, wealth or intelligence. CalPERS, the largest state pension scheme in the US, with an enviable performance record, reported a 20% decline in its assets between 1 July and 20 October principally as a result of its 60+% weighting in equities. This reversal of fortune for the $192bn scheme, comes after it having boasted assets of $250bn just three years ago.
USS goes alternative
The Universities Superannuation Scheme (USS), the UK’s second largest pension scheme, is in the process of taking advantage of depressed alternative asset prices to build its allocation of alternative investments from 4% to 20% of scheme assets. Currently the scheme, whose funding level when valued on a gilts basis, (as gilts have a lower yield than AA corporate bonds, this increases the value of reported liabilities) has declined from 98% last summer to 77% at the end of March, holds 80% of its assets in equities.
PPF assesses Lehmans’ scheme
The Pension Protection Fund (PPF), the pensions industry funded safety net for members of DB schemes, is assessing whether the assets within the Lehmans Brothers UK DB scheme are sufficient to cover members’ accrued benefits. Although in September, the scheme’s trustees secured a guarantee of benefits from the parent company, which means the scheme becomes a creditor of the parent company rather than just Lehmans’ UK subsidiary, any shortfall will be covered by the PPF, subject, of course, to the PPF’s cap on scheme benefits.
And finally…
Trustees kept on their toes
In order to avoid a breach of duty, Trustees are being advised to update their Statement of Investment Principles (SIP) or rebalance their DB asset portfolios, if recent extreme market movements have dramatically altered the composition of scheme assets. In addition, it has been suggested that a breach could also arise if any fees generated through lending out scheme assets to short sellers, such as hedge funds, do not cover any losses incurred on those assets as a result of short selling inspired market falls.
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