News
Pensions Watch - Issue 22
23 December 2008
PPF concerned at widening deficits
Against the backdrop of falling equity values and rising liabilities, as gilts yields follow interest rates lower, The Pension Protection Fund (PPF), the defined benefit (DB) pension scheme financed safety net, reported a record collective deficit for the UK ’s 7,800 insured DB schemes of £155bn as at the end of November. Representing a near three-fold increase on November 2007, 86% of the UK ’s DB schemes are now underfunded whilst, according to consultants Hewitts, 15 of the UK ’s top 100 companies have DB scheme liabilities greater than their stock market capitalisation.
However, the PPF maintains that the shortfall is some £50bn less than it would have been in February 2003, when the FTSE 100 index sank towards a value of 3,300 (compared to around 4,300 today). Whilst the PPF, itself with a deficit of £517m, remains concerned at the recent actual and projected increase in the number of sponsors with DB schemes becoming insolvent and the extent to which schemes have failed to more closely match their assets to their liabilities, PPF Chief Executive, Partha Dasgupta, maintains that there is no question of the PPF lifeboat not remaining afloat.
TPR expects longer recovery periods
The Pensions Regulator (TPR) reports that despite 89% of DB scheme recovery plans being set to repay the scheme deficit within 10 years, recovery periods may well lengthen from hereon against the current economic backdrop, as many cash strapped sponsors postpone the closing of deficits. With the evaluation and monitoring of sponsor covenant risk rising to the top of trustee agendas, contingent assets, such as charges over sponsor land and property, are likely to become more widely used as a means of minimising the impact of a deterioration in a sponsor’s health.
Fiduciary management
As market dislocations give rise to an increasing array of tactical investment opportunities and the complexities of asset management demand ever greater levels of trustee governance, the delegation of investment decisions to, so-called, fiduciary managers and investment consultants could well become as popular in the UK as it has in the Netherlands . Indeed, around 60% of Dutch pension schemes employ fiduciary managers to design, implement and monitor their investments. That said, schemes with limited resources and expertise are often better off keeping things simple and cost efficient.
Pensions envy
All of the above hasn’t gone unnoticed by the Confederation of British Industry (CBI), which has called for the costs and benefits of public sector pensions to be scrutinised by an independent commission. In an attempt to close the pensions divide between the public and private sectors, the CBI proposes that scheme members’ contributions should more closely reflect the costs of provision, whilst the benefits are brought more closely in line with that of the private sector. The CBI also remains concerned that unfunded public sector schemes liabilities, which by some estimates may well exceed £1,000bn, are placing “a massive and growing burden on future taxpayers.” This comes at a time when details have emerged of decades of public sector pension overpayments amounting to about £100m.
And finally….
…the Trustee Tutor team would like to thank all of our readers for their comments and observations throughout the year. We wish you all a very Merry Christmas and a Happy, Healthy and Prosperous New Year and look forward to bringing you more of the latest on pensions in 2009.
