News

Pensions Watch - Issue 23

27 January 2009

Widening deficits unlikely to be plugged anytime soon

The Pensions Protection Fund (PPF) reports that the collective defi ned benefi t (DB) scheme defi cit for UK plc as at the end of 2008 amounted to nearly £195bn. This £40bn increase from November’s £155bn, is principally a result of the dramatic decline in gilt yields; gilt yields being used by the PPF to value scheme liabilities.

This comes at a time when many DB scheme sponsors, feeling the full force of deteriorating economic conditions, have cut back on one-off cash contributions to plug DB scheme defi cits.

Indeed, the Office for National Statistics (ONS) reports that special contributions to occupational DB schemes in 3Q08 at £1.1bn, fell to half their level of 3Q07.

Widening defi cits and demands from trustees for greater defi cit fi nancing has necessarily raised concerns at the Confederation of British Industry (CBI), who believe that this could place many cash strapped companies in an even more precarious position. However, as reported in last month’s Pensions Watch, The Pensions Regulator has suggested that longer DB scheme recovery plans will be allowed, but has yet to confi rm how far beyond the 10-year trigger point this would extend.

 

Weak sterling limits overseas losses

Whilst pension schemes suffered heavy losses in 2008 from their domestic equity and corporate bond investments – with only
gilts and gold generating positive returns – sterling’s recent steep slide cushioned losses from overseas investments.

Despite many overseas equity markets falling by up to 40% in 2008, sterling’s 40% decline against the Japanese yen, 28% against the dollar and 24% against the euro, meant that losses were limited in many of these markets to single digits or low double digits. As a result, State Street estimates that on average UK DB pension schemes asset values declined by around 13% in 2008.

 

Trustees urged to encourage a more responsible approach

Trustees are being urged by the TUC, amongst others, to insert a “do no harm” clause into their statement of investment principles (SIP) that would require a scheme’s fund managers and advisers to satisfy trustees that their investment decisions do not adversely affect the fi nancial system or scheme members’ interests.

In addition, the TUC is encouraging trustees to require their asset managers to sign up to the UN Principles for Responsible Investment (UNPRI), fast becoming the de facto industry standard for responsible investment, within investment management agreements (IMAs).

 

It’s your M&S pension

The venerable Marks & Spencer will, from October, limit the extent to which pay rises will count towards future accruals for members of its closed DB scheme, to the lesser of 1% or the retail prices index (RPI), which in December registered an annual increase of 0.9%.

Although M&S isn’t the fi rst large employer to limit the rate of future accruals within its DB scheme – Rentokil, BA, IBM and the Royal Mail have all done similarly – given its public perception of being a generous pensions provider, (its non-contributory DB scheme retains its 1/45th accrual rate) this could well lead to many others imitating its actions.

 

Trustee concerns over shotgun wedding

Although trustees to the HBOS DB pension scheme have abandoned their plans for a legal challenge to the bank’s acquisition by Lloyds TSB, they, along with their peers of the Lloyds TSB DB schemes, are pressing for the new parent company to guarantee their respective scheme defi cits, which would otherwise rank as unsecured debts in the event of the new parent company hitting the buffers.

 

Pensions Insurance Corporation secures buyouts

The Pensions Insurance Corporation has taken on the assets and liabilities of both the £1.1bn Thorn DB pension scheme and the £230m Leyland DAF DB scheme. The former is the UK’s largest buyout to date, whilst the latter is one of the 11% of UK occupational schemes that is in surplus, having completed a switch from equities into bonds in 2007.

 

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Unless stated otherwise the opinions expressed are those of Aviva Investors Global Services Limited.

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