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Pensions Watch - issue 29
Death by a thousand cuts (Part 2)
In the June 2009 edition of Pensions Watch, we boldly predicted that the month of June will be remembered by many pensions professionals as the point at which the future viability of the defined benefit (DB) pension scheme came under serious threat. This was against the backdrop of FTSE 100 blue chips BP, Barclays and Morrison’s having made sweeping changes to their DB schemes and 15 FTSE 100 companies having found themselves in the unenviable position of their pension scheme liabilities exceeding their respective stock market values.
In August, research conducted by the Association of Consulting Actuaries (ACA) reminded us that 87% of defined benefit (DB) schemes, by number, are now closed to new entrants, not least because combined employer and employee contributions into these schemes now average 29.5% of total earnings, against an average of 15.8% of earnings in 2002. Despite this, only 18% are closed to future accrual. However, the report, based on a survey of 309 pension scheme sponsors with total scheme assets exceeding £138 billion, suggested that further change was afoot by disclosing that 39% of DB schemes were presently considering changes to future accrual, with 35% considering a move to career average earnings and 22% cent a move to defined contribution (DC). Separately, Watson Wyatt found that 48% of those DB schemes still open to future accrual are expected to be closed by 2012, which would leave an active membership of around 1m in private sector DB schemes. In addition, of the 250 companies surveyed, a further 28% suggested that they would be looking to dilute future benefits.
Despite this, the ACA survey found that 76% of employers felt that their employees were not fully equipped to manage the inherent investment, inflation and longevity risks associated with DC schemes, especially at a time when combined contributions into DC schemes, of around 10% to 11%, are a mere one-third of those made to DB schemes. (That said, in a separate survey conducted by Aon Consulting, 18% of those who contribute to a DC scheme were found to have increased their contributions over the past year, with half having maintained their contributions).
The long and short of it is that employers, battling with the prohibitive costs of maintaining a fully fledged DB scheme, are concerned that current legislation does not allow for sufficient innovation in pensions design – innovation, such as shared risk schemes – that would enable employers to better control DB costs whilst continuing to provide a more stable pension outcome than is possible with DC.
The bitter end
After a four month consultation, FTSE 250 company, Whitbread – the Costa Coffee, Premier Inns and pubs chain owner – is to close its DB scheme to further accrual. The scheme closed to new members in 2002, and in February 2009 had a deficit of £233m. Even though the move only affects 3% of its 33,000 workforce, the cost savings will allow the company to extend its DC scheme to an additional 14,000 employees, into which the company will contribute between 3% and 10% of salary.
If the cap fits (Part 3)
The Royal Bank of Scotland is to cap pensionable salary increases for the 62,500 active members of the state-backed bank’s £14bn DB scheme, to the lower 2% or the rate of inflation and reduce the lump sum payable to those who retire early. The scheme, which closed to new members in 2006 and has a deficit of £800m, is expected to save £100m per annum. The 2% capping follows similar action taken by pubs and restaurants group Mitchells & Butlers last month and retailer Marks & Spencer earlier this year.
The (not so) naked Civil Servant
PwC have found that the average civil servant, whose civil service career begun in 1981 at age 21, can expect to receive an index-linked pension on retirement at 60 of £28,900 per annum at today’s prices. To achieve this, given a 1.5% employee contribution, effectively means the taxpayer funds an annual contribution to the civil service pension scheme, in respect of active members, of 35.5% of the average civil service salary. An equivalent private sector employee with an average DC scheme and a combined contribution of 10% can “look forward” to a level pension of £11,600 per annum.
Hedge funds spout green shoots
According to the Credit Suisse Tremont Hedge Fund Index, the average hedge fund (if there is such a thing) delivered a return of 9.9% during the first half of 2009. This follows a dire 2008, in which the average return was -19.1%, making the performance in the first half of 2009 the strongest rebound in the hedge fund arena since 1988.
Investment Consultants bury their heads in the sand
Fiduciary managers SEI found that 58% of UK DB schemes are re-evaluating the role of their investment consultant, after 25% report having had to actively ask their investment consultant for advice. In addition, the poll revealed that trustees spend more than half of their time on either administrative activities or the monitoring of investment managers, rather than on strategic issues.
Musical chairs
The chair of EMI’s board of trustees was forced out of his post by Terra Firma, the private equity firm that now owns the music giant. Ian Smellie’s removal came after having asked the board for a £170m top-up payment into the £1bn, 22,000 member scheme. Terra Firma, burdened by debts of £2.5bn, was unwilling to make the payments and talks between the trustees and the company’s chief executive broke down as far back as May. Despite it being the chair’s role to robustly negotiate with the sponsor over scheme funding, the ease with which Smellie was dismissed and replaced with an independent trustee by the company is explained by the unusual setup at EMI, whereby the trustee chair is appointed by the company. What the Pensions Regulator will – or can – do in this case remains to be seen.
And finally…
May the force be with you
In response to a quite startling 390,000 people having revealed themselves to be “Jedi” in the 2001 UK National Census, the Pensions Management Institute (PMI), in responding to the recent Personal Accounts Delivery Authority (PADA) investment consultation paper, suggested that given the all inclusive and universal nature of personal accounts, consideration should be given to “funds that meet the requirements of specific religious and cultural groups such as…Jedi.” Disappointingly for Star Trek fans, Vulcans and Clingons didn’t receive a mention.
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