News
Pensions Watch - November 2009
What goes up must come down
The aggregate deficit of those 7,400 UK private sector defined benefit (DB) pension schemes, covered by the industry funded Pension Protection Fund’s (PPF) safety net, improved from £148.9bn in September to £97.6bn in October. To put these numbers into context, the UK government’s budget deficit for 2009/10 is forecast to be £185bn.
BT numbers disappoint
The BT pension scheme, the UK’s largest DB scheme, recorded a £9.4bn deficit as at end-September. Whilst the scheme’s £41.9bn of liabilities dwarf the company’s market capitalisation of £11.4bn, at least BT’s third quarter profits of £1.4bn, albeit before interest, tax, depreciation and amortisation, exceed its annual pension contributions of £525m.
No plane sailing at British Airways
The Occupational Pensioners’ Alliance (OPA) has joined The Association of British Airways Pensioners (ABAP) in demanding the urgent removal of Roger Maynard, chairman of BA’s two DB pension funds. The closed schemes, with an estimated joint shortfall of around £3bn, pose a potential stumbling block to BA concluding a proposed £4.4bn merger with Spanish airline, Iberia. The OPA and ABAP alleges that Maynard, who also has boardroom roles at both BA and Iberia, is conflicted in agreeing a recovery plan for the schemes with BA that will not unduly alarm Iberia but may be to the detriment of the pension schemes’ 100,000 members. BA currently contributes £320m per annum to the schemes and has until June 2010 to agree with trustees the amount it will put into the funds in the future. If Iberia thinks the arrangements are “materially detrimental” to the merger, the Spanish airline can walk away, subject to an £18m break fee. The ABAP has outlined its concerns in writing to The Pensions Regulator.
De-risking remains in focus
According to Hymans Robertson, 127 buyouts and buy-ins worth a total of £2.45bn were transacted in the first nine months of 2009. This was in addition to the three longevity swap deals worth £2.9bn engineered in the third quarter. The consultant believes that continued sponsor and trustee appetite for laying-off risk will underpin strong growth in the various de-risking markets. Indeed, according to the latest F&C liability driven investment survey, fears of runaway inflation on the back of the Bank of England’s £200bn quantitative easing (QE) programme, saw DB schemes hedge £11.4bn of inflation-linked liabilities in the third quarter. In addition, over 40% of the 51 large UK DB schemes, surveyed by Aberdeen Asset Management, expect longevity derivatives and liability driven investment to play a “strong role” in managing future scheme funding.
Warning to underfunded schemes
The High Court has confirmed that trustees of underfunded pension schemes, with failing sponsors and the clear prospect of the scheme being transferred to the PPF, cannot secure preferential benefits for a select group of members and expect the PPF to underwrite the resulting increased deficit. In Independent Trustee Services Limited v Hope and others, known as the Ilford Imaging UK case, the trustees sought to secure, or buy-in, annuities from an insurance company for those members who had taken early retirement and whose pensions exceeded the compensation payable under the PPF rules.
Concern over covenants
Whereas 50% of trustee boards believe their own sponsor is financially sound, consultant HamishWilson found that over 90% of DB schemes believe that other schemes could encounter problems with their sponsoring employer. This suggests that whilst trustees acknowledge the systemic relationship between many sponsors, in that problems affecting one sponsor can often have a knock on effect on others, their sponsoring employer is somehow sheltered from such systemic risk. The survey covered 171 DB schemes ranging in size from £50m to £1bn.
Rising public sector DB membership
The latest Office for National Statistics (ONS) annual survey of occupational pension schemes shows that, as at April 2008, 6.3m public sector workers were accruing a final salary pension, up 0.2m on April 2007. Meanwhile membership of private sector DB schemes, at 2.6m as at April 2008, continues to fall against the backdrop of schemes closing to new membership and more recently to future accrual. Trinity Mirror, with a deficit of £275m, is the latest high profile scheme to announce plans to close its DB scheme to future accrual.
And finally…
Cult threatens vicars’ pensions
The Church of England Pensions Board is considering reducing the rate at which the clergy accrues pension benefits and raising the scheme’s retirement age, as a consequence of having succumbed to the “cult of the equity”. In a highly unorthodox move, the scheme invested 100% of its assets into equities just before the FTSE hit its all time high in 1999 - a level which has yet to be revisited – and has religiously refused to diversify. With £813m of liabilities overwhelming assets of £461m at end-December 2008, only now has the scheme begun to break its equity habit by moving into corporate bonds and currencies. Pensions Watch apologises for the puns used in this article.
