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Pensions Watch - January 2010

Coming home to roost

After an extensive programme of research - that involved more than 3,200 employees, employers and advisers and at a cost of £371,000, NEST – the National Employment Saving Trust – has become the new name for Personal Accounts.  The government implemented auto-enrolment pension scheme will ultimately concentrate on around 9 million low to middle-income earners who are not members of an occupational pension scheme in an effort to supplement the state pension on retirement.  NEST will be run by the NEST Corporation, a not-for-profit trustee corporation from 1 July 2010, upon the Personal Accounts Delivery Authority (PADA) being disbanded, whilst the administrator for the scheme will be decided upon in June but currently only Tata Consultancy Services are in the running. 

NEST is being introduced in stages from October 2012, initially for those employing 120,000 or more staff, but it won’t be fully up and running for all employers and employees until September 2016.  In addition, employer contributions to the scheme will start at 1% from 2012 and rise to a minimum of 3% by October 2017.   NEST has met with some damning feedback from employers with fewer than 500 employees, who are concerned about the financial strain the NEST contributions will place on their businesses, and from Dr Ros Altmann, former policy adviser to Number 10, who believes that there is a danger in misleading millions into a false sense of financial security.  Dr Altmann has been particularly scathing of the failure to consider the impact of declining annuity rates on the eventual NEST pension pots.  Separately, the Association of Consulting Actuaries found that 24% of employers expect to “level down” their existing scheme benefits to that of NEST and 15% suggested they may close their schemes in favour of NEST. 

Mind the gap

Despite the average defined benefit (DB) scheme having recorded 15 per cent gains on their assets in 2009, Consultant Mercer estimates that the aggregate FTSE 350 DB pension scheme deficit rose from £60bn at 31 December 2008 to £170 billion at 31 December 2009.  This saw the aggregate funding level fall from 86% to 73%. 

This was principally as a result of the decline in corporate bond yields (DB liabilities are discounted, or valued, with reference to bond yields) and rising long term inflation expectations (from the low base of a year earlier).  Ironically, the latter, which is derived from the difference between conventional and index linked gilt yields, is as a result of DB pension schemes moving concertedly into index linked gilts and inflation swaps as a means by which to guard against the re-emergence of inflation.  As it transpired, the Retail Prices Index (RPI) measure of inflation – that which is most relevant to DB pension schemes – rose from 0.3 per cent in the year to November to 2.4 per cent in the year to December – the largest one month rise in more than 30 years.   

Shutting up shop

Following in the footsteps of those 26 large DB schemes that, in 2009, announced their intention to close to future accruals, DSG International, the Currys and PC World group, is the latest to propose similar measures.  Separately, the Association of Consulting Actuaries, having surveyed more than 300 large employers, found that 87% of DB pensions are closed to new members whilst 18% are closed to future accrual. 

Public sector pensions feeling the pinch

Warwick University has joined a number of other older universities in closing its DB pension scheme to new non-academic staff.   Newer universities tend to enrol non-academic staff into the local government pension scheme.  Separately, the Universities Superannuation Scheme (USS), the nationally run and funded DB scheme for over 120,000 academic staff, with its £31.8 billion of liabilities and a £5 billion deficit, has said that the scheme “will become unaffordable” and expects to announce major changes to the scheme shortly.   

Trustees opt for the alternative

A survey by consultant Bfinance of 63 DB schemes worldwide, of which nearly half were UK schemes, suggests that over the next six months allocations to fixed income, UK equities and hedge funds could lose out to overseas equities, real estate, commodities and private equity.  On the back of strong gains made in 2009, 27% of schemes are seeking to further increase their allocation to overseas equities, whilst 27% are considering allocations to real estate and 16% to commodities and private equity, principally as a means by which to improve diversification.  Separately the Investment Property Databank (IPD) reported that UK pooled property funds returned 10.4 per cent in the fourth quarter of 2009.  This was their strongest quarterly performance for 20 years. 

…and finally

Live and let live

With predictions that the number of people in the UK aged 100 or over is set to double by 2020 to 22,000 and then grow more than 12-fold to 280,000 by 2050, is it any wonder that, in its latest Global Pensions Risk Survey, consultant Hewitt found that 40% of UK employers are actively considering the hedging of longevity risk within their DB schemes.  Separately, Hewitt asked 300 people from the pensions industry to estimate the life expectancy of particular groups of people drawing on factors such as health, wealth and lifestyle and found that on average longevity was underestimated by five years.  This is equivalent to underestimating the liabilities of UK DB schemes by 15 per cent, or £150 billion. 

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