August 2009
'RBS takes measures to reduce DC costs' Simon Banks comments:
"Within banking generally, there is a shift towards salary and away from bonus.
"This change would allow such a shift to occur without granting expensive pension windfalls.
"However the potential savings for those already on very high salaries should not be overstated as most schemes have retained a cap on pensionable salaries that currently stands at £123,600 for members who joined after 1989." Pensions Week, 31 August 2009
'Schemes may suffer if BoE buys longer maturity gilts' Danny Vassiliades comments:
"In this scenario, the nominal yield of gilts will fall on these longer maturity gilts, which means there will be a correlated fall in the long yield on corporate bonds.
"The nominal yield on gilts is also a quite popular rate from which pension schemes set their liabilities through their technical provisions, therefore as yield falls, liabilities will rise." Professional Pensions, 27 August 2009
'IASB official discount rate review' Simon Banks comments:
Punter Southall principal Simon Banks said: "By applying this sticking plaster the IASB has given itself more time for its detailed review of IAS19 which is ongoing. It has gone out of it way to say that this change in no way implies that the outcome of their detailed review will be to continue to use corporate bond based discount rates." Professional Pensions, 27 August 2009
'PIC insures Walthamstow Stadium pensions' Richard Jones comments:
Pension Corporation have been considering raising additional capital in the private markets for nearly a year now. There have been no updates on this process in recent times and so it is not surprising they are also considering all the available options such as a floatation or trade sale." Professional Pensions, 27 August 2009
'RBS High Flyers face pensions woes', Simon Banks is quoted:
Simon Banks, a consultant at actuaries Punter Southall, said RBS' pensions change would be particularly bad news for younger workers with high earning potential over their careers.
He said: "If all the banks are going to start increasing base salaries to compensate for reductions in bonuses, then RBS' move is well-timed to stop that impacting too badly on the pension scheme's liabilities."
He added: "Most companies already have a cap of GBP123,600 on pensionable earnings for workers who joined after 1989. So the people who are already on six-figure sums are unlikely to be affected. However, younger workers earning less than GBP123,000 who get pay rises in future, will now not enjoy pensions windfalls as a result." Dow Jones, 26 August 2009'Consultants see IAS19 'sticking plaster' as important first step', Simon Banks is quoted:
Simon Banks, Principal at UK consultancy Punter Southall, said although the move by the IASB to ease the burden of discount rate selection was welcome, it only serves to highlight the pressing need for the board to address measurement of defined benefit obligations.
"The current sticking plaster is a price we are paying for the delays in addressing the fundamental issue of measurement. The feeling among some market participants is that they would like to see the issue of measurement – in particular the discount rate – settled once and for all," said Banks.
"This is a very sensible sticking plaster and it certainly makes sense to try to align the situation in different countries. I doubt that the proposal will have too much impact in the UK. Only a multinational with a subsidiary that has a pension fund in a country lacking a deep bond market is going to be affected."
Banks added that any future consideration of the discount rate will inevitably reignite the debate over whether or not the IASB board should move to a risk-free rate, for the purposes of arriving at a net present value of a defined benefit commitment.
"Until the IASB and the FASB in the U.S. get stuck into this issue, and we see what else they come up with, I have no fixed view on whether or not they should move to a risk-free rate for discounting purposes," he said.
"There are clearly some strong arguments for risk-free, not least conceptually because if you move away from that starting point, you then need to have a clear rationale why you would draw the line at some other point."
Banks continued: "The approach of using a ‘risk-free’ discount rate would simplify the task of hedging a pension obligation because it would bring the accounting measure more into line with the liability measures used by trustees and others, which are often based on discount rates that are a fixed margin above or below risk-free." IPE Online, 25 August 2009'The pensions corporation does not rule out the possibility of flotation' Richard Jones comments:
"Pension corporation has been trying to raise additional capital in the private markets for nearly a year now without much success and therefore it is not that surprising that they are looking at alterations such as a flotation or trade sale." Employee Benefits, 19 August 2009
'Quantitative easing raises salary inflation concerns' Danny Vassiliades is quoted:
Punter Southall principal Danny Vassiliades said the yield on long-dated inflation linked gilts had fallen by around 0.4-0.5% percentage points per year since quantitative easing was announced in March – while the yields on long dated fixed interest gilts has remained broadly similar to their pre-announced levels. The firm said this reflected higher inflation expectations.
Vassiliades said: "With pension funds in particular exposed to rising inflation, which increases the amounts required to pay current and future pensioners, it is likely some are selecting protection against what may be very uncertain times ahead."
He added that some schemes with significant deferred pensioner liabilities would be "surprised at how much inflation exposure they have".
Vassiliades explained: "Because deferred pensions increase with inflation capped only if the average exceeds 5% a year over the whole period to retirement, a sudden burst of inflation will significantly increase fund liabilities and deficits, at a time when those deficits are already causing employers significant concerns." Professional Pensions, 13 August 2009
'ITV considers further DB changes' Richard Jones is quoted:
Richard Jones, a principal from consulting actuaries Punter Southall, said that ITVs increase in the deficit over the six months was equivalent to around eight times the earnings before interest, tax, depreciation and amortisation (EBITDA) that ITV earned over the six month period. Jones said rises in long-term inflation expectations in financial markets was the key driver in the increased deficit, rising from three per cent to 3.5 per cent per year over the last six months. He said that ITVs 15-year scheme duration could have increased the benefits payable by up to 7.5 per cent. Pensions Age, 13 August 2009
'ITV consulting over changes to schemes after deficit triples to £538m' Richard Jones is quoted:
Punter Southall said ITV's half year results demonstrated the problems that a company incurs when its pension scheme is greater than the market capitalization of the company. ITV's pension scheme is worth around £2.5bn and its market capitalisation is around £1.6bn.
Punter Southall principal Richard Jones said: "Despite management pumping in £31m of ITV's precious cash into the scheme over the past six months in an attempt to plug the funding gap the shortfall in the scheme ballooned from £178m as at December 31, 2008 to £538m as at June 30, 2009."
He said this was equivalent to around eight times the earnings before interest, tax, depreciation and amortization (EBITDA) that ITV earned over the six month period.
Jones added: "The key driver of the increased deficit was rising long term inflation expectations in financial markets. Rising inflation expectations increases the expected amount of benefits that the scheme will pay to members in the future and is a cost borne by the company. Inflation expectations rose from 3% to 3 ½% per annum over the past six months. Given that the ITV pension scheme has a duration of 15 years such a change could have increased the cost of the benefits payable by up to 7.5%.
"The other factor that ITV cite for the worsening funding position is that the assets in the scheme have underperformed expectations. ITV have taken a substantial portion of the risk out of their scheme by investing around 60% of the money in lower risk bond assets.
"However around 35% of the assets are invested in equities and property assets. Equities were broadly flat over the six months and commercial property continued to fall with the impact that the overall asset portfolio failed to generate the investment returns required to pay off the benefits without the deficit increasing each year (circa 6 - 6.5% per annum)."
However, Jones warned the deficit could worsen as credit spreads - used to calculate the funding position for accounting purposes - are still at relatively high levels compared to historic data. Should spreads normalise, then scheme liabilities will increase.
Jones said: "The big challenge for ITV will arise if the funding position does not improve by 1st January 2010 or 1st January 2011 when the next triennial valuations of the various sections of the ITV scheme are due.
"These will set contributions that ITV will have to pay into the scheme for the following three years and, if the deficit persists at the current high level, cash contributions will have to increase dramatically."
He added: "ITV seem to be managing their scheme pro-actively, as witnessed by the revelations earlier in the week of a project to offer ITV pensioners alternative pension benefits, but with the pension scheme deficit so large the only ways that the deficit is going to be seriously reduced is through additional cash contributions from ITV or excess performance on the equity and property assets.
"All other things being equal a return of equity indices to their highs in 1999/2000 would eliminate the majority of the deficit in the scheme so all is not lost but it is likely that ITV will have to continue paying substantial sums into its pension scheme for the foreseeable future." 7 August 2009, Professional Pensions Online
'On the move' Richard Thomas is quoted:
Taking it further from nice-to-have to a necessity, Richard Thomas of Punter Southall believes that "electronic technology is a fundamental foundation to the current provision of TPA and has become the norm". He explains that this is due in part to "the need for improved efficiencies in an ever more competitive market place, control of risk and data security, auditable, flexibility of working practices and sharing of information. Members stand to gain improved access to information in relation to their pension, lower costs, and greater comfort due to improved transparency." 1 August 2009, Pensions World
'RSA Insurance Group's £1.9bn buy-in with Goldman Sachs' Matthew Furniss is quoted:
The RSA Insurance group deal with Goldman Sachs and Goldman Sachs' Rothesay Life unit represents the first synthetic or "DIY" pension scheme buy-in. This type of action has the potential to become a viable alternative for many schemes to the standard buyout or buy-in, particularly given the recent increases in buyout prices. However in considering such a move, trustees need to take clear advice on the design and pricing of swaps particularly in comparison to buyout prices and scheme funding reserves. 1 August 2009, Pensions Insight
Punter Southall Pensions Bulletin - July 2010