January 2009
'Consultant claims buyout firms could cut pensions if deflation occurs' Speaking on the effect of deflation on pensions, Matthew Furniss comments:
"Trustees may have assumed that insurers paying bought-out pensions were subject to the same rules that occupational pension schemes are in relation to this floor.
"In fact, insurers are well within their rights to reduce pensions in payment should deflation occur. It is the trustees' responsibility to ensure that this protection is in place through the contract and may have easily been overlooked when transferring liabilities in the past as inflation rather than deflation was the concern."
He added: "Trustees of ongoing schemes who have already bought-out liabilities may wish to review the terms of the buy-out agreed and take appropriate action if deemed necessary. Where a scheme has wound-up, members may be able to bring a claim in relation to this issue.
"Trustees who have already bought-in will not have concerns with member claims but will have to make up any shortfall in pension payments. Under a buy-in it is still the responsibility of the trustees to pay the pension benefits as the buy-in is effectively just a scheme investment. In a case where the floor is not recognised by the insurer, the buy-in contract will not match the pensions payable exactly if inflation becomes negative. It is also important to realise that future pension increases within the buy-in (or buy-out) will also be applied to the lower pension values used by the insurers. This means that the proceeds from the buy-in will be short of what is required to pay the pensions in all future years and the difference, which may not be insubstantial, will have to be covered by schemes' remaining assets or further contributions.
"Trustees in the process of buying-out or buying-in should ensure that this issue is addressed with the respective insurers and be aware that all benefits should be explained in as much detail as is necessary. Allowance for the floor may increase premiums payable to the insurers." 29 January 2009, Professional Pensions Online
'Warning for schemes backed by US-based parent companies' Speaking on how falls in sterling's value present opportunities may benefit overseas UK pension scheme sponsors, Kevin Burgess comments:
UK pension schemes back by US-based parent companies could find their sponsor's guarantee "worthless", a consultant warned.
Senior consultant Kevin Burgess said changes to the scoring methodology used by Dun & Bradstreet in the US had resulted in a "significant worsening" of the financial stress score for many companies.
And he said, while having the backing of a stronger US parent company has historically reduced the cost of the levy for UK schemes, this may no longer be the case.
Burgess added: "For schemes where a US company provides a guarantee, this has historically resulted in significant levy savings for the scheme if the levy is based on the score of a stronger US parent rather than the UK. With the recent financial stress score reduction for many US companies, the value for such guarantees could have declined substantially and in many cases the guarantee may be worthless leaving UK schemes open to greater risk and PPF levies.
"Affected schemes should urgently seek ways to improve the score of the US parent and the UK sponsor to reduce the levy. With so many companies struggling in the credit crunch, keeping the levy as low as possible is very important.
"With just over two months to take action to secure reductions to both the 2009/10 and 2010/11 PPF levies, pension schemes and their sponsors should be discussing this with their advisers as a matter of priority" 29 January 2009, Professional Pensions
'Watkins wins senior admin role at Punter' Speaking on the appointment of Dave Watkins, Richard Thomas comments:
"Dave's sharp customer focus, as well as his considerable experience of designing, implementing and managing pensions systems, will contribute greatly to the firm maintaining an almost 100% satisfaction rating from its clients" 28 January 2009, Pensions Week
'British Airways –Iberia mergers talks on the rocks' Speaking on the BA-Iberia merger plans, Andy Scott is quoted:
Andy Scott, principal of pension's consultant Punter Southall, said falling interest rates also would have sapped asset growth which would not have been compensated by falling inflation. 'Falling markets and a reduction in interest rates is highly likely to have had a greater effect,' he said. 28 January 2009, Reuters UK
'Sterling fall benefits foreign sponsors' Speaking on how falls in sterling's value present opportunities may benefit overseas UK pension scheme sponsors, Danny Vassiliades comments:
"The current weakness in Sterling represents a strong financial case for overseas employers to shore up their UK pension schemes.
"European and US based parent companies with struggling UK pension funds could use the current financial markets to their advantage by making special lump sum contributions to their pension fund."
Vassiliades added any contributions made by foreign sponsors would be worth more than in the past.
As an example he said a contribution of €10m would make up a £9.5m funding deficit, compare to £7.4m a year ago. Similarly, a lump-sum contribution of $10m would equate to a deficit reduction of £7.4m, compared to £5m a year ago.
Vassiliades added: "Employers with strong covenants should consider such an approach and trustees should be putting this idea to their overseas parent to see if the employer is willing to use this opportunity. We may well find that this opportunity may close more quickly than expected."
Vassiliades did however concede economic pressures elsewhere in a sponsor's business may make the likelihood of decisive action to reduce deficits unlikely, and the largest UK pension funds were part of UK-based firms.
He also said UK-based multinationals should consider prioritising domestic pension deficits before turning their attention to foreign pension funding, due to the lower value of Sterling compared to major global currencies.
He noted: "With the currency against them, {UK multinationals} would be better off using any money in the UK." 26 January 2009, Professional Pensions (online)
'Talking Point: The future of DB schemes' Speaking on the future of DB schemes, Joanne Livingstone comments:
Joanne Livingstone, principal at Punter Southall, supported the NAPF's "call for action, which follows our own five point plan issued earlier this month. Both programmes recognise that reform is necessary and that there are a number of options available to government beyond just yet another bailout." 26 January 2009, Investment & Pensions Europe (online)
'Pensioners feel inflationary chill' Speaking on deflation's effect on pensions, Matthew Furniss comments:
"As prices appear to be falling, potentially dramatically for pensioners, their incomes may be rising despite the low savings rates that pensioners are having to get used to," says Matthew Furniss at Punter Southall, the financial advisers. Financial Times, 24 January 2009
'Deflation 'a positive' for pensioners' Matthew Furniss is quoted:
Matthew Furniss, a senior consultant with Punter Southall said the risk of deflation in the real economy was "a real possibility", but owing to the way state and corporate pensions are calculated, could actually stand to benefit pensioners.
Furniss said the high levels of inflation seen over 2008 had a negative impact on pensioners, but falling food and energy prices - crude oil currently stands at less than $40 per barrel - would increase spending power.
"Although pensioners were the worst hit from recent inflation, they are, for the same reasons and to a similar extent, those most likely to benefit from falling prices particularly in energy.
"The government has also recently ensured that the basic state pension will increase by a minimum of 2.5% each year which will safeguard any future increases from deflation. Company pensions are also protected from deflation as they cannot normally be reduced and a proportion of pensions are increased by fixed percentages, normally between 2.5% and 5% per year.
"With all the current financial gloom, this increase in purchasing power is a least one positive glimmer for pensioners in the light of upcoming deflation." Professional Pensions Online, 20 January 2009
'UPDATE 2-Pension Insurance Corp buys Leyland DAF pension fund' Speaking on buy-outs, Marin Hunter is quoted:
However Martin Hunter, a consultant for Punter Southall who advises companies on buy-out deals, said the industry achieved assets of 8 billion pounds in 2008, against a widely expected 10 billion pound mark, and it is not likely to hit the target in 2009 either. Reuters, 13 January 2009
'Doubts over FSCS role on benefits' Speaking on the FSCS benefits provision, Matthew Furniss is quoted:
"Until recently, the thought of a major insurer going bankrupt would have seemed unthinkable, because of the high reserves that the FSA requires them to hold. This is no longer the case, and we receive many enquiries from clients who are understandably concerned.
Furniss said: "News of the probable fall in the level of protection for the first £2000 of benefits is unexpected and unfortunate for any members with smaller pension pots that would be affected – and we will monitor developments carefully on behalf of clients to keep them updated." Professional Pensions (Main), 8 January 2009
'Five point plan to help pension schemes weather the recession revealed' Speaking on how to alleviate the recessionary burdens on pension schemes, Joanne Livingstone comments:
"Gordon Brown may not yet have saved the world but there are positive steps that Government can take to ease the pensions burden for 2009." EUBankers.net, 7 January 2009
'Terminal decline' Speaking on the future of private sector DB schemes and the level of protection the PPF can realistically offer, Peter Black comments:
"There's some leeway, but if it gets to the stage where schemes simply can't afford to pay it and the cost is pushing them into the PPF it gets a bit silly," says Peter Black, principal at Punter Southall. The options are therefore a government handout or a cut in benefits. Pensions Age, 1 January 2009
'2009: looking for a better balance' Speaking on the importance of a good relationship between trustee and sponsors in the coming year, Danny Vassiliades comments:
Danny Vassiliades, principal and head of employer consulting at Punter Southall believes that managing the relationship between trustee and sponsor will be particularly important in the year ahead.
"Employers will need to work with trustee boards to create funding arrangements which will not put pressure on the employer's cash constraints," he says.
"Employers are likely to need to manage their cost base down over the year and use any spare cash to pay down debt. Once cash contributions plans are in place all employers should assess in balance of risks in their pension arrangements." He adds that reducing risks should be a priority for employers and a menu of feasible approaches should be considered and implemented. All of this means that 2009 will an a busier one than usual in this area, as risk reduction, highlights Vassiliades, is not a single strategy but a combination of different processes.
"When applied as a full program, it can reduce overall risk significantly, ensuring that members are more likely to receive their full benefits," he says. Pensions Age, 1 January 2009
'Past its sell-by date?' Speaking on enhanced transfer values, Nigel Wilmin comments:
"Particularly in engineering many employees are in their forties and well into their pension schemes. So in that sector you need a good scheme open to new entrants.
"But people are still wary of enhanced transfer values. The number of employees taking up the offers is decreasing because they have increased personal debt and may be willing to close down their scheme to pay off a credit card. In particular, younger workers are taking the cash and worrying about their pensions later." Midlands Business Insider, 1 January 2009
'Surviving the global storm' Speaking on the effect of the credit crunch on company pension scheme accounting, Peter Black is quoted:
As the yield on AA-rated corporate bonds had risen "massively" above gilts, there had been a positive effect on balance-sheet or accounting-based pension statements. "Companies are quite happy with that" he said, "they want to put a positive figure on their balance sheets." Global Pensions, 1 January 2009
'Making the crisis with maths' Speaking on the position of trustees with regard to scheme specific valuations, David Cule comments:
"I think that right now trustees are getting nervous about the fact that, from an accounting perspective, their schemes have either not changed or are even better off. They know that their equity assets have fallen in value and that their liabilities haven’t actually changed – they still have to pay the same pensions – so they are clearly uncomfortable.
"While this is the position of trustees in the short term, in the medium term, they are entering a round of second scheme specific valuations, which requires them to go through the process again, looking at the covenant and working out what their funding position is." Global Pensions, 1 January 2009
Punter Southall Pensions Bulletin - July 2010