Connected Research

Union policy research in the 21st century

Posts Tagged ‘Pension schemes

PPF index shows a slight slip

leave a comment »

The Pensions Protection Fund published the PPF7800 Index today for the end of April, showing the state of health of the 7,400 pension schemes under its supervision.

The Index is currently showing a small net deficit, of £2.2bn, reversing March’s small surplus (£0.3bn). Given the growing turmoil in currency markets during April associated with the financial and economic situation in Greece and other small EU countries, something which was only capped this week with the agreement between EU finance ministers, a drop of the Index back into negative territory is not surprising but the small-scale nature of the drop was a surprise, and a particularly welcome one.

Some 69% of schemes were in deficit this month, more or less the same as the 68.5% in March, which seems to support the view that the picture is, essentially, little changed. Evidently, this remains an uncomfortable proportion of schemes in deficit, even if the overall net balance of assets and liabilities lends the view that the average scheme is not all that much in deficit. The total assets of these schemes reached £913bn, a drop of 0.2% over the month and an increase of 18.2% since April 2009; total liabilities stood at £915bn, a small increase on the month but a drop on the £961bn recorded in April 2009.

During April, the value of both assets and liabilities deteriorated, the latter by more than the former (hence the drop of the net figure into negative territory). Over the year as a whole, rising stock markets have added 16.4% to pension scheme assets, while rising bond yields have added only marginally to liabilities.

So, overall the picture continues to be encouraging, although the change in the actuarial assumptions underpinning the calculation of the Index in October last year continues to affect the figures. Caution remains necessary – pension schemes are far from out of the woods just yet.

Written by Calvin

11/05/2010 at 9:09 pm

Pension Trends: ONS speaks on contributions

leave a comment »

The Office for National Statistics produced the most recent instalment of its ongoing Pension Trends publication, which it appears to update on a rolling basis, last Friday. This most recent update is for Chapter 8, on pensions contributions.

The headline stuff from the report, and the policy implications that flow from it, has been pretty well rehearsed – and is also there in one-page summary at the start of the document. Total contributions into pension schemes went down in 2008, for the first time since the series began in 1995; while the level of total saving in DC schemes, at around 9.1% of salary, not only compares poorly relative to the level of contributions going into DB schemes (21.5%); but also in absolute terms, in the context of the levels of contributions generally thought necessary to produce a decent income replacement rate in retirement. Employers pay around 70% of the contributions, which closely aligns with the policy of the Connect Sector of Prospect for a split of two-thirds: one-third between employer and employee contributions.

These things we know (not least because the ONS has already reported them in its annual survey (press release; report). What I did find particularly interesting about the updated chapter 8, however, was Table 8.14, which reports the changing levels of employer and employee contributions since 2001 by type of scheme; specifically, funded and unfunded ones.

This reports that employer contributions into funded schemes has more than doubled since 2001, to 32.7% (although now apparently off its peak), while the employee contribution has also risen, to 7.1%. In unfunded schemes, the employer contribution has also risen, to 14.8%, but it is the employee contribution that has more than doubled, to 7.5%. Thus, the ordinary members of unfunded schemes are actually paying a higher level of contribution into their pension schemes than are members of funded schemes, in absolute terms, as well as a higher proportion of the employment-based costs of such schemes.

Well worth bearing in mind when considering the position of unfunded schemes and the debates over pensions provision in the UK.

Meanwhile, Philip Inman has an ill-considered and over-the-top piece in The Guardian today which purports to name ‘the California teacher, the BT engineer and the German car worker‘ as ‘the real villains of the piece’ in the global economic crisis, as a result of their membership of occupational pension schemes (the California teachers pension is the second largest in the US; the BT Pension Scheme is the largest private scheme in the UK; and the German car worker – well, it fits the thrust of Inman’s story). According to Inman, it is chasing the level of returns required to finance an ‘otherwise unaffordable’ retirement, forcing investors to ‘stop at almost nothing to win big’, which is to blame for creating the global asset bubbles which led to the crisis. Hold the history books! I thought it was greed that got us in this mess, when after all it was ordinary folks just trying to do an honest job to give us the retirement pensions that we so unreasonably demand…

Bearing in mind that very recent ONS data records that pension funds only account for around one-eighth of the UK stock market, and consistently so since 2006, it’s a little difficult to believe that yours and my pensions are really at fault for investment managers’ speculative activity: still less to pin it down to the ‘greed’ of workers for an ‘affluent retirement’ via their membership of occupational pension schemes. More prosaically, schemes will invest in a variety of investment vehicles commensurate with the age profile of their members. Some of that will be in high risk assets; some in low risk ones. According to its most recent Annual Report, the BTPS invests some 41% of its assets in low risk vehicles such as fixed interest accounts and inflation-linked savings; a further 11% in property, 35% in shares and 12% in alternative investments. That doesn’t look so irresponsible to me, still less the sort of investment profile which gives a green light to investment managers to ‘rape and pillage’ on their account.

A rather shameful piece in this respect, Mr. Inman.

During April and May, the Connect Sector of Prospect is asking branches to help members understand the importance of pension provision and the advice they can get from the union in this area: if anything in this post confuses, concerns or alarms you, why not have a word with your branch principal officers and try and arrange something which seeks to respond to your concerns?

Written by Calvin

12/04/2010 at 4:18 pm

Ralfe has a bit of a go

leave a comment »

Today’s Financial Times highlights some of the results of a report by pensions consultant John Ralfe for TalkTalk, BSkyB and Cable&Wireless on the Ofcom Pensions Review, the first stage of which closed last week.

Ofcom has now started to publish the non-confidential responses – including that by the Connect Sector of Prospect – (follow above link, or go here) but while each of the three companies’ responses refers to the Ralfe report as having been provided to Ofcom, it doesn’t unfortunately appear on the site, and Ralfe’s own website appears to be a little shy of carrying it just yet. That’s a bit of a shame as I’d like to see it – though perhaps it is a private report (in which case its use in a public policy-making process is, perhaps, somewhat limited).

The pink’un‘s report indicates two issues that Ralfe has highlighted:

1. BT hasn’t paid the full costs of its early leaver programmes;

Ralfe costs these at £3.2bn and contrasts this with what he says BT paid into the scheme (£1.1bn). The £1.1bn is easy – that comes from BT’s accounts, helpfully summarised in Table 5, p. 41 of the Ofcom consultation document, while the £3.2bn is a product of Table 5 and Table A3 – essentially, it is the accounting charge figure for the costs of the release schemes.

But how does Ralfe know that BT hasn’t paid these costs in full? The accounts may well provide a specific cash figure for what BT has paid in release programmes – frequently as a result of specific requests from the trustees and as a result of what actuaries at the time said was the cost of such programmes – but BT has paid more than £3bn in additional special contributions since 1990. The need for additional special contributions has a number of reasons, including people living longer in retirement, investment returns being less than envisaged requiring what we now call a recovery plan to be put in place, changed actuarial assumptions – and, as Ofcom points out in para. 5.56, the effect of early release schemes.

The point is that BT has had to stump up such costs out of its other operations whereas, in reality, it is a normal business cost that should have been present in its regulated costs all along.

2. And the scheme was £626m in deficit on privatisation and BT should have dealt with this by putting its money into index-linked gilts.

The figure for the size of the deficit is new – we were aware that, in the words of the valuation of the scheme prepared in advance of privatisation, ‘The resources transferred were not sufficient to meet the liabilities assumed by the Scheme’. There was a deficit in the Post Office Staff Superannuation Scheme at the time and, thus, the newly-established BT scheme essentially assumed a share of this. According to the FT, Ralfe obtained this figure via a FoI request – and he’s done helpful work here. (By the way, £626m in 1984 was a huge sum – a real millstone hung by BT’s privatisers around the neck of the company, equivalent to around £1.5bn at 2007 prices.)

Ralfe’s long-held view is that all pensions assets need to be invested in risk-free vehicles – the source for his belief that the BTPS would now be £4.5bn better off. Indeed, while he was at Boots, he pioneered a switch of assets entirely into bonds – a move which has, since his departure, been at least partly reversed (as I blogged about here). Interestingly, the valuation published in March 1986 held that the assets were – in the rather more imprecise language of pensions valuations in the times – ‘now very nearly sufficient to meet the cost of benefits’. So, investing in equities had ‘very nearly’ (!) wiped out the deficit in a couple of years.

The difficulty that Ralfe faces in rationally sustaining his charge here is an old one, of which he is likely to be well aware – pensions are long-term investments and measuring their worth at any particular period of time – or between any two periods of time – essentially gives only a snapshot picture. And one that is more or less useful, depending on the assumptions made and the time at which they were made. In December 2008, the assets of the BTPS, according to the scheme’s annual report and accounts, stood at £31.3bn; one year earlier, they had stood at £39.7bn. So, assuming that the scheme would, on current figures, be £4.5bn better off had it invested in index-linked gilts since privatisation ignores that it would have been pretty much about the same amount worse off had the current figures reflected the December 2007 situation rather than the December 2008 one. And, of course, there has been a stock market recovery since December 2008 and the asset base of the BTPS is now likely to be in much better health as a result.

These remain difficult times for the BTPs, as for all schemes – and they are ones that are not likely to be beneficially confronted by precipitate actions of the type recommended by Ralfe.

As for the Regulator, the point facing it is, essentially, one of principle: should a regulated company be able to recoup the full costs of providing its regulated products and services, even though some of those costs might not appear until later? There can only be one answer to that.

Written by Calvin

01/03/2010 at 7:03 pm

KCom pensions review

leave a comment »

KCOM is to begin a consultation exercise on a harmonisation of the Group’s ten different pension arrangements into a single, newly-created and Group-wide pension scheme for all employees. The proposal will, at the same time, close all the existing schemes to future service.

We firmly believe that KCOM Group has a responsibility to maintain the long-term promise it has made its employees to provide decent pensions. We would always advocate a rational response to proposals such as those which have been put forward, but we would not accept that this means putting up with severe detriment.

Prospect, which has already met KCom on the proposal, will continue to be active in the consultation exercise and is urging all Prospect members in the Group to read all the documentation, review their own pension situation and also to take an active part in the exercise.

In the meantime, Oxera Consulting today published a short review of defined contribution pension schemes in the financial crisis. Largely aimed at reviewing the policy responses in central and eastern Europe, the document is very good on the difficulties that are posed to individuals faced with the need to make investment decisions as a result of membership of DC schemes, and of the social jeopardy resulting from people retiring at different points of the economic cycle with the same contributions record but entirely differently-sized pots. It also makes the very good point that, for all the problems associated with higher-risk investments, the long-term return from equities is much higher than with safer forms of investment.

Switching increasingly into less risky investment vehicles is vital to protect capital in the run-up to retirement – but those needing to draw shortly on their pension, for example, those who would ordinarily have been looking to switch into safer forms of investment say in March 2009, would have been placed in the invidious position of having to consider whether, in contrast to this basic advice, to gamble on staying with equities in the hope of the stock market rebound. Over the course of 2009, such a rebound did happen, but its timing and extent were evidently far from clear at the outset. Playing with spare cash in that situation is one thing; playing with your retirement savings is entirely another.

As more schemes switch to DC-type provisions, there is a need to consider DC scheme design so as to achieve some means of a targeted level of pension benefit, not least in the (deliberately extreme) situation highlighted in the Oxera report. It has always been possible to design some form of targeted benefits underpin, with this re-appearing most recently in the collective DC approach which, although not fault-free, did at least offer some means of getting around the potential timing-based unfairness of DC and of sharing the risks associated with this form of provision more evenly between scheme members. The DWP has withdrawn from the idea of collective DC but it’s certainly possible to design on a private basis a DC scheme to suit such characteristics as are appropriate both to scheme members and to the companies offering them, so as to create a DC scheme which is both more fair and more balanced. The question remains one of whether there exists the will to do so.

Written by Calvin

22/02/2010 at 5:52 pm

Heat and light and the BTPS deficit

with 2 comments

Today’s announcement of BT’s third quarter results was accompanied by the long-awaited outcome to the discussions between the company and its trustees on the most recent triennial valuation, due at the end of December 2008.

In brief, the upshot is that the scale of the deficit – as at December 2008 – is some £9bn and that the company has agreed with the trustees of the scheme to make annual payments to clear the deficit as currently envisaged over the next 17 years, starting with £525m per year for the next three years, increasing to £583m in the fourth year and indexed by 3% thereafter. The Regulator, however, which has also been involved in aspects of the discussions up to this point, has concerns over parts of the agreement and will be undertaking its own review of the recovery plan.

The news was greeted rather poorly in the barrowlands of the City, with the results of the day’s share trading activity seeing an 8.6% drop in the value of the company, taking it to a market capitalisation of £9.3bn – just a little over the size of the deficit, incidentally (and some 30% of the asset value of the BTPS). This is despite BT making sufficient free cash from its operations to support a recovery plan of that scale:

This is a prudent valuation and a recovery plan which re-affirms BT’s commitment to meeting its pension obligations. The operational improvements we are making in the business are generating sufficient cash flow to support the pension scheme whilst allowing us to pay dividends, invest in the business and reduce debt. (quote from Ian Livingston, BT  Chief Executive; same link as above)

At the same time, the news was accompanied by an announcement that the trustees of the scheme are to seek a court ruling to clarify the precise scope and extent of the Crown Guarantee given to the members of the scheme on privatisation back in 1984. The question of the Crown Guarantee was examined in today’s Peston’s Picks and it is here where the most heat has been generated (not Peston’s fault – I’m thinking of the uninformed and prejudiced comments on his blog post).

The key lack of understanding here surrounds the circumstances of the Crown Guarantee coming into play – i.e. an insolvent BT with insufficient assets to meet the debts of the scheme. It has to be admitted that such a circumstance is an evidential possibility – but it remains an extremely remote one. The question of how much of the total amount of the debt would then fall on the taxpayer as a result of the Crown Guarantee is the subject of the court case since it may not be all of it – we simply don’t know. The £9bn current deficit is thus, from the point of view of the state, very much a worst case scenario. The circumstances around why the case is being taken now are likely to reflect BT’s contributions to the Pensions Protection Fund and the role of the Crown Guarantee in reducing these which resulted last year – one year ago to the day, coincidentally – in the announcement of the outcome of a European Commission investigation on the grounds of state aid.

The accepted debt of £9bn would put the BTPS’s funding situation at about 79.5% (remembering that this is the picture as at the end of December 2008 – i.e. immediately prior to the rise in the stock market over 2009 which would have inflated asset values).

The Pensions Protection Fund has recently produced the 2009 edition of its Purple Book which provides a comprehensive indication of the state of health of defined benefit pension schemes as at the end of March 2009 – so, more or less similar to the end of the period covered by this BTPS valuation. The Purple Book‘s estimate of the overall funding position of schemes at that point was also 79.5%. Thus, the BTPS was no worse off than the average scheme at that point. It looks worse, because of the size of the deficit which, according to Robert Peston, is a record – but that’s because of the sheer size of the scheme. Given its size, the size of the deficit is, actually, in line with what you might have expected given the average state of health of schemes generally.

The scale of the overall deficit in March 2009 – some £200bn – has, in the nine months in the interim, been reduced to £52bn, indicating an overall funding position of 94% based on total scheme assets of £860bn. The BTPS is also likely to have seen a rise in its funding position in this period although this – and the exact scale of the recovery – is clearly open to conjecture.

Will BT have to pay back this total £9bn – possibly, if the actuaries have their sums right. Depending on the outcome of the next valuation, it may be less than this if stock market recovery continues (or if some of the other assumptions underpinning the valuation change). Of course, that’s an uncertain bet. But if it does, the next valuation will indicate a different basis for the amount to be recovered (and, perhpas, the period over which it needs to be done).

Pensions are long-term investments and the difficulty with valuations is that they provide only snapshots of what is a continually changing picture. Once the regulator has conducted its review of the recovery plan, the reasons for its concerns may become clearer. But, what matters for now is that BT believes the recovery plan to be fair and that it is capable of meeting the costs of this – that, and that the trustees of the scheme are content with the strength of support of BT as scheme sponsor.

Written by Calvin

11/02/2010 at 5:37 pm

Posted in Pensions

Tagged with , , , ,

Collective DC schemes – DWP speaks (softly)

leave a comment »

To very little fanfare (to whit: no press release), the DWP has published three documents on how collective DC schemes might operate in the UK.

Collective DC schemes are a Dutch invention and their potential applicability in the UK, encouraged by particular proposals from Hewitt Associates, first came to light in 2008 during the DWP’s continuing examination of risk sharing in the pensions context. Essentially, a collective DC scheme is a pooled investment vehicle based on a particular set of target benefits, paid for entirely by the employer, with employees paying additional contributions for an improved set of benefits. This type of arrangement also potentially lends itself very well to quality governance arrangements based on a board of trustees. In the shift from defined benefit to defined contribution, collective DC has something to offer and Connect earlier welcomed the opportunity for their further exploration, albeit outside the specific context of risk sharing.

The DWP ‘package’ consists of a summary document, a modelling of the likely operation of collective DC schemes in the UK and a research report into employer attitudes, including the scale of likely demand. The conclusion is that the government needs to take no further action, not least since the positive outcomes of these sorts of schemes in some areas are, the DWP concludes, outweighed by the drawbacks – while employer demand is likely to be limited.

The latter is, of course, a key criterion. The DWP’s research here concludes that employers have different approaches based on the the type of scheme currently operated but that, overall, demand would probably remain low:

– sponsors with open DB schemes considering closure and employers that had already moved to a DC scheme would not consider collective DC on the grounds that the additional costs compared to a DC scheme were not justifiable [that says sufficient!]

– employers with trust-based DC schemes were reluctant to add to trustee duties since trustee recruitment would become more difficult [hmm]

– employers with contract-based DC schemes who would like to deliver a better pension to their employees might, however, consider a collective DC scheme, especially if these became the expected norm.

This overall conclusion is something of a shame, since collective DC schemes do offer a more beneficial approach to pensions saving than ‘pure’ DC, while remaining of the DC type – i.e. they contain no guarantees that the ‘targets’ for the retirement benefits will be met. The ‘collective’ approach is evidently attractive in a trade union setting – although one of the reasons for the DWP’s conclusion is that the dangers of inter-generational cross-subsidy might lead to perceived unfairness – while, as Kay Carberry, Assistant General Secretary of the TUC, has argued this morning, collective DC does potentially offer something towards the fundamental need to improve governance in DC arrangements (many of the hard-fought-for improvements in pension scheme governance is endangered by the sliding away of DB schemes).

Nevertheless, it is the employer approach to costs which is the key. An employer-only contribution of 12% (and for a not particularly attractive basic benefit of a 1% career average scheme and retirement at 68) represents something of a ‘challenge’ to employers making an average contribution into DC schemes of just 7.00% (albeit that this figure is rising). As always, the scale of contribution that an employer is prepared to make is the acid test of its intentions – and, it would seem, a contribution of 12% lies beyond where employers are – currently – prepared to go.

Challenging that – and pushing that boundary further – will be a key task for unions and employees as the economy improves. Exposing the inadequacy of pensions based on an insufficient contributions structure will be a major component of that, in which the structures and benefits provided by a collective DC scheme might play a useful comparative role. In this context, I hope that the concept is not entirely dead.

Written by Calvin

16/12/2009 at 1:12 pm

PPF7800 Index – end-November update

leave a comment »

It’s second Tuesday – so the Pensions Protection Fund has updated its index of the financial health of the country’s 7,400 defined benefit pension schemes.

The aggregate position is that schemes are in deficit to the tune of £92.5bn – though this represents an improvement of £5.1bn on the month and of £31.4bn on the position one year ago. Some 78.9% of schemes are currently in deficit on the calculations used by the PPF – again, an improvement on the 79.5% recorded last month and a considerable advance on the 91% recorded when the position was at its recent worst in February 2009.

The improving position during November is a result of assets rising by a faster rate than liabilities due to rising stock markets – the same explanation is true for the relative position over the last year, with assets rising 15.2% to a total of £863.2bn, compared to a 9.4% rise in scheme liabilities to a total of £955.7bn.

The improvements are welcome, but the figures continue to demonstrate the volatility of pensions scheme funding – aside of the statistical adjustments made in the calculations. The same continues to be true for decisions made in the current environment about the future of individual schemes. In the meantime, the NAPF suggestion for Pre-Budget Report assistance to pension schemes made in its annual survey (see below) remains a valid one: it would see further positive changes in the value of scheme liabilities which would ease the substantial pressure which remains on schemes in practice.

Written by Calvin

08/12/2009 at 5:01 pm

Posted in Pensions

Tagged with , ,