Connected Research

Union policy research in the 21st century

Posts Tagged ‘PPF

PPF index shows a slight slip

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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

Pensions Regulator goes after Nortel assets

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The UK Pensions Regulator has filed a major submission to a court in Ontario seeking a £2.1bn share of the estate assets of Nortel Networks, the Canadian telecoms services company that went bankrupt in January last year. Nortel is in the final stages of selling its assets in a programme that has raised comparatively scant proceeds ($3bn) so far – unsurprisingly, given the economic timing – although all except the most recent sale has had more than one bidder [registration required; limited viewing time]. It has still to decide what to do with its portfolio of intellectual property and next generation wireless patents, which may turn out to be lucrative.

The bankruptcy left 43,000 employees in the UK, Prospect members among them, relying on the Pensions Protection Fund, which pays a limited pension in such situations. Given that the PPF is  in deficit, according to its most recent annual accounts, the Regulator is thus more or less obliged to pursue whatever avenues it can to maximise the PPF’s asset base since it is this that will be used to pay the pensions of those drawing on the Fund.

The comments on the newspaper article show that the move has aroused opposition in Canada, not least amongst pensioner groups as Canada seems to have no law proving employees in bankrupt groups with a fall-back pension, leaving them essentially relying, along with other creditors, on the distribution of sold assets for the payment of their pensions. And pensioner groups see any successful legal claim by the Pensions Regulator as reducing the amount available to them.

The Pensions Regulator has perhaps little choice but to pursue such a claim in court – though it may of course not be successful: no-one yet knows whether the Pensions Regulator has the ability to lodge a claim in this way, while hackles have also been raised locally over the late timing of the intervention (though that’s not the fault of the Regulator, given the uncertainty over its powers in this area). A higher asset base for the PPF is itself welcome since this will facilitate the payment of pensions to those under its protection, and it will also lower the pressures on the levy as regards other UK schemes. From the perspective of UK workers, both ex-Nortel and more generally, both these would be welcome developments. Nevertheless, it is sad to see that the impact of this is essentially to set worker against worker.

The court case is due to start next Monday.

Written by Calvin

24/02/2010 at 5:05 pm

Heat and light and the BTPS deficit

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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

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PPF Index for January

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The Pensions Protection Fund has updated its Index of the collective health of the UK’s 7,400 or so defined benefit pension schemes.

The latest figures (for January) are that the total deficit has widened over the course of the month to £51.9bn, from £32.6bn at the end of December. Some 75% of schemes are in deficit. The reasons for the drop are almost exclusively to do with falling asset values as a result of lower equity prices (particularly over the last week or so in the month); the total value of liabilities having remained almost static. The size of the deficit compares with a total asset base of £859.6bn (thus giving total liabilities of £911.5bn) – so it remains the sort of figure which is well within manageable limits.

Last week’s suspension of the Bank of England’s quantitative easing programme should result in improved prospects for liabilities since gilt yields – which is used to measure the current value of scheme liabilities – should now start to rise as a result. After a rally during early February, equity prices have continued their falling trend, indicating that asset values are – at least this point in the month – still falling. The resumption of the decline in the stock market coincided with the suspension of quantitative easing, leading some to question whether there was a direct link between the two and, indeed, the overall effects of the programme. Others have also wondered whether this may be the start of a mini-slump – or even a ‘double dip’.

For pensions, the good news on the one hand thus looks likely to be counterbalanced by bad news on the other. Well, ’twas ever thus…

Written by Calvin

09/02/2010 at 4:49 pm

More evidence of improved outlook for pension schemes

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The Pensions Protection Fund’s most recent update to its Index shows that the net deficits of UK defined benefit schemes now total £32.6bn – a huge improvement on the £92.5bn deficit it recorded for November, as well as on the £190.6bn deficit recorded for December 2008.

Reasons for this improvement were a 2% increase in the value of scheme assets as a result of rising UK and global equity prices, as well as a 5.6% fall in the value of scheme liabilities as a result of higher gilt yields, with these now showing a value higher than at any time during 2009.

£32.6bn is still a sizable sum, while 73% of all schemes are still showing a deficit (on the measure that the PPF uses). So there remains a problem which needs to be tackled. The size of the drop in one month shows the huge amount of volatility that is attached to any assessment of scheme valuations at the minute – as well as the level of opportunism which might be associated with short-term decisions recently taken on what are long-term funds. But just to put the figures in context, the net deficit relates to a total asset base of pension schemes of some £872.7bn, compared to liabilities of £905.2bn – which indicates that schemes are, in total, 96.4% funded on the PPF’s measure.

That looks a lot better than it has done recently.

Written by Calvin

13/01/2010 at 5:02 pm

Posted in Pensions

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PPF7800 Index – end-November update

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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

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PPF says schemes’ deficit not that bad after all

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The Pensions Protection Fund yesterday published its November update of its PPF7800 Index, containing figures for the net balance of assets and liabilities in the 7,400 or so defined benefit schemes within its purview up to the end of October.

The highlights of the figures are that schemes remain substantially in deficit and that the picture was worse than it was twelve months ago.

Much of the media comment (see, for instance, the BBC) has focused on a change to the methodology used by the PPF to calculate liabilities, based on new guidance on calculating scheme deficits on which it consulted back in the summer. Essentially, it has become cheaper for pension schemes to purchase pensions for members from insurance companies and the effect has been to remove some 7% from the value of scheme liabilities.

This has reduced schemes’ net deficit as calcuated by the Index to below £100bn – an improvement of over £50bn on the September figure of a deficit of £148.9bn (34%). If the new assumptions had not been introduced, and this month’s PPF Index had been calculated on the old basis, then net deficits would have increased by some £20bn (13%) as a result of stock market falls over the month and lower returns on government bonds used to calculate scheme liabilities.

The cynical view might be that the PPF is seeking to use statistics and changed assumptions to legislate the issue of deficits out of existence. It might, of course, have a good reason to do so: so as to ease potential pressures on its own funds at a point when it has only last week revealed what these are via its annual report (blogged about below). It’s important for all manner of reasons that the figures are accurate as they can be – but the PPF is doing itself no PR favours by appearing constantly to tinker with the assumptions on which it bases its calculations

Nevertheless, the huge reduction in the deficit does remind us that the scale of deficits that schemes face is volatile as well as being a movable feast: pensions are long-term investments, and need to be seen as such, but they are also subject to continual human intervention, either for good or for bad, but frequently with short-term considerations in mind. We need to remind ourselves of the costs to ordinary workers which flow from policies based on such short-termist interventions.

There was good news for the PPF yesterday since it won a High Court case preventing Ilford Imaging, a company that collapsed in 2004 with a scheme in deficit to the the of £45m, from using scheme assets to buy annuities to cover the shortfall between expected pensions for higher paid workers and the PPF’s pensions cap (of c. £28,000). This inevitably had the effect of reducing the level of the scheme’s assets going into the PPF, while leaving it with the same outgoings, and thus increasing the pressures on the Fund. Thoughtfully, the judge concerned, while ruling that this was not what parliament had intended, further commented that agreeing to Ilford Imaging’s proposal would have opened the PPF up to ‘numerous and ever more ingenious attempts to take advantage of the PPF … [putting the fund] under increasing and possibly fatal pressure.’

It’s the judicial attempt to block consultancy-inspired ‘creativity’ that I particularly like here.

Written by Calvin

11/11/2009 at 2:26 pm

Posted in Pensions

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