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UK Pension Costs Hurt Salaries

Report says 53% of UK employers believe defined benefit plans negatively impact salary raises.

By Michael Katz

More than half of UK employers say the costs associated with their defined benefit pension plans are having a negative impact on salary increases, according to an interim report from the Association of Consulting Actuaries (ACA). 

The findings in the first interim report of the 2017 ACA Pension Trends Survey, which was conducted over the summer and received responses from 466 employers, showed that 53% say the costs associated with their defined benefit schemes are having a negative impact on pay increases, with 80% saying their cost was also having a negative impact on inter-generational equity.

According to the interim report, 42% say defined benefit costs are also having a negative impact on contributions into newer pension plans. Additionally, 84% of employers say the law should be changed so that defined benefit plans can reduce pension increases if continuing to provide increases at the current level will severely and adversely affect the employer.

“Our survey findings this year paint a picture of defined benefit schemes where complexities introduced over the years—largely by dint of public policy—have taken their toll,” said ACA Chairman Bob Scott. “Legislative and regulatory changes seem unremitting and are continuing to present challenges to sponsors and trustees.”

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Scott said the report’s findings pointed to the need for both caution and courage in further proposed reforms of the defined benefit pensions regime. He said the findings also reiterated that there was still no appetite among employers for a radical restructuring of pension taxes.

“On pension taxation, it is clear the restrictions in reliefs in recent years have had a major impact on pay and benefits strategies at firms, with many senior staff ‘opting out’ of pension arrangements as a result,” said Scott. “Beyond doubt, this has had an adverse impact on support for schemes within firms, often with those on lower incomes losing out as a result.”

Key findings in the interim report include:

  • 32% of employers feel consolidation of defined benefit plans is “generally a good thing” and that cost savings would be real. However, many respondents remain uncertain on the pros and cons of consolidation.
  • 79% of employers support increased punishments for those caught mismanaging plans, while 68% support new criminal offenses for directors who “deliberately and recklessly” put at risk the ability of a plan to meet its obligations.
  • 77% of employers favor retaining the current pension tax relief structure, but with more help targeted on lower incomes.
  • Just 13% support moving to pensions being paid tax-free, with pension tax relief abolished.
  • 52% of employers say restrictions on pension tax relief have caused those with higher incomes to leave their firm’s plan.

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Home > News > Research > Preqin: IT-Focused Funds Deliver Strong Performance, Industrial Sector Lags
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Preqin: IT-Focused Funds Deliver Strong Performance, Industrial Sector Lags

Buyout funds return strong over the long term.

By Chris Butera

In its September private equity and venture capital spotlight, Preqin reported a strong long-term performance for the buyout market, which currently holds $1.49 trillion in assets under management—57% of global private equity industry assets.

Preqin determines that one of the reasons institutional investors commit vast amounts of capital to buyout funds is because of their strong long-term returns, which have been performing consistently well since 2005. According to the report, median net internal rates of return (IRRs) for vintage funds have ranged from 9.8% in 2005 to 17% in 2012, a 7.2% spread.

However, return ranges in growth funds and venture capital over the same period have been much higher, at 10.7% and 16.4%, respectively.

Over the five-year period ending December 2016, the average annualized returns for buyouts reached 16%. Across all vintage years, buyout funds taking a diversified approach across multiple sectors have median returns of 13.7%. Their net IRR performance has a standard deviation of 19.8%.

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In sector-specific funds, Preqin also notes that information technology (IT)-focused funds have the highest median IRRs at 15.1%, while the lowest median returns are in energy and utilities-focused funds, at 4.5%.

Depending on the industry focus, the returns for the funds will differ. Preqin found 36% of IT-focused funds have net IRRs inserting them in the top quartile—the largest proportion of any sector. By contrast, 28% of industrial-focused funds delivered returns in the bottom quartile, while 55% of business service-focused funds have IRRs below the median for all buyouts.

“Buyout funds are the stalwart of the private equity industry, and account for more than $1.5 trillion in assets under management as of the end of 2016. Part of their enduring appeal to investors has been the ability of buyouts to deliver strong, diversified long-term returns, even in challenging circumstances. Even across the period of the Global Financial Crisis, median returns from buyout funds barely dropped below 10% on an annualized basis,” Preqin’s Christopher Elvin, head of private equity products, said in a statement. “However, while buyout fund performance has been consistent overall, there is more variance among those vehicles focusing on specific sectors. Investors should certainly be aware that while sector-specific funds can deliver some of the highest returns of any buyout fund, the potential for reward comes with increased risk.”

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