Record Contingent Asset Use by UK Pension Funds

(February 1, 2012) — Pension funds’ use of contingent assets has hit record levels over the economic crisis as employers in the United Kingdom search for innovative ways to plug funding gaps.

The number of occasions that sponsoring companies have handed over assets, rather than made extra cash contributions to pension plans, hit 900 for the year measured to the end of March 2012, up from 750 a year earlier, according to the Pension Protection Fund (PPF), which acts as a lifeboat for bankrupt UK companies.

This meant the number of these contingent assets put in place by UK pension funds rose by 20% in 12 months.

John Belgrove, principal at investment consulting firm Aon Hewitt, said recognised contingent assets could range from simple parent company guarantees to complex special purpose vehicles involving company assets like property or even a brand.

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Previously British Airways used aircraft as contingent assets to try and shore up its funding level, while retailer Marks & Spencer also sparked a trend of creating a property partnership by taking control of its parent’s outlets on the high street worth around £500 million.

Belgrove said: “In a market environment of declining gilt yields and weak economic growth, risk assets have been driven down and liabilities have soared so on a buyout basis, the funding gap for pension schemes has never been bigger.”

The PPF said that in December, UK defined benefit schemes had hit their lowest funding ratio since 2006, when it began reporting figures, with an aggregate 79% on a buyout basis. In June 2007, the same schemes enjoyed a 120% funding ratio.

Belgrove said: “There are two main ways to solve a funding gap: better investment returns or higher sponsor contributions. In tough economic times companies are unlikely to welcome demands for additional cash injections to their pension schemes so it is no wonder we are seeing higher levels of recognised contingent asset solutions as a compromise.”

He said reasons for using such vehicles could range widely from the failure of the sponsoring company to make contributions, through to the funding recovery not being in line with expectations or agreed plan.

Belgrove said: “Since March 2011 funding levels have become even worse so we continue to see a trend in pension schemes finding innovative ways to plug the gap albeit there is no silver bullet.”

The figures on contingent assets reported by the PPF were those in place at the end of March 2011. From that time, the organisation changed its guidance to ensure that companies using contingent assets to improve the health of their pension schemes were not penalised in the same way as those using similar vehicles in lieu of paying a supplier when issuing the annual levy to the lifeboat scheme. This had previously been the case.

In December, the PPF said it would allow a broader range of companies to use them to top up their funding level, as long as the move was agreed with trustees.

Belgrove said: “There is another solution to push out recovery periods, but trustees need security, which comes in the form of the sponsor covenant strength which is now monitored much more closely. Where there are reasonable concerns contingent asset solutions fit the bill quite nicely.”

Newly settled litigation allows California’s top insurance regulator to keep tabs on the state's insurers’ investments in companies doing business in Iran.

(January 31, 2012) — California’s top insurance commissioner has settled litigation over the state’s efforts to thwart insurers’ investments in companies doing business in energy, nuclear, or defense-related work in Iran, which has been identified by the US State Department as a state sponsor of terrorism.

The settlement — led by five insurance trade associations — allows for California Insurance Commissioner Dave Jones to keep “a public list of businesses involved in volatile sectors of the Iranian economy,” according to a release by the industry group. Meanwhile, the commissioner is permitted to continue to review and publicize the names of insurance companies that invest in businesses with interests in Iran.

California Insurance Commissioner Dave Jones announced the settlement late last week. The settlement stemmed from a 2009 initiative led by Steve Poizner, Jones’ predecessor, who threatened to penalize insurance companies that invest in companies doing business in Iran. Insurance companies asserted that Poizner’s anti-Iran initiative was illegal. Subsequently, Poizner sued a state agency, the Office of Administrative Law. The settlement with the California commissioner now allows the Department of Insurance to share its information over Iran with the federal government.

“We continue to emphasize that these investments are legal under both state and federal law,” a release written by the five insurance trade associations said. “We also believe supervision of insurers’ lawful foreign investments must remain uniform and is best administered at the federal level so that the United States can effectively respond to international challenges.”

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The trade associations that challenged the Department of Insurance’s regulation regarding Iran-related investments were the American Council of Life Insurers; the American Insurance Association; the Association of California Insurance Companies; the Association of California Life and Health Insurance Companies; and the Personal Insurance Federation of California.

Worries over business with Iran have becoming more forceful in recent years. In May, California Public Employees’ Retirement System (CalPERS) asserted that it plans to shed the rest of its Sudan and Iran-linked holdings. The move was in response to strong sanctions adopted in 2010 by the federal government, the United Nations, and European Union, which started the withdrawal of several large multi-national oil and energy companies from Iran and Sudan.

Other funds have faced mounting pressure to exit holdings of Iran. In August 2010, Massachusetts Governor Deval Patrick signed legislation that will force the state pension fund to divest from companies supporting Iran’s oil industry. According to the legislation, the Massachusetts Pension Reserve Investment Board (MassPRIM) – which manages roughly $42 billion on behalf of public entities in the Bay State – had one year in which to hire an independent research firm to conduct a study of its holdings and divest from any companies that invest in the Iranian oil industry. Additionally, the law stipulated that the MassPRIM board update the list of prohibited companies on a quarterly basis.