Regulator ‘Too Harsh’ on Pensions Hit By QE

(April 27, 2012) — New guidelines on flexibility around funding ratios, issued by the United Kingdom’s Pension Regulator, do not go far enough in making allowances for the tough economic climate, industry sources have claimed.

Companies running defined benefit funds that are reporting their funding position in the 12 months to the end of September this year will be viewed with leniency by the watchdog and may not be forced to put such strict recovery plans in place as would be due in more ‘normal’ economic conditions, the regulator said today.

However, some have claimed the guidelines still do not go far enough.

Kevin Wesbroom, Managing Principal at Aon Hewitt, said: “Unlike the regulator, we think that deficits in this cycle of valuations will be materially higher – after all, liabilities are typically one-third higher than three years ago. Asset values have also increased since March/April 2009. However, following their 2009 valuations, many schemes’ recovery plans were agreed based on a position after equity markets had recovered in early 2010. Where this is the case, schemes will be looking at deficits which are far larger than are addressed by their current recovery plans.”

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Others were concerned that the regulator would not be taking Quantitative Easing (QE) into account.

Neil Carberry, Director of Employment & Skills Policy at the Confederation of British Industry, said: “The Bank of England’s QE programme has exposed a fundamental problem with the way pension scheme funding is calculated, which the regulator fails to address. Although QE has been necessary to support the economy, one side effect has been to make pension scheme deficits look artificially big by lowering gilt yields at the very moment when firms are also doing their three-yearly valuation.”

Carberry said despite the Pensions Regulator acknowledging the side effect of QE, its advice failed to deal with the problem, namely how ‘technical provisions’, the amount required to cover a scheme’s liabilities, are calculated.

He added: “Increases in deficits distorted by QE lead to demands for even more money from hard-pressed employers. They divert money away from investment in growth and job creation and lock it away unproductively. This can have serious implications for firms’ credit ratings, as well as their ability to raise finance and their market outlook. The best form of protection for members’ employment benefits is a healthy, solvent employer and the Regulator and DWP should put this first.”

The regulator also said that it would be keeping an eye on dividend payments made by companies to shareholders when they had a deficit-stricken pension fund that needed attention.

Joanne Segars, Chief Executive of the National Association of Pension Funds, said: “It is good that that the Regulator will look sympathetically on employers that have experienced significant deficit increases by allowing extensions in recovery periods and, in some cases, allowing recovery plans to take on board any potential improvements in economic conditions. However, as the negative growth figures this week have shown, the outlook for the economy remains highly uncertain and there is the possibility that more QE will unfold. Whilst the regulator is optimistic that the majority of pension schemes will not need to make significant increases in their contributions, it will need to stand ready to adjust its expectations if the real experience of pension schemes turns out to be far worse.”

There are 33 points made by the regulator in its annual funding statement. The organisation’s Chief Executive, Bill Galvin defended its stance: “There are a number of economic factors impacting gilt yields, such as QE and demands for UK sovereign debt from the international banking sector. We have been in a low interest climate for some time. Yields have fallen further in the last nine months, and it is unclear when and to what extent there will be a market correction. The net effect across defined benefit schemes is not uniform and will vary greatly depending upon the extent to which their risk-management, investment and contribution strategies have insulated them from the effects.”

A recent article by Fortune Magazine attacks CalPERS over questions surrounding placement agent activity, but the California scheme has fired back in defense.

(April 26, 2012) — A recent article by Fortune Magazine notes that the $235 billion California Public Employees’ Retirement System’s (CalPERS) fraud case filed by the SEC is raising more questions about the fund’s legitimacy — but the California public pension is firing back with vitriol.

The SEC alleged that the former CEO of CalPERS from 2002 through 2008, Federico R. Buenrostro, and his friend Alfred J.R. Villalobos, who served on the CalPERS board from 1992 to 1995, fabricated documents given to New York-based private equity firm Apollo Global Management. “Buenrostro and Villalobos not only tricked Apollo into paying more than $20 million in placement agent fees it would not otherwise have paid, but also undermined procedures designed to ensure that investors like CalPERS have full disclosure of such fees,” said John M. McCoy III, Associate Regional Director of the SEC’s Los Angeles Regional Office, in a statement.

The Fortune article by Dan Primack claimed that the letters from the SEC to the public pension asked the fund to verify three pieces of information, which the scheme refused to sign: (1) That the placement agent was working on behalf of the private equity firm for a specified fee; (2) The fee is paid by the general partner, not by the limited partner; (3) The investor has a copy of the fund’s private placement memorandum and related documents. The article concluded that altogether, the SEC alleged that the documents (in aggregate) entitled Villalobos to approximately $20 million in fees from Apollo.

Meanwhile, CalPERS fired back, saying: “Dan Primack’s Fortune blog post (“New charges in public pension corruption saga”, April 24) about why CalPERS refused to sign an investor disclosure letter provided by Apollo Global Management reads more like a best-selling fiction novel and in our view doesn’t hold water.”

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The response by CalPERS continued: “With all due respect to Mr. Primack, and we have talked at length with him about this, the reason we didn’t sign Apollo’s investor disclosure letter is set out in our Special Review and given under oath by former CalPERS staff.”

CalPERS outlined the following reasons: “(1) We had never, ever seen such a letter in the industry before that one. (2) There was no reason or benefit for CalPERS or our members to sign it and at the time we had no way of knowing the represented facts in the letter were true or not. (3) The fund had nearly closed and there was no business reason for us to sign it. Our staff made a good judgment call by not signing the letter.”

According to CalPERS, even if the letter had been from a different fund or from a different placement agent, the scheme would still not have signed the investor disclosure letter. The scheme continued to note: “As clearly spelled out in the charges by the SEC, once CalPERS refused to sign the disclosure letter, Mr. Buenrostro and Mr. Villalobos literally took matters into their own hands, including forging documents, and they did everything they could to do it outside the walls of CalPERS including in a different state. The rest is a sad history of deception and fraud. Whether or not Mr. Primack believes it, those are the facts.”