UK Corporate Pension Deficit Nearly Triples in October

The aggregate deficit of the 5,588 defined benefit pension plans in the PPF 7800 Index increased to £107.7 billion ($139.2 billion) at the end of October from £38.7 billion at the end of September, lowering the funding level to 93.6% from 97.7%, according to the Pension Protection Fund (PPF), the UK’s pension lifeboat for collapsed companies.

Total assets decreased by 1.6% over the month, but increased by 1.7% over the year, while liabilities increased 2.6% from the previous month, and 2.8% from the year-ago month. The funds had total assets of approximately £1.588 trillion, with total liabilities of approximately £1.696 trillion. The position of the funds has worsened from October 2017, when the deficit was £87.7 billion, and the funding level was 94.7%.

The number of plans in deficit at the end of October increased to 3,755,

representing 67.2% of the total, compared to 3,437 plans in deficit at the end of September (61.5%) and 3,652 in deficit at the end of October 2017 (65.4%). At the same time, the number of plans in surplus fell to 1,833, representing 32.8% of the total, down from 2,151 at the end of September (38.5%), and 1,936 at the end of October 2017 (34.6%).

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The aggregate deficit of all the plans in deficit at the end of October rose to £212.8 billion from £170.3 billion at the end of September, and from £196.7 billion at the end of October 2017. Meanwhile, the total surplus of plans in surplus decreased to £105.1 billion from £131.6 billion at the end of September, and £109 billion at the end of October 2017.

The PPF said that during October, conventional 10- and 15-year gilt yields fell by 13 basis points and nine basis points, respectively, while 20-year gilt yields fell by seven basis points, and index-linked 5-15 gilt yields fell by 19 basis points. Gilt yields, along with the equity markets, are the main drivers of the plans’ funding levels.

Over the year to October, conventional 10-year gilt yields were up by five basis points, while the 15- and 20-year gilt yields were down by four and seven basis points, respectively. The index-linked 5-15 year gilt yields were down by 3 basis points, as the FTSE All-Share Index was down by 5.2% and the FTSE All-World Index was down by 2.5%.

Tags: Corporate Pension, Defined benefit (db) pension plans, Funded Status, Pension, Pension Protection Fund, UK

The California Public Employees’ Retirement System’s $178.6 billion global equity program received an overall grade of B from the system’s general consultant, but the overall CalPERS investment organization was given a much lower D rating.

Wilshire Consulting cited a strong team-based culture among investment officers managing the global equity portfolio for its B rating but named turnover among CalPERS top investment officials for its overall D rating.

In a November 13 report, Wilshire cited the departure of Chief Investment Officer Ted Eliopoulos and turnover in the chief operating investment officer (COIO) position for its low rating.

In September, Wilshire had also issued the investment office the same overall D rating, citing the same senior management departures, as part of its evaluation of CalPERS’s $84.7 billion fixed-income program. At that time, Wilshire also gave the fixed income program an overall B rating.

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Today is Eliopoulos’ last day. CalPERS’s new CIO Yu Ben Meng won’t start until sometime in January even though he was appointed to the position in late September.

The delay is because of a non-compete agreement put in place by the Chinese government. Meng had been a key investment officer in China, managing more than $1 trillion of China’s foreign currency reserves.

CalPERS was also without a permanent person in the number two spot in the investment officer, the COIO, for five months after the early January 2018 departure of Wylie Tollette. Elisabeth Bourqui, the head of pension assets and liabilities management at ABB Group in Switzerland, was named C in May.

Wilshire consultant Steve Foresti told investment committee members at the Nov. 13 meeting that the CalPERS investment office’s overall rating should improve “as we move forward, and things stabilize and get integrated.”

He said the drop to D from C in the investment office rating between 2018 and 2017, was “purely because of that level of turnover at the CIO level and COIO level.”

As to the previous 2017 C rating for the investment office, Foresti told the investment committee that staff turnover, not only among CalPERS senior management, but among investment staff in the global equity program, was an issue. He said CalPERS is unable to offer the incentive structure and asset management ownership that can be offered at private asset managers. Some of the same factors were also cited in the Nov. 13 Wilshire report that was presented to the investment committee.

“CalPERS faces some unique organizational risks that for-profit enterprises have greater flexibility in managing,” the report said. “There is a lack of long-term ‘ownership’ opportunities such as direct ownership, phantom stock, and other incentive-based compensation packages.”

CalPERS portfolio officers do get bonuses but the yearly pay of several hundred thousand dollars at most pales to the potential millions of dollars in compensation investment officials can earn at asset managers.

Wilshire noted in the Nov. 13 report: “While the Global Equity team continues to look for outstanding candidates for new and open positions, compensation bands constrain its ability to attract candidates especially with competition from both local asset management and asset owner organizations. There are currently open positions at the Investment Director (ID), Investment Officer (IO), and Associate Investment Manager (AIM) levels, which play an important role in supporting the senior team and will be crucial in maintaining the quality of personnel over the long-term.”

The Wilshire review of the global equities program also looked at the underperformance of the global equity portfolio in the latest 12-month fiscal year ended June 30. Despite strong absolute performance—a net return of 11.5%—Wilshire noted that the global equity portfolio underperformed its custom benchmark by 0.4%.

Wilshire said the program’s recent underperformance, “appears to be largely the result of its intentional tilt towards defensive positioning rather than from any deterioration in investment approach or process.”

Wilshire did recommend continual monitoring of the global equity team’s investment approach.

CalPERS has an overall investment portfolio of $361.1 billion and is the largest pension plan in the US.

Tags: CalPERS, Private Equity, Wilshire Consulting