Home > News > Newsmakers > UK Pension Update: Record Fund Closures, More Contributions
Newsmakers

UK Pension Update: Record Fund Closures, More Contributions

The death knell for defined benefit pensions has long been tolling in the UK, and now it looks as if the chimes are speeding up.

(January 28, 2013) — Defined benefit pension funds closed at a record rate in the UK’s private sector last year, as employer contributions rose and capital was allocated to less “risky” assets, the country’s industry body has announced.

The percentage of close DB funds that were closed to new members in the UK rose to 87% last year, the National Association of Pension Funds (NAPF) said in its annual report today. This is a rapid increase from 81% in 2011 and 79% in 2010, the organisation said.

For those funds still open to new members, over half reported to the NAPF that they were considering changes in the next few years to try and ease the pension burden, including 46% considering closing funds to future accrual. Already, the percentage of funds close for future accrual grew from 7% in 2010 to 31% last year, the NAPF said.

Joanne Segars, NAPF CEO, said: “The pressures on final salary pensions have proven too great for many businesses. The growing liabilities fuelled by quantitative easing will have been a factor behind the record hike in closures.”

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

Moves by the Bank of England to help stimulate the economy through quantitative easing, have pushed down government-issued bond yields, which has forced up many schemes’ liabilities. The Bank of England admitted its actions had inflicted pain on the industry in a report issued last summer.

Malcolm McLean, consultant at investment advisory firm Barnett Waddingham, said: “This is further depressing evidence about the decline of final salary schemes in the private sector. It is apparent that many more will find themselves on the slippery slope to oblivion if employers cannot be persuaded to find other ways to keep them open.”

One way to help ease the pain of poorer funding levels – this dropped from an average 95% on an IAS19 basis in 2009 to 93% last year – was to extend recovery periods. The NAPF noted that the average recovery period had extended from seven years in 2009 to up to 9.5 years in 2012.

Those in charge of pension funds addressed the risk they posed to an employer – and vice versa – last year, with an increased number enquiring about strategies including buyout, longevity hedging and contingent asset guarantees. However, only a fifth of schemes had so far implemented any kind of such strategy, the NAPF said.

Asset allocation among UK pension funds has continued to follow the global trend away from equity investment, with the average allocation falling seven percentage points from 42% in 2011 to 35% last year. Domestic equities took the largest hit in this regard.

Corporate bonds and other non-sovereign-backed vehicles picked up assets in 2012, with an increase from 13% in 2011 to 19% last year, the NAPF said.

Segars concluded: “While many have closed their doors, private sector final salary pensions are far from finished. More than two million workers are still saving into one and they pay the pensions of over four million pensioners. It is essential that the government shows them more support in managing some extremely testing economic circumstances.”

For an in-depth interview with Joanne Segars, CEO of NAPF, see the January/February edition of aiCIO – out next month.

Home > News > Newsmakers > With Volatility Comes LDI, Risk Transfers
Newsmakers

With Volatility Comes LDI, Risk Transfers

Cutwater Asset Management's second annual survey of over 100 corporate defined benefit pension plans across the United States shows that LDI implementation is transitioning from discussion to action.

(January 25, 2013) — Liability-driven investing (LDI) strategies and risk transfer deals have emerged as a reaction to persistent volatility and depressed funded ratios among corporate pension plans, Cutwater Asset Management shows.

Cutwater’s survey focuses on investment strategies that corporate pensions are currently implementing, showcasing the adoption of LDI to better manage pension risk. “What surprised me the most is how far along so many corporate schemes in our study were in LDI implementation,” Dave Wilson of Cutwater told aiCIO. “More and more of them are getting serious about their end game.”

While the average corporate pension in Cutwater’s survey was 75% funded last year, that number rose to 82% this year. Meanwhile, in 2012, 31% of survey participants implemented LDI. That percentage rose to 74% this year.

So what does this all reflect?

For more stories like this, sign up for the CIO Alert newsletter.

“The broader message of the survey is that corporate pensions are aggressively trying to derisk their plans to manage volatility,” Wilson said. He added that the poll of participants last year was geared toward open plans (72% of plans were open, 22% closed, and 6% hard frozen). This year, 44% of plans were open, 30% were closed, and 26% were frozen. The implication of closing or freezing a plan translates to higher adoption of derisking strategies such as LDI.

“Corporations are experiencing the problem of directing attention to their pension instead of focusing on their core business, which is another reason LDI is really gaining traction,” Wilson concluded.

Cutwater’s survey was conducted with input from aiCIO for the publication’s 2012 Liability Driven Investing Survey. Regarding increasing LDI popularity, aiCIO echoed many of Cutwater’s findings, noting late last year that the reasons for such a pickup vary, but two drivers of change did rise above the rest: contribution uncertainty and funded-ratio volatility. “Regulatory considerations, strikingly, was the least important factor driving actions—a finding at stark odds with conventional wisdom put forth by industry pundits, this magazine often included,” the survey found.

Risk transfer deals have become increasingly popular on either side of the Atlantic, aiCIO reported late last year. In early December, the UK’s Merchant Navy Officers Pension Fund announced it had secured around £680 million of members’ pension benefits in the fund’s Old Section by purchasing a bulk annuity insurance policy with Goldman Sachs’ Rothesay Life. Around half of the Old Section’s liabilities were secured through policies with specialist insurer Lucida in 2009 and 2010. Lucida was closed to new business last month. The deal was the largest to be transacted in the UK in 2012, but it is still smaller than some in previous years that were worth in excess of £1 billion. After a poor start to 2012 the market has seen something of a reasonable resurgence. In the third quarter, some £900 million was transacted and last week sugar refiner Tate & Lyle announced a buyin deal with Legal & General, worth £350 million–or around 30% of its members.

Related article: aiCIO’s Liability Driven Investing Survey 2012

«