Blog: RDR and auto-enrolment a ‘toxic mix’

31 Janaury - To the Savoy this morning for an illuminating breakfast with Punter Southall to discuss their latest DC survey.

The results included: more than half of employers don’t realise that they need to pay more; fewer than half of employers know their correct staging date; and only one in 20 intends to engage with NEST, with important implications for the business models of providers seeking to compete with the State, such as NOW: Pensions and B&CE.

In addition, almost a third of companies surveyed currently use commission to pay their advisory costs, yet 59% of employers with commission-based pension schemes are unaware of the impact of the Retail Distribution Review, which occurring at the same time as auto-enrolment is, according to Punter Southall, a “toxic mix”. Many advisory firms have little or no experience of working on anything less than a commission basis, and for the clients of these firms dealing with negotiations regarding remuneration agreements will be an extra hassle.

Punter Southall’s research also flagged that, despite a lot of talk about wraps being the future of DC, only 14% of respondents offer the ability to save into anything other than a pension and just 2% offer access to a corporate ISA. However, Punter Southall thinks this situation could change once the economy picks up, the jobs market becomes more competitive and employers seek to differentiate their benefit offerings to make them more attractive as employers.

 

19 January - The assault on DB provision

Estimates of the effects of Solvency II style buffers for UK pension funds, by which the European Commission will insist schemes hold more capital, range wildly; from a relatively modest £100bn as proposed by the Department for Work & Pensions, to a whopping £1trn claimed by JLT Pension Capital Strategies.

One reason for the wide disparity in this range of seeming ‘guestimates’ could be the difficulty in establishing what value to put on the employer’s covenant as part of the European Insurance and Occupational Pensions Authority’s ‘holistic  balance sheet’ approach. Would it be based on the earnings of the company? Maybe the scheme’s PPF score?

This European assault on the viability of sponsors offering final salary schemes is just the latest in a long list of attacks on the foundations of defined benefit provision; from contributions holidays and Gordon Brown’s tax raid to the reduction in tax relief and IAS19 accounting requirements.

There are few in the UK who are happy with the situation, except maybe insurance companies offering de-risking solutions, into whose arms sponsors are eventually driven, Shell the latest example, a watershed moment as it was the last FTSE 100 company with a DB scheme still open to new joiners.

 

12 January - The new defensives

 

A thought-provoking briefing from veteran investor Jim Swanson, of MFS, last night.

Some of the old defensive sectors  just can’t be classified as such any more, he says. Telecoms are vulnerable because as consumers move more into a mobile world they are less concerned with maintaining landlines. The healthcare sector is also less secure as governments around the world make cuts to healthcare budgets.

Swanson  argues technology stocks are the ‘new defensives’. Technology stocks, he says, will benefit from a rebound in the unusually low capex spend in Europe and the US, where the average age of software is now a positively decrepit 5.2 years. Over the last ten years, companies in the S&P Information Technology Index have seen massive increases in trailing earnings yield, free cash flow to enterprise value, free cash flow yield and free cash flow margin, according to Swanson.

And Swanson’s forecast for Europe – a shallow recession with a -2% contraction lasting for two, maybe three, quarters.

 

14 December - hardly festive cheer!

Legal & General Investment Management (LGIM) says the UK and Eurozone are sliding into recession. More bearish than consensus forecasters LGIM says the best outlook is for two to three years of sluggish global growth at best. Global recession isn’t on the cards next year but the UK will feel the pain of contraction as a result of austerity measures and diminished export markets in Europe.

The solution to the euro crisis? The EFSF leveraging first proposed in October is unachievable as core bond markets are under threat; such a plan would rely on France retaining a AAA rating and the fund manager is already worried about France’s borrowing costs. The IMF on the other hand only has a total of £350bn of resources – not enough to intervene successfully. Ultimately only one entity has the firepower to stabilise the situation says LGIM - and that’s the European Central Bank.

 

7 December 2011 - Researchers claim to debunk women/pensions savings myth

At the Strategic Society Centre today. Researchers from ISER at the University of Essex have conducted some significant research into participation in occupational pension schemes, and with a sample of 25,995 individuals it’s more than the usual 1,000 telephone sample that passes for an evidential base these days.

The findings, said researchers, debunked the myth that males dominate in the prevalence of pension savings take-up over their female counterparts (although the report only looked at participation, not amount of contributions). Just a 3% difference existed for example between those who were not saving for a pension at all (42% of men and 45% of women).

The researchers said the myths may have been built up around research based on previous cohorts, before legislation significantly narrowed the gender pay gap. Indeed the research also found, using regression analysis, that comparing otherwise identical individuals, being female increased the chances a person would save into an occupational scheme by +4.6%.

However, the findings also showed that birds of a feather flock together. In three quarters of couples where the head of households was not saving into a pension the partner was also not saving.

In addition it was found that having a degree increased the chance of occupational pension saving by +5.6% and owning property outright  by +3.2%. Unsurprisingly, having a student loan decreased the probability (-4.8%) as did being two months in mortgage arrears (15%). Being offered employer contributions also increased the probability, but by a surprisingly whopping 70%.

Pensions Minister Steve Webb said some follow-up research he would be interesting in seeing would be to drill-down into the effect of contribution-matching and higher contributions on pensions participation.

 

6 December 2011 - USS also likes infrastructure but looking for brownfield opportunities

Spoke to Tom Merchant, chief executive of the Universities Superannuation Scheme, today who says the fund, like the LPFA, would also be potentially interested in the infrastructure investment opportunities currently being proposed by the UK government, but would want brownfield investments – “a fairly stable cashflow going forward, rather than investing in green field projects which carry a lot of development risk.”

Separately, Merchant is concerned that the Eurozone could enter Japan-like depression scenario “for a long, long time” so, accordingly the fund is seeking opportunities on a global basis.

Another worry for all UK pension funds, he says, is the proposal for Solvency-II style buffers for defined benefit pension funds. “Despite the 500 page consultation document it’s very unclear exactly what is being proposed but if it’s half as bad as people think be it will be an absolute disaster for DB pensions in the UK.”

EC Commissioner Michel Barnier, he says, is trying to create a level playing field between insurers and pension providers in France. Applying the same to the UK is apples and oranges.

 

1 December 2011 - Infrastructure returns and risk must be right

Just had an interesting chat with Mike Taylor, chief executive, London Pensions Fund Authority, who is one of Pensions Insight’s Top 50 Most Influential People in Pensions. The LPFA of course has signed a memorandum of understanding with the Treasury to promote investment in the UK’s infrastructure.

The LPFA has already invested £115m on infrastructure (such as waste disposal – recovery of waste and recycling , clean energy funds) with a further £65m commitment not yet drawn. But much of this investment is overseas where the best returns can be found.

Mike says politicians would clearly like to see more investment in infrastructure in London in particular, and the LPFA would like to support that but the fund must invest for the best returns it can achieve, commensurate with the risk taken. If those opportunities are to be found within London then that makes sense, but the returns and risk profiles need to be right. The LPFA is looking for returns of 10% plus net of fees in early stage infrastructure projects.

He says: “This is the critical factor. For returns of 10% plus the investor is taking a certain amount of risk – building risk, usage risk etc. If UK is less risky, for example if there were certain guarantees in place, lower returns might be acceptable. The infrastructure we might be interested in include transport, housing and waste facilities.”

Mike says at the moment the LPFA just wants a seat at the table to talk about this with government, get the LPFA’s view over and establish what the fund would seek to achieve from investment in such infrastructure. Discussions are at an early stage, he emphasised.

 

30 November 2011 - Finance directors pull your socks up…

I attended a briefing this morning which revealed some new research from Metlife - finance directors are increasingly taking charge of derisking decisions. Metlife says this is a change from three years ago when trustees were tasked with investigating the options and led the process, but these days the FDs are fully involved in the decision-making and now sit in on beauty parades, whereas they didn’t in 2008.

 

However, the research found 45% of FDs were not aware of any of the typical derisking activities (buyins, swaps, buyouts, PIEs, ETVs etc) and 56% are oblivious to key pensions regulatory changes. This means there is certainly an education job for the industry to do on getting FDs up to speed.

 

29 November 2011 - Happy birthday EDHEC Risk Institute!

Went to the 10 year birthday of EDHEC Risk Institute last night. EDHEC believes beta matters more than alpha in terms of risk management – though they recognise this is a paradox as they were first to publish a hedge fund index. There is a lot to the firm which they recognise is counter intuitive however – they are also the only financial firm they know of to have relocated from the French Riviera to London!