Monday, July 17, 2006

UK Pension Funds moving into the Black Again

Very interesting piece in the Times about pension funds:

WHISPER it quietly, but the pension deficit problem is receding fast. Official figures this week show Britain’s employers are shovelling cash into their defined-benefit schemes in unprecedented dollops.

Partly this is due to regulatory chivvying. Under the new regime, employers normally have to put in place plans to plug their deficits within ten years. Partly, it is due to the lashings of cash thrown off by many blue chips. Without a murmur, HSBC has been able to find £1 billion to boost its pension fund, Royal Bank of Scotland £750 million and Lloyds TSB £200 million.

...........Last year just five of Britain’s 100 biggest listed companies were able to report a pension fund surplus. So long as there are no adverse market movements in the coming months, dozens more will join them. Alliance & Leicester, 3i, Enterprise Inns, British Land, Smiths Group and United Utilities are among those tipped to cross back into the pensions black. Of course, there are still many firms struggling with serious deficits, but on an aggregate level, the problem has eased.

However, the move towards and beyond equilibrium raises the question of whether we may ultimately see the whole ghastly cycle repeat itself. Many factors contributed to the pensions crisis, but the seeds were sown in the 1990s when companies understandably declined to pay into pension funds that were already comfortably in surplus. Taking a “pension fund holiday” seemed only reasonable, especially as contributions into funds heavily in surplus were penalised by the taxman.

Are we going to see a repeat of that problem? Will managements refuse to build up cushions in their schemes? After all, under the new regime it is virtually impossible to claw back contributions, however large a surplus were to become.

The problem may not arise at some employers because of their changing attitude to risk. According to independent pensions consultant John Ralfe, the moment schemes get into surplus in future, their sponsoring employers will want to lock in certainty by pulling out of equities and buying safe bonds. The chances of a surplus disappear, but so do the risks of a deficit. The ageing membership of defined-benefit schemes will also push them deeper into bonds, leading to less volatility.

Let's hope the cycle does not repeat - it would be bad for pensioners and bad for the companies themselves. But it requires everyone to think long-term, rather than short-term.

1 comment:

snowflake5 said...

I think you'll find that there is quite a lot of churning within pension funds, some more than others.

Obviously the churning is expensive as it incurs fees everytime assets are bought and sold - some pension fund trustees responded to this in the 90's by having a core tracker, within the find, to cut down on the fees. Others like the Boots scheme shifted entirely to bonds and their fees dropped from some £10m per year to about £600k.