UK – ABN Amro has sent a letter to IPE about an item we ran yesterday picking up comments it made about consultants and trustees. The full text of the letter is below:

“We refer to yesterday’s article headed “Trustees and consultants ‘ill-informed’ – ABN AMRO”. It is unfortunate that from a detailed 71-page report, exploring many complex issues and providing a range of advice, IPE chose to focus on one paragraph.

The report, which builds upon our previous studies last year into the issue of pension underfunding, does not seek to point the finger of blame at the trustees and/or the consultants. That the risk of defined benefit pension funding arrangements was not generally well understood is a matter that has been raised and opined on by many previous studies, the Myners report being a good example. Thus our comment was intended only to provide an historical perspective to one aspect of the issue.

The misunderstanding was evident in government policies, regulatory requirements and corporate action of which the trustees and the consultants are a part. As we note in our report, all relevant parties to the pension debate appear to be better informed today than they were in the past, a development that is at the very least helpful.

We feel the report would have been done justice if IPE had focused on the forward-looking aspects of the report rather than commentary on historical developments. For example, improvements to pension deficits will be difficult to come by in an environment where asset returns are likely to be modest at best.

And while we may all wish for the pension funds to take less risk by reducing their exposure to equities and increasing their exposure to bonds, the reality is that the cost of doing this to the extent needed is prohibitive. This has resulted in an unfortunate situation where corporate UK, despite its best intentions, will only be able to make modest improvements to the investment risk within pension funds. The residual risk will remain difficult to manage and endangers the longer-term security of defined-benefit pension schemes if the employers’ covenant weakens.

This reality is very discomforting for all who have a vested interest in a well funded pension system in the UK.

Alistair McCreadie
Senior Credit Analyst