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UK roundup: Agreement struck on USS valuations; UK approaching peak LDI

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A second wave of strike action by university staff over reforms to the country’s largest pension scheme has been averted following a national ballot.

Nearly two-thirds of votes (64%) cast last week favoured the establishment of a joint expert panel to re-examine the valuation methods applied to the £60bn (€69bn) Universities Superannuation Scheme (USS).

The Universities and Colleges Union (UCU) said the employers had also stated they did not intend to return to their original proposals to shut the defined benefit (DB) section of the scheme, and had agreed to discuss a wide range of issues raised by the union.

A spokesperson for Universities UK (UUK) said: “Reviewing the methodology and assumptions in the current valuation will build confidence, trust and increase transparency in the valuation process.”

UUK and UCU would appoint a jointly agreed chair for the new panel as soon as possible, the spokesman said, before developing its terms of reference, order of work and timescales.

In mid-March, UK university staff rejected a proposal that would have closed the defined benefit section of the scheme.

UK approaching ‘peak LDI’

The dominance of liability-driven investment (LDI) in UK DB schemes is set to come to an end by 2021 as schemes become fully hedged, according to a new report.

Consultancy Hymans Robertson and investment bank Nomura predicted the country’s pensions sector was close to an “age of peak LDI” as the current pace of increasing hedging levels could only continue for three more years at most.

Jon Hatchett, partner at Hymans Robertson, said: “We are close to a point in the UK where DB schemes will only increase rate hedging at the margin in an opportunistic manner. 

“Our research suggests that notional interest rate and inflation hedging exceeded 75% of private sector DB assets by March 2017.”

LDI first came to prominence roughly 15-20 years ago and has grown rapidly in use since then. Hatchett said his firm believed about £1.2trn of notional interest rate risk was now hedged and that schemes would not hedge far above asset levels of around £1.5trn. 

Pension funds had been adding about £100bn of notional interest rate exposure a year for the past couple of years, he added. 

“At that pace, and given the high level of hedging already in place, we expect to see schemes fully hedged up to the level of their asset bases in the next three years,” Hatchett concluded.

Split consultants and fiduciaries, argues Xafinity Punter Southall

Xafinity Punter Southall has advocated the legal separation of fiduciary management and investment consulting services.

Patrick McCoy, head of investment at the consultancy group, argued that actions by the industry itself were unlikely to make a significant positive impact for clients.

Yesterday, IC Select – an independent consultant selection company – announced the launch of a performance reporting standard for fiduciary providers aimed at improving transparency and comparability during the tendering process.

“A number of possible solutions to help tackle the conflicts within the investment consulting and fiduciary management industry have been suggested,” McCoy said. “This includes further training and information being provided to trustees.

“We believe this will have little benefit and mandatory tendering will not solve the problem either due to the strength of the conflict within the [providers]. We believe the only way to resolve this issue effectively is to separate the fiduciary management and investment consulting services and, importantly, the link to the scheme actuary if they are from the same firm. This would include the complete separation of people, research, tools and remuneration structures.

“A further, cleaner step is to require mandatory legal and ownership separation, which in the long run would be good for the fiduciary management industry as it will remove the stigma that exists around the cross-selling issue, which would then leave fiduciary management as a service to succeed or not on its own merits.”

The UK’s Competition and Markets Authority (CMA) is several months into an assessment of the sectors to ascertain whether new rules are required to improve competition and combat conflicts of interest.

In a working paper published at the end of March, the CMA outlined potential methods of separating consulting from fiduciary services. Fully splitting up companies “would directly address the conflicts of interest present in the sector” but could also prevent the provision of integrated services, “which some parties have told us is beneficial”.

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