UK roundup: Brunel Pensions Partnership, FCA, MiFID II, Zurich

The Brunel Pensions Partnership (BPP) has added its voice to those calling for the Financial Conduct Authority (FCA) to rethink its stance on MiFID II.

The FCA, in its most recent consultation on implementing the wide-ranging European directive, proposed classifying local authorities as retail investors, providing them with greater investment protections but restricting the asset classes in which they can invest.

This risks undermining efforts to overhaul local government pension schemes, which are run by local authority staff.

The BPP, a collaboration of 10 LGPS funds based in the south and south-west of England, argued that not being classified as professional clients was “likely to be significantly negative”.

In a statement on its website, it said: “Costs would likely increase because of the higher regulatory burden. Particularly at risk would be most alternative investments: as illiquid or complex investments, they are not considered suitable for retail clients.

“In particular, investment in infrastructure could be curtailed significantly, undermining the government’s stated desire to see LGPS funds have an increased ambition to invest in infrastructure.”

Other pools, including the Local Pensions Partnership and the London CIV, have also called for the FCA to classify LGPS funds as professional investors, as has the Pensions and Lifetime Savings Association.

In other news, Zurich Assurance has completed a £300m (€341m) longevity swap transaction with an unnamed UK pension fund.

The deal was a “named life” longevity hedge, meaning it covered 2,300 named pensioners and their dependants.

It is the fifth such deal for sub-£1bn schemes to be completed in the past 12 months, according to advisers Mercer.

Suthan Rajagopalan, lead transaction adviser and head of longevity reinsurance at Mercer, said: “These deals pave the way to competitive longevity reinsurance pricing for small and medium-sized schemes, which are more exposed to so-called ‘concentration risk’, and where there is potential for greater variability in members’ life expectancy due to diverse pension amounts.”

He added that the longevity swap was “a significant step towards a “DIY pensioner buy-in’”, something Mercer claimed had never been achieved before for a deal of this size.

Elsewhere, more than half of FTSE 100 companies could pay down their pension shortfalls within two years by foregoing dividend payments, according to JLT Employee Benefits.

The consultancy’s research found that just six companies in the index were paying more into their pension schemes than to their shareholders, but 53 could erase deficits within 24 months.

In contrast, eight companies had pension liabilities worth more than their market capitalisation.

Charles Cowling, director at the firm, said: “The good-news aspect of all this is that it is clear that, for the very large majority of FTSE 100 companies, their pension deficits can be easily managed within the normal ongoing management of their capital structure – even for some of those with very large pension deficits.”

In the 12 months to the end of June, FTSE 100 companies contributed £6.3bn in deficit recovery payments, up from £6.1bn in the previous 12-month period.

Darren Redmayne, head of Lincoln Pensions, pointed out that there was no regulatory requirement to pay down deficits as soon as possible.

He said: “Withholding dividends where there is a healthy sponsor covenant that can afford to pay a deficit over time could worsen shareholder value, make UK [companies] less investible and negatively impact the businesses supporting the pension schemes. 

“So somewhat counter-intuitively, such an approach could damage both the shareholder value and the security of the member benefits you are trying to improve.”

Lastly, almost one-third of pension schemes in the UK have been hit by fraud, according to a survey by audit and tax consultants RSM.

However, more than half of respondents said fraud was “not a significant threat”, which RSM said showed a “worrying level of complacency among trustees”.

One-quarter did not realise fraud prevention was a responsibility of pension scheme trustees.

Hoaxes included ‘pensioner existence fraud’ – dependants continuing to receive benefits despite the pensioner having died – and pensions liberation fraud.

“Worryingly, schemes and administrators have experienced an increase in suspicious member transfer requests since the introduction of new pensions freedoms introduced in April 2015,” RSM said.