Actual spending by FTSE 350 firms on defined benefit pensions has fallen from £19bn (€22.5bn) to £15bn, according to analysis in Hymans Robertson’s 2019 FTSE 350 DB Pensions Report. This is the largest year-on-year fall in the last 10 years.
In a year that has seen The Pensions Regulator (TPR) continue a tougher approach and offer a clearer indication of its funding regime, the report also found that over half of FTSE 350 DB pension schemes are able to well support themselves and likely to fall into segment ‘A’ in TPR’s new categorisation.
Alistair Russell-Smith, head of corporate DB at Hymans Robertson, said: “We’re likely to be seeing this [fall in contributions] because schemes that have hedged are now starting to reach full funding on technical provisions. So, some will be in a position to start turning off their deficit contributions.”
He said that a key decision for corporates in 2020 and 2021 will be to adopt the ‘fast track’ or ‘bespoke’ funding approach for their DB schemes under the new regulatory regime expected to come into force in 2021.
“Our analysis shows that over 50% of the FTSE 350 DB pension schemes are likely to be in segment A. To qualify for this they are already reasonably well funded and we expect that most companies in this segment can take the ’fast track’ route without increasing deficit contributions,” he said, adding that ’fast track’ is, therefore, likely to be attractive for these companies to reduce regulatory risk.
Hymans Robertson’s report shows that 20% of companies are likely to be in segments D and E. They are more likely to consider the ‘bespoke’ funding route to manage cash contribution levels, even if this risks regulatory intervention, Russell-Smith said. “The ‘bespoke’ route may also be an attractive option for corporates that are willing to provide security or contingency plans to support a lower funding target or longer recovery plan.”
As the move towards consolidation continues and the market waits for commercial consolidators to take off, the research found that 84% of FTSE 350 DB schemes have a funding level that enables access to commercial consolidators, and meet the ‘gateway test.’
The ‘gateway test’ requires schemes to be more than five years from full insurance buy-out meaning that commercial consolidation is a viable option under existing regulatory guidance.
Russell-Smith said corporates with schemes that pass the gateway test would have to pay on average 2.1 times the existing cash commitment all upfront to transfer the scheme to a commercial consolidator.
“This is a significant uplift to the existing cash commitments, meaning trustees should seriously consider a commercial consolidator offer if it is put on the table by their sponsoring employer,” he said.
Despite a volatile year, the funding position of FTSE 350 DB oension schemes was in surplus for most of the year and 93% of companies could pay off their IAS19 deficit with less than six months earnings, the report concluded.
LGIM centralises global trading onto Charles River IMS
Legal and General Investment Management (LGIM) has selected Charles River Development’s Investment Management Solution (IMS) to streamline its global trading operations.
Building on LGIM’s initial adoption of the cloud-based Charles River IMS for pre- and post- trade compliance, the addition of cross-asset order management capabilities will help consolidate investment processes for LGIM’s index, liability driven investment (LDI), equity, fixed income, and multi-asset solutions.
“Increasing workflow and pressure on trading desks is driving investment managers to adopt greater automation across their investment processes,” said Gavin Lavelle, managing director EMEA, at Charles River. “By consolidating onto a centralised, cloud-based platform like Charles River IMS, firms have the flexibility to simplify their business model, expand product offerings and support growth.”
Ed Wicks, head of trading at LGIM, said the firm’s continued growth in local and international markets highlighted the need for a scalable solution to centralise order management processes across all asset classes. “Our partnership with Charles River will bring significant efficiencies to our trading operations, allowing us to further evolve our global model, to the benefit of our clients.”
New IC Select assessment service puts trustees in the driving seat
IC Select, an investment advisory specialist, has launched a new service that will for the first time allow trustees to measure the success of their investment advisers.
This service comes after years of mediocrity in investment advice and will finally enable DB pension scheme trustees to judge value for money. It also provides an independent, cost-effective framework that will allow them to assess the performance of their advisers against the strategic objectives.
Peter Dorward, managing director, IC Select, said: “This IC Select initiative arises from unprecedented growth in demand for IC Select’s investment governance services. Partly on the back of stronger trustee governance and partly in response to the Competition and Markets Authority (CMA) requirement for trustees to set clear strategic objectives for their investment advisers, whether investment consultants or fiduciary managers.
In addition, the new advisory oversight service will also allow trustees to benchmark the capability of their investment consultant against other firms, understand in detail the positive and negative drivers of their performance, compare their performance against other similar funds, benchmark the fees paid by their fund and assess the effectiveness and comprehensiveness of their quarterly reporting.
“Setting strategic objectives is just the start of the process,” Dorward said. “To be effective, trustees also require a framework to assess performance against these objectives. The Pensions Regulator has already stated that having consultants mark their own homework is against the spirit of the orders,” he added.
He believes this new oversight service provides the tools trustees need to assess how effective their investment consultant is in meeting their strategic objectives.
As the deadline for setting clear strategic investment objectives looms on 10 December, stipulated by the CMA review, IC Select has seen an unprecedented growth in demand for its services. One of the main things the CMA review highlighted was the lack of necessary tools, information and insights readily available to trustees for holding their advisers to account.