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UK roundup: Land Securities, Nottinghamshire, regulatory 'excess', discount rate 'quandary'

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The pension and assurance scheme of FTSE 100-listed commercial property company Land Securities has completed a £110m buy-in (€129m) with insurer Just.

The deal was signed in December and covers around three quarters of the scheme’s pensioner liabilities.

In a statement, Just said it is one of the most significant deals it completed since merging with Partnership Assurance in April 2016.

A medical underwriting exercise is due to take place, which Just said would provide potential to deliver improved terms to the trustees.

Peter Frackiewicz, chair of trustees said: “We are very pleased to have taken this important step in managing risk within our scheme, gaining protection against demographic risks and a source of income that will help us meet our benefit payments with a reduced need for divesting assets in order to do so.”

Nottinghamshire County Council Pension Fund has awarded Kames Capital a £300m buy-and-hold fixed income mandate that is designed to help the pension fund implement its infrastructure investment plans.

Kames will invest the £300m in a portfolio of corporate bonds with a target yield of 1.25% over Libor after fees, “with the aim of providing periodic cash flow” to meet the pension fund’s five-year infrastructure investment plan.

Keith Palframan, group manager of finance at Nottinghamshire County Council Pension Fund, said: “We have made a long-term commitment to infrastructure and plan to make staged investments from March 2018 to the end of 2021. Kames Capital has created a customised corporate bond portfolio to meet our objectives for liquidity, security and performance over this period.”

Elsewhere, Pensions Institute, Pinsent Masons and Pendragon have published a report that is intended to be the first of an annual survey of pensions regulation in the UK.

The pensions rulebook, the authors argued, “has become generally recognised as excessive and counter-productive … yet there are presently pressures to increase it even further in quantity and complexity”.

The report said that “the immense quantity of legislation [is] increasing (to now around 160,000 pages) at a time when the membership of defined benefit schemes (to which most legislation relates) is declining”.

It argued The Pensions Regulator should play a smaller role, perhaps “as a branch of the courts”, and that there should be no more “nagging” of trustees. The authors also said regulators should forget about scheme consolidation as a solution to problems within the defined benefit sector.

The report – “Pensions and chocolate[1] – The state of pensions regulation in 2017” - can be found here.

In other news, Punter Southall has published a report showing that a quarter of UK pension schemes would move from deficit to surplus if they calculated their discount rate differently than under the average approach, where expected returns are based on gilt yields.

One in four could reduce deficits by half, it said.

The firm said that schemes should consider approaches less correlated to bond market returns, such as an “inflation plus” approach. In this method, the equity return is set relative to expected future inflation. Alternatively, schemes could use “intrinsic value”, which derives the return on assets from market information within those markets, rather than data from the bond market.

Richard Jones, principal at Punter Southall Transaction Services, said the “gilts plus” approach may be perfectly suitable for some schemes, but that for others “alternative methods may prove to be a better option and would likely have a dramatic impact on funding levels and employer contributions”.

Schemes should carefully weigh a switch to a higher discount rate and ensure they are comfortable with the additional risk this brings, according to Punter Southall.

“Due to the budgeting nature of a valuation, using a higher discount rate means that the scheme is asking for less money from the employer and therefore taking more risk that the employer will not be able to make good any deficit in the future should the discount rate view prove erroneous,” said Jones.

The paper – “The discount rate quandary” – can be found here.


[1] The report’s authors wrote: “But, rather like chocolate, while rules might indeed be a good thing, too much might be bad for us.”

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