UK roundup: LGPS valuations, MNOPF, Coats, Unison, Pearson
A standard portfolio-based approach should be used for valuations of UK local government pension schemes (LGPS) to make them comparable and allow funding risk to be assessed, a consultancy has argued.
In a report produced in collaboration with Iain Clacher from Leeds University Business School, consultancy Clerus said the discount rate used as part of such an approach should reflect the asset allocation of individual schemes, disagreeing with a suggestion from the Centre for Policy Studies that a uniform range of discount rates should be used across schemes when determining liabilities.
BNY Mellon recently said the UK government should mandate a uniform approach to discount rates to facilitate the forthcoming pooling of LGPS, saying the different discount rates used by local authorities made meaningful comparisons difficult.
Clerus argued that it was the Equity Risk Premium (ERP) that should be the same – and shown for a range of outcomes – as the expected return over UK government bonds (Gilts) comes through “exposure to equities or riskier asset classes held within individual LGPS portfolios”.
Clerus also called for a government actuary to decide what performance assumption criteria should be used for all LGPS.
It suggested equity risk premiums of 0%, 1%, 2% and 3% be used.
Clerus said its suggested methodology would not have a material impact on the aggregate deficit for LGPS, but it added that the funding position of a number of local authorities could change significantly – if its analysis is representative across the LGPS.
The funding level of Worcestershire County Council’s pension scheme, for example, could increase by 15% – a deficit decrease of £450m (€573m) – while Royal County of Berkshire’s could fall by 26% to 49% via a deficit increase of £1.1bn.
Clerus also said the impact of recovery period extensions should be quantified, noting that, for many schemes, this “smacks of kicking the can down the road, rather than addressing some of the value-detracting activities that have led to the need to massage the numbers”.
In other news, the Merchants Navy Officers Pension Fund (MNOPF) will close its defined benefit fund to future accruals from 31 March.
Its circa 600 members will instead be enrolled in a replica of the industry-wide defined contribution scheme, the Ensign Retirement Plan.
Contributions will total 30% (20% from the employers).
The move follows advice from the scheme actuary showing the increase in contributions needed to maintain the benefit level in the DB scheme: from 20% to 25.8% for the employer and 12.2% to 15.7% for members, whose National Insurance contributions would also increase due to the abolition of contracting out in April.
Elsewhere, threadmaking company Coats Group, which grew out of the former Guinness Peat Group, has initiated settlement discussions with the trustees of the Brunel, Staveley and Coats UK pension schemes to resolve ongoing pensions investigations.
As part of its 2015 annual results announced on Friday, the company said it was retaining $505m (£342m) within the group to support the schemes and not make a capital return to shareholders.
This would be on the condition that the UK pensions regulator end its investigations by withdrawing warning notices on the three schemes, and for Coats to be able to start paying normal course dividends to shareholders and have sufficient cash to “invest in growth opportunities”.
The move is the latest in a dispute with The Pensions Regulator (TPR) that goes back to at least late 2014, when TPR issued the Guinness Peat Group with a warning notice about insufficient resources for the Coats pension plan.
Coats has argued that “it is not proper” for TPR to use its statutory powers in relation to the Coats plan.
Lastly, trade union Unison’s staff pension fund has joined US union pension funds in lodging a shareholder resolution at education publisher Pearson due to concerns about its recent business performance.
The resolution, also signed by the Chicago Teachers Pension Fund and Trade Union Fund Managers, calls on the former Financial Times-owner “to review its business strategy in the wake of four straight profit warnings, tumbling revenue and plunging stock price”.
The resolution also calls for a halt to the company’s plan “to create schools for profit in parts of the world where there are no proper state education systems”.