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UK roundup: Pension Insurance Corporation, BDO Investment Management, EMI, Equitable Life

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  • UK roundup: Pension Insurance Corporation, BDO Investment Management, EMI, Equitable Life

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UK - The risk transfer market was buffeted by underlying asset volatility in the third quarter, according to Pension Insurance Corporation's Q3 2010 Pension Risk Transfer index.
 
Overall affordability remained relatively stable due to increases in the asset markets, offsetting the fall in long-term interest rates, which have increased liabilities.
 
The movement and volatility of long-term gilt yields was a major factor in the market during the third quarter, driven by market concerns over the re-starting of quantitative easing.
 
The index showed that for several days toward the end of the quarter, there were significant swings in yields, impacting funding positions by as much as £50bn.
 
The quarter saw the innovative use of deferred premiums, with the schedule of payments matching a previously agreed funding arrangement, and discussions with trustees on flexible contracts taking into account the switch from the retail price index (RPI) to the consumer price index (CPI).
 
According to BDO Investment Management, this switch is causing major problems for accountants trying to work out how to reflect the change in company accounts.
 
The change affects all public sector final salary schemes, together with some private sector schemes, which link pension increases to the statutory minimum level of increase.

As CPI is generally expected to be 0.5% lower on average than RPI, the change will reduce pension liabilities shown on company balance sheets.

Last week, the Urgent Issues Task Force issued a draft opinion, which suggested that using the change to report a one-off increase in profit would not be appropriate.

But the accounting and actuarial professions are still a long way from consensus on the issue.

John Broome, actuarial director at BDO Investment Management, said: "Whether or not it is appropriate to reflect this as profit depends on whether you take the view these companies were previously 'obliged' to provide RPI-linked increases."
 
In other news, the Pensions Regulator has reached agreement with the trustees of the EMI pension fund, thereby avoiding a hearing before the regulator's determinations panel.
 
Advised by law firm Sackers & Partners, EMI has agreed to pay £197m of additional funding in staggered payments until 2016, with an immediate initial payment of £16m.
 
Peter Murphy, a partner at Sackers, said: "In the four years it has taken to reach agreement, the trustees have worked tirelessly to achieve the best outcome they could possibly secure for their members."
 
Lastly, the government is expected to announce a £1.5bn compensation payout to Equitable Life policyholders, bringing to an end one of the longest running financial debacles in the UK.
 
The payment, due to be announced in the Comprehensive Spending Review on Wednesday, is more than three times the £400m compensation recommended in Lord Chadwick's report published in July this year.
 
The chancellor, George Osborne, is expected to announce upfront payments of around £1bn, with a further £500m for with-profit annuity holders.

Payouts are likely to start in 2011.
 
The Equitable Life Members Action Group criticised the planned payout as being far too low compared with the £4-4.8bn loss calculated by consultants Towers Watson.

The group also claimed the recommendations made by the parliamentary ombudsman Ann Abraham had been ignored.
 
The Public Select Committee last week called for greater transparency over how the £1.5bn figure was calculated and recommended refraining from citing a final compensation level in the spending review.

 

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