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IPE special report May 2018

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UK roundup: Regulator to investigate third-pillar system

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The UK regulator is to investigate the country’s third-pillar pension system amid fears that products are overly complex and consumers are not being protected.

The Financial Conduct Authority today published a discussion paper seeking feedback from the pensions industry and consumer groups about weaknesses and competitiveness among providers of individual pension products.

It said it wanted to “better understand the market for non-workplace pensions: the providers and consumers, and the relationship between them, with a view to assessing the potential presence, nature and extent of harm”.

The regulator estimated that the “non-workplace pensions” sector was worth roughly £400bn (€455bn), and included a range of different types of products.

The discussion paper highlighted the impact of pension freedoms, which removed the requirement for pension savers to buy an annuity at retirement.

“Looking to the future, there are some emerging issues that cause us concern,” the FCA said. “Competition is not working well for consumers who don’t seek advice, and we have concerns about how a competitive market will develop in the future.

“We also have concerns that consumers who move into drawdown may struggle with the complexity of the decisions they have to make, particularly where they have not taken advice.”

The FCA is seeking responses to the discussion paper by 27 April.

Melrose boasts of pension track record in GKN takeover offer

Engineers working on a generator for Brush, a Melrose-owned company

Engineers working on a generator for Brush, a Melrose-owned company

Engineering specialist group Melrose has detailed its strategy for the pension funds of GKN as it attempts to persuade shareholders to accept its £7.4bn cash-and-shares offer for the firm.

GKN’s pension schemes have become a central element of the hostile takeover bid since it was made public at the start of last month. The trustees warned at the time that any “material change” to the structure of GKN would affect the sponsor covenant, and potentially increase the cash contributions required from the employer.

Melrose – which specialises in buying and restructuring engineering companies – yesterday restated its intention to pay £150m to the schemes if the takeover is successful.

It added: “Melrose has been a good steward of pension schemes of the companies it has owned and is committed to looking after all stakeholders.

“The key pillars of our strategy are to maintain professional relationships with the trustees, to put in place ongoing deficit reduction programmes, to maintain prudent levels of leverage and to implement one-off actions to derisk liabilities when there is a window of opportunity to do so.”

The letter to GKN shareholders also sought to highlight Melrose’s handling of the pension schemes connected to McKechnie and FKI, two companies it acquired in 2005 and 2008 respectively.

GKN

GKN’s CEO dismissed Melrose’s offer as “derisory”

Both schemes were subsequently offloaded to US group Honeywell as part of the sale of Elster, a utility meters manufacturer. Melrose claimed yesterday both schemes were either fully funded or nearly fully funded when Honeywell took them on, having reduced shortfalls substantially under Melrose’s watch. However, according to a Financial Times report at the time, a third DB pension scheme connected to Elster had a shortfall of more than £100m.

Anne Stevens, GKN’s chief executive, dismissed the latest offer as “derisory” and claimed the deal was structured to allow Melrose to buy GKN “on the cheap and with GKN’s own money”.

GKN’s pension funds had assets of £2.3bn at the end of 2016, according to the UK-listed company’s latest annual report.

DB scheme funding improves in January

FTSE 350 pension schemes finished January £3bn better off on aggregate despite asset prices falling, according to Mercer.

The consultancy estimated that the combined deficit across DB pension schemes for listed companies fell due to rising corporate bond yields. This offset the 1.3% fall in combined assets to £771bn. Aggregate liabilities fell by 1.5% during January to £844bn.

During 2017, Mercer’s data estimated that the aggregate funding level of DB schemes improved significantly, with the combined deficit falling from £137bn at the end of 2016 to £76bn as of 31 December 2017.

Le Roy van Zyl, strategy adviser at Mercer, said many schemes “still have significant risk exposures and there are a number of scenarios under which this good news could reverse”.

He urged trustees and sponsors to review the risks they were taking and predicted an increase in derisking activities such as insurance buy-ins and buyouts.

Related images

  • The entrance to the FCA's headquarters in London

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