It’s been a year of flux in the UK pensions market, not least with UK schemes recording negative performance figures for 2000 that ran on into the first quarter of 2001.
According to WM, the performance measurement consultancy, falling equity markets slashed £31bn (e50bn) from the value of UK pension funds in the first three months of the year with funds on average losing around 6% of their value. The underperformance certainly focused minds on an area that had been glossed over in the heady bull run – DC benefits and the impact of closing DB schemes.
Earlier this year, when Britain’s largest pension fund, the £29bn (e46.5bn) British Telecommunications’ Pension Scheme became the latest defined benefit (DB) scheme to close its doors to new members and switch to a defined contribution plan, the DB death knell started ringing.
The 2001 Survey of Occupational Pensions Schemes by market research groups The Pension Fund Partnership and MRM Projects, confirmed the trend, finding that more than one in 10 DB schemes said they were likely to close their final salary plans to new members within one year.
The survey said the numbers underpinned a general sense of concern within UK funds over the complexity of pensions legislation. Half of the UK’s funds said keeping abreast of legislation as well as the uncertainty of government decisions were major challenges to their operations.
The DB rot appeared to be compounded by an August survey from consultant Bacon & Woodrow, which found that increasing numbers of the UK’s largest pension funds were under-funded.
Seventeen pension funds reported funding levels down by 100% on last year compared to only seven in 2000, with one scheme reporting a deficit of nearly £170m (€268m). The proposed closure of DB schemes raised hackles amongst trade unions and employee organisation - and it was not the only issue to do so.
A ruling by the House of Lords in April that electricity supply company, National Grid, could use its pension fund surplus to pay for redundancies through enhanced early retirement, also called into question the relationship between the corporate sponsor and its pensions obligations. The decision is likely to be challenged in the European courts.
However, the most significant recent event for the UK pensions industry was the March publication of the Myners Report on institutional investing. It heralded the beginning of the end for the universally criticised minimum funding requirement (MFR), with the government wasting no time in accepting Myners’ recommendations for its abolition.
Nonetheless, the wide-ranging review initiated by the government appeared to be a slow burner – welcomed at first, then challenged later as its full potential implications became apparent. Amongst other findings, Myners called for an enhanced voluntary code of practice for pension fund trustees – with the threat of future regulation to come.
The issue of trustee remuneration was also put on the table, sparking a debate on the lay principles of pension fund administration.
Perhaps the most controversial point raised, however, was the suggestion that investment managers should include costs such as outsourced broker research in their fees to pension funds, and not through opaque commission charges. The jury is still out on this one.
Significantly, Myners cleared the UK consultancy market over accusations of competition concerns, but recommended that pension funds split actuarial and investment advice contracts to bring more players into the country’s restricted advisory market.
Certainly the UK market has become less static in its investment than it used to be.
An August survey by Dresdner RCM Global Investors, revealed that consultants are increasingly pushing UK funds into choosing more globally oriented investment managers, with seven out of 10 saying they believe as much as 50% of UK portfolio should be invested overseas.
After years of sticking to the so-called safe haven of UK equities, consultants are conceding that pension funds have to move further into global markets to make the most of future returns.
Mark Archer, head of institutional business development at Dresdner RCM Global Investors, commented: “With the current ratio of UK and overseas equity investment in UK pension funds standing at around 68% and 32% respectively (WM figures), our research is showing a significant sea change in consultants’ opinions as to where pension funds should be invested.”
Going forward, stakeholder pensions, the government’s drive to bring more low and medium paid workers into employer facilitated personal pensions, will be making the headlines as the October 8 date for companies to introduce employee stakeholder access draws near. A recent survey by Virgin Direct did not augur well for stakeholder’s success, finding that as many as 22% of smaller companies – those employing between five and 10 staff - could incur government fines to a total value of £2.5bn (€4bn) for not having stakeholder pension arrangements in place in time for the October deadline.
Controversy over the 1% fee cap for providers has not abated either, with employee benefits consultancy Gissings recently predicting that fierce competition in the market would drive the 1% fee even lower.The firm added its belief that the market will eventually adopt a flat fee, with some companies already offering annual management fees below the government’s 1% cap.
On a more general level, the government has come in for renewed criticism over its pensions policy, which was recently declared at risk of “unravelling”, by IPPR, a UK centre-left think tank.
An IPPR report argued that doubts over whether stakeholder pensions would reach their target group threatened the sustainability of the government’s plans. “Clarity over what individuals need to provide for themselves and what the state will provide is needed if any settlement for retirement is to be sustainable,” noted the report.