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Special Report

Impact investing


Higher on agenda

It’s been a difficult year for the UK pensions industry. Continued adverse market conditions, a flurry of new government legislation, increasing scheme maturity and pension fund deficit stories hitting the front pages of the national press have left the UK to think long and hard about how it should be managing its entire pensions system.
The government reacted to criticism of its pensions policy by issuing its long-awaited Green Paper in June this year.
One of its main features was the announcement of an insurance net for UK pension plans based on the US Pension Benefit Guaranty Corp, in response to a number of high profile scheme wind-ups where members had been left with little in the way of pension benefits.
The government also set out its intention to change the priority order so that the remaining assets of a scheme in a wind-up situation are distributed fairly among the workforce, reflecting the length of service of employees.
The other significant strand of the government’s policy was the final abolition of the Minimum Funding Requirement (MFR), to be replaced by a new scheme-specific funding requirement. The government said this would allow companies greater control of the design of their pension fund and its financing, resulting in greater flexibility and freedom.
Around the same time, the government also named Malcolm Wicks as its new pensions minister, filling a post that had been vacant for a surprisingly long time given the new prominence of pensions debate in the UK.
In a sign that the retirement issue had moved some way up the government agenda, the Department of Trade and Industry also put out for comment controversial proposals to raise the retirement age to 70. Under the new proposals employer-set retirement ages would become unlawful “unless objectively justified”.
Additionally, the government announced the creation of a Pension Commission, set up to review private pensions and long-term savings, with plans to issue its first report in 2005.
The commission will focus on eight areas: demographics, retirement behaviour and trends, savings behaviour, impact of state pension on private savings, the economics of private pension provision, adequacy and expectations, macro-economic issues and the modelling of pension adequacy.
In the meantime, discussion about the impact of the pan-European Pensions Directive on UK pensions legislation has also been taking place.
David Collinson a partner at consultant Watson Wyatt in the UK, says that one major impact of the European legislation would be the increased powers required by the UK regulator – far wider than those that OPRA (Occupational Pensions Regulatory Authority) currently possesses.
“Although many of the directive’s requirements will not be new to UK pension schemes, there will be some additional demands and, significantly, a substantial increase in the role of the regulator, not least in its requirement to collect and store information.”

Collinson notes that the government’s review of OPRA currently taking place is timely in this respect: “The directive may, however, result in a far larger and more bureaucratic, and therefore costly edifice than the government currently envisages.”
Another area where Watson Wyatt believes there may need to be some clarification regards a technical discrepancy between the directive and current UK practice on the funding requirements of DC schemes – particularly those that self insure death benefits, which were not previously covered by MFR in the UK.
Developing practice in the UK is to use best estimates of most assumptions with margins for prudence, for example, in investment assumption. The directive appears to require margins in most, if not all assumptions.
Collinson says that thus far multinational interest in the potential for pan-European pensions plans is at the “wait-and-see” point.
“If you were trying to do this I imagine that you might see fairly chunky administration cost upfront to set it all up, which would pay back over a longer period. Also you’d have to think about the administration set up in terms of languages and skill sets. It’s a lot of cost at a time in the economic cycle when people are not willing to jump in.
“It could be that people are looking for one company to lead and implement such a plan. Maybe one of the consultant companies might demonstrate how it could be done?”

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