Dealing with deficits and regulation – they are the two things uppermost in people’s minds in the UK pension industry today.
It’s not so much regulation itself that is the intrinsic problem; it’s more in the implementation and uncertainty surrounding it that causes difficulties. As one consultant puts it, it’s unfair to be getting “pieces of the jigsaw” bit by bit.
Richard Barlow, chief executive of the £17bn (e25bn) Electricity Supply Pension Scheme (ESPS), says: “The main thing we’ve been concerned about are the deficits in the scheme and the deficit repair programme.” There was this and the “immense raft of regulation” from the government and quasi-governmental bodies that were the main focus at the ESPS. “Cumulatively they put an immense burden on pension schemes. These things are very prescriptive and can serve to reduce flexibility,” he says.
The UK pension landscape is facing considerable change at the moment, with the launches of the Pension Protection Fund and of scheme-specific funding requirements amid the new Pensions Act causing widespread unease. It has occasioned what critics have termed an even more complex picture for those who have to comply. Added to this picture are the wider problems of increased longevity, lower bond yields and new accounting standards.
“The problem is that they’re much more difficult to apply to a large number of occupational pension schemes,” says Barlow, referring to smaller schemes who may lack the resources to implement the various regulatory changes. Larger plans, he argues, are more able to react. He suggests that some smaller funds may not be as well run, and that there is a need for higher standards in the sector least able to deliver.
The suggestion is that smaller schemes are to a degree hindered by the very rules that are intended to make things easier. “Simply understanding and tackling that raft is exceedingly time consuming,” says Barlow. The challenge is to find time to run the pension scheme in the first place, he adds.
“Pension schemes do face real problems – as well as doing everything as economically as possible,” he says. “Dealing with all the regulation generally places costs burdens on you and members would rather see you spend your budget on providing pensions.”
Barlow argues that the last few
years of improved markets have not had the attention they deserve in terms of the impact on pension funding. Two good years of good returns has effectively offset two of the three bull-market years already, he maintains. “We shouldn’t lose sight of the significant market recovery.”
Regarding asset allocation, Barlow takes a traditional line that is somewhat at odds with the current shift towards fixed income. “The conventional wisdom is that you can’t go wrong by investing in things that aren’t equities,” he observes. “I continue to be a believer in the concept of a diversified investment strategy.”
The other potential iceberg in the path of the ocean liner that is the UK pensions industry is the forthcoming EU directive on occupational pension funds. For some schemes this is an issue that they have thought about – and are concerned about. For others, even household-name multinationals, it’s not on the radar screen yet. Although the directive has been transposed into national legislation in the UK, unlike in some other member states, the ramifications don’t seem to have percolated down to all players in the market yet.
Barlow has considered the implications of the directive. “Our view is that when you look at it carefully it is by no means clear,” he says. “We have considerable worries.” He sees potentially “quite catastrophic” consequences arising from the directive. “The wording contains numerous potential constraints on investment. For example, the constraints on borrowing could hit underlying investments such as hedge funds. It wasn’t the directive’s intention to stop borrowing like this.”
Barlow says the ESPS is in talks with the department of work and pensions on the matter. “Hopefully the outcome will be positive,” he says. Going forward, Barlow says all schemes are going to have to look at their costs.
Greg Meekings, chairman of the trustees at the Reuters Pension Fund, says the changes at the fund has provided the highlight in the past 12 months or so.
“From the wider perspective we restructured our fund – that I think has been a positive thing for the fund,” says Meekings, a former executive at the London-based news and data firm. “We changed our investment consultant and moved away from a traditional to a more risk-based approach.” The idea was to take risk more seriously and get a higher yield for the same amount of risk taken, he explains. The changes the fund has implemented are centred on the so-called Value-at-Risk measure, which is a way that encapsulates information about the risk in a portfolio,
“I think the main regulatory impact is considering the implementation of the valuation,” Meekings states, adding that the fund has moved into what is now a “pretty substantial deficit”. The company has disclosed a deficit of £115m, a new phenomenon at the scheme. “From the trustee perspective it’s the swing factor. There’s been a big swing.”
This shift is the result, as elsewhere, but factors outside the trustees’ control, Meekings reports. He cites mortality improvements and a “different view” of gilt yields.
Looking ahead, Meekings sees different types of possible pitfalls, or, as he puts it: “there’s generalities and there’re specifics”. The first of these is legislation, which for funds and their trustees contain “unclear” guidelines and codes of practice. For example, Meekings asks what the regulator means by ‘as soon as possible’ in terms of a scheme in deficit. “There’s lots of ambiguity there.”
He asserts: “Trustees are concerned about the level of change in legislation,” adding there is a trend towards ever more onerous rules. He worries that some of the changes could undermine the idea of “lay trustees who take advice and use common sense”. Meekings, himself a former IT manager, is a lay pensions person, and maintains that the non-specialist trustee can “add a huge amount of value”.
Meekings fears the rise of the professional trustee – which could put up costs for no real extra benefit. “It’s getting to the point where it would be difficult to get people to be part-time trustees,” he warns.
A multinational like Reuters might be thought to be interested in asset pooling, thought Meekings says the benefits are not obvious and the practicalities are “significant”.
Looking forward, the emphasis will be on “keeping step with the whole practical impact of the legislation and managing the deficit”. There would be interesting discussions with the company about possible contributions to the pension fund.