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UK roundup: Towers Watson, pension increase exchange, PPF

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Towers Watson has predicted UK pension funds will look increasingly to de-risk by offering members cash in lieu of inflation-linked increases.

The consultancy said 23% of respondents to a UK pension strategy survey said they hoped to undertake a pension increase exchange (PIE) exercise over the next three years, while one-third said they would use a retirement transfer option (RTO) for members yet to retire.

Both exercises allow for the transfer of risk away from a defined benefit (DB) fund, with members who agree to a PIE forsaking future inflationary benefit increases in favour of an immediate, one-off increase in benefits.

Fiona Matthews, head of implemented settlement solutions at Towers Watson, said an industry-led Code of Practice for such incentive exercises had addressed previous concerns that members did not “fully understand all the factors around PIEs”.

“The Code of Good Practice for Incentive Exercises has addressed these concerns with the provision of financial advice to pensioners if the company offer is less valuable than the increases foregone,” she added.

“Thus, members’ desires for flexibility can be met at the same time as providing the scheme and the company with the benefit of a reduction in the liabilities.”

Matthews also welcomed a greater level of involvement from trustees in agreeing such incentive exercises, noting that a collaborative approach was “more likely to meet joint objectives besides giving members’ choice”.

The consultancy also said the potential use of RTOs, allowing for the transfer of the equivalent cash sum DB benefit to a defined contribution (DC) fund, would be taken up by 30% of survey respondents within the next three years.

In other news, the Pension Protection Fund (PPF) has estimated that the aggregate deficit among UK DB funds had fallen to just above £60bn (€73bn) at the end of last month, resulting in an average funding ratio of nearly 95%.

According to the PPF 7800 Index, the universe’s liabilities increased marginally – by 0.2% – over the course of February, while assets increased by 1.6% over the same period.

The average funding ratio, which at the end of February stood at 94.9%, was a marked improvement over the same period in 2013 – the change both a result of a £67bn drop in aggregate liabilities and a nearly £46bn increase in assets under management.

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