Highest UK pension deficit level ever recorded
The distance between liabilities and assets of UK defined benefit (DB) pension schemes expanded further last month, with deficits hitting the highest level recorded as long-term bond yields declined further. The UK pensions lifeboat revealed its latest PPF 7800 Index bulletin, which showed that the deficit of the 5,945 schemes in the index has grown to around £408.0bn last month, the greatest level recorded by the index, up from a £383.6bn deficit the month before. The average funding ratio of the schemes fell to 77.4% last month from 78% the month before. Total assets came in at £1,401bn, while total liabilities totalled £1,808.9bn with 5,020 schemes in deficit and 925 in surplus. The index shows the latest estimated funding position of DB schemes in the PPF’s universe, on a section 179 basis.
Issue of fee transparency for UK asset managers
Those wanting greater transparency have rebuked the UK’s Investment Association after it released research looking to answer what it regards as “hysteria” over hidden asset management fees. In a detailed announcement the day after the asset management industry body said hidden fees were like the mythical Loch Ness monster, Andy Agathangelou, the founding chairman of the Transparency Task Force, said the opacity of fees in the industry was a “festering sore on the face of financial services”. Agathangelou said he was usually happy with any piece of research looking at the topic of hidden fees but was “concerned” the IA was jeopardising its own efforts with its reference to the Loch Ness monster. “Hidden costs prevent the market working efficiently because knowledge of true cost is a pre-requisite for the ‘invisible hand’ of market forces being able to work its magic. In market-efficiency terms, the pensions/investment sector is fundamentally flawed at best.” He continued by questioning if the IA were accusing legislators and regulators of being “fools” for believing there is a problem over transparency within the industry.
US infrastructure debut for Legal & General
Legal & General will make its debut in US infrastructure with a 1.2m square foot university extension. The UK institutional investor is offering around $100m on a 38-year term to the University of California. The deal comes after notable investment in infrastructure in the UK, where it has contributed £8bn of a proposed £15bn. The deal is the first ever educational sector public–private partnership in the US. The facility is being put forward by Legal & General Retirement (LGR), with another $560m coming from other lenders. Managing Director of LGR, Kerrigan Procter said, “It doesn’t get more attractive than this when the underlying asset is being developed for one of the world’s leading universities.” The university will use the capital to double its size, adding teaching, research and accommodation facilities. The project includes 13 buildings to be delivered by the Plenary Group and Webcor between 2018 and 2020.
Positive bonds rally in first half of the year for Veritas
Veritas reported a positive investment return for the first half of 2016 as it made the most of bond prices rallying due to actions taken by global central banks. Veritas said investments contributed a 0.9% return in the period, increasing from a 0.4% loss for the first three months of 2016, but below the 5.8% it recorded in the first half of last year. Niina Bergring, investment director at the pension’s insurance company said, “Fixed-income investments produced the best return, at 2.4%, because the level of interest rates sank markedly after the central banks introduced new stimulus measures, and because economic uncertainty continued to increase.” In the first six months of 2015, fixed-income investments returned just 1.1% for Veritas. Equity investments, on the other hand, made a 1.2% loss in the six-month period. Bergring said. “Listed shares returned minus 2.2%, while unlisted shares returned 9.2%,” In the first half of last year, Veritas made a 12.9% return on its equity investments, including 13.3% for listed shares and 9.2% for unlisted.
Aon buy-in contributes to a 25% increase in profits for PIC
Pension Insurance Corporation (PIC) has announced a 25% growth in operation profits to £79m in the first half of the year. PIC said it wrote £918m of new business over the six months, compared to £702m during the same period last year. The majority of the new business came from the Aon Retirement Plan, which contributed £900m for a buy-in contract in May. PIC’s value has increased by £398m to £2.3bn in the first half of the year and it says that it completed its third longevity reinsurance transaction with the Prudential Insurance Company of America to cover the lives of 2,900 pensioners it insured as part of the Aon transaction. The insurer's financial investments have grown by £2,488m and the amount of the portfolio tied in corporate bonds has grown by 3.3% to 58.3% since the end of 2015. Chief Executive Officer, Tracy Blackwell said that the organisation had gone through a very "eventful" six months of 2016. "I am pleased to report that PIC has had a successful first half, in terms of new business levels, solvency and financial performance. This was achieved notwithstanding the challenges posed by the introduction of a new solvency regime and the impact on the financial markets of the UK’s referendum result to leave the European Union. The foundations for our strong first half performance were laid last year, following our successful preparations for the implementation of Solvency II. We were delighted to be one of only 19 UK insurers to have had its Internal Model approved by the Prudential Regulation Authority in advance of implementation.”
Allow UK funds to force CPI indexation to cut deficits
Sponsors with sizable UK pension deficits should be able to bypass any indexation provision and only offer increases in line with the consumer prices index (CPI), LCP has argued. Proposing the government drop the “legal lottery”, the consultancy predicted FTSE 100 firms would witness a £30bn (€35bn) fall in their liabilities if they were allowed to swap to CPI, rather than the retail prices index (RPI) for all future indexation. The request came as LCP predicted the biggest firms had pension deficits of £63bn by early August, following the Bank of England’s re-launch of quantitative easing, a notable growth from the £46bn estimated shortfall in June when assets stood at £582bn. However, while supporting the change, LCP partner Bob Scott said the transition to the traditionally lower level of indexation should only happen with certain safeguards. He said, “The safeguards are important as they should not automatically allow a profitable company with a large pension surplus to increase that surplus by reducing benefits. They could, however, provide relief to a company with a large deficit where the trustees agreed it was in the members’ interests for benefits to be reduced.”