Plan Sponsors Are Underused Derisking Resource
26 July 2012 (PLANSPONSOREurope.com) - Plan sponsors are an underused resource in opening up options for trustees to de-risk defined benefit pension schemes, Mark Humphreys, Head of UK Strategic Solutions at Schroders has told PLANSPONSOR Europe.
This week Schroders, Economic & Strategy Viewpoint for July 2012 warned that the UK has been one of the worst performers since the crisis with output lagging the US, Eurozone and Japan, while official data shows the UK economy contracted by 0.7% in Q2 – worse than first thought.
Humphreys told PLANSPONSOR Europe: “Falling inflation creates a downward pressure on bond yields which of course underpin the liabilities that these schemes have. It makes the conditions that have in place for a while now of low yields and very high valuations even worse. In normal circumstances this would suggest that schemes would be trying to increase the amount of hedging they undertake. There are s a number of ways you can do that without tying up the capital in bonds – it can be synthetic type instruments. However, you could argue that bond yields are at fairly extreme levels already and this certainly doesn’t move it in a way that would benefit pension schemes by raising yields and lowering liabilities. There is no clear end in sight for the situation we are in. There has been a constant expectation that things will improve and growth will return and yields have got to increase. That point is some distance in the future and remains some distance in the future. There are still things that schemes can do to address this uncertainty.
“Sponsors are in a position to lead that debate because they tend to have higher skills when it comes to those relevant to risk management. So rather than holding physical bonds schemes can get the same interest rate and inflation protection using synthetic assets without tying up capital and use that capital to try and generate growth to reduce deficit and improve the strain on sponsors in terms of contributions.
“That is still relatively underused by pension schemes – in part because they don’t have the level of expertise that you would see in the finance department of a sponsor. These are things that sponsors could do and suggest to their pension schemes which would be beneficial to themselves and the Trustees.”
According to Nigel Green, chief executive of the deVere Group, contraction of the UK economy has led to speculation that the Bank of England will announce a further round of Quantitative Easing (QE), which is another hammer-blow for pensions.
“These GDP figures highlight the depth of the UK recession, yet it is highly unlikely that the Bank of England’s Monetary Policy Committee will move away from its ‘Plan A’, which is to pump money into the economy whenever it falters.
“As such, we forecast that the Bank of England will expand its QE programme by an additional £50bn when the current asset purchases – also £50 billion- are completed in November.
“And more QE means more misery for retirees.”
“QE can cripple pension funds as it can fuel inflation, meaning more bad news for those who’ve already seen their funds dwindle due to high living costs and low interest rates.
“In addition, another round of QE, like the ones before, will make the vast majority of those who are nearing retirement now, permanently poorer as it will further slash annuities – which are already at historic lows.
“By damaging pensions and pension funds, and increasing inflation, QE, a supposed ‘stimulus’, could in fact have the opposite effect of what it is intended to do. Quite clearly, it could hinder economic growth by impoverishing millions of British retirees,” adds Mr Green.