No great surprises in yesterday's report from KPMG, on the funding position of the top UK DB pension schemes, but interesting that they feel the "tipping point" has been reached, at which schemes are paying out more on retired scheme members' benefits than on current members' benefits. What's more, 22% of the top DB schemes "face no prospect of clearing pension deficits from discretionary cashflow over any reasonable time period" – a sobering thought given that cashflows are unlikely to improve in the foreseeable future.
The findings echo the views of senior figures in the pensions and investment industries revealed in a Penrose survey earlier this week, of whom 94% thought private sector DB schemes are "unsustainable" and would close to existing members for future accruals in the next couple of years.
With DB schemes seemingly being closed on a "weekly basis", the end of DB provision in the private sector looks to have been factored in by most commentators as pretty much a fait accompli. The debate instead is moving towards what will replace DB schemes. Here the picture is much less clear cut. Many fear employers will revert to DC schemes with contributions levelled down to the minimum prescribed under the Personal Accounts system. Others, such as Adrian Waddingham interviewed in FTfm this week, feel some will bring in some form of hybrid scheme, comprising elements of DB and DC.
The real "tipping point" in all this has more to do with the shift in the balance of risk between the employer and the individual. It's about the labour market and life expectancy. During the post-war period, when many of the DB schemes now facing closure were originally set up, there was a shortage of labour, so employers introduced final salary pensions as a way of attracting workers. Life expectancy for the average UK male was somewhere in the low seventies, so the cost of providing this benefit to people retiring at 65 was relatively low. Nowadays, with unemployment at 2.4 million and rising, employers don't need to go to such generous lengths to attract staff. And with life expectancy in the mid-eighties (and also rising), but retirement age still 65, the cost to employers is significantly greater. To put simply, if a trifle brutally: in 2009 can any rational employer justify offering a DB pension as an employee benefit? The answer, sadly, seems to be a resounding "No".
CM
Friday, August 14, 2009
Wednesday, August 12, 2009
Back to the bad old days?
Today's UK unemployment figures make for grim reading. Nearly two and a half million Britons are out of work, the highest figure since the mid nineties, accounting for 7.8% of the workforce. What's more, the data emerges amidst dire warnings of continuing deterioration in the jobs market into 2010 and beyond.
For those of us old enough to remember the 1980's, when unemployment was well over 3 million, one of the striking differences between then and now is the relative scarcity of cultural references to the jobless. Where is today's television equivalent of Alan Bleasdale's Boys_from_the_Blackstuff? Who is recording the noughties versions of The Specials' Ghost Town or UB40's One in Ten? (Admittedly "One in Twelve point Eight" doesn't scan well, but you get my drift.)
Perhaps the cultural references will follow in due course, as the full impact of rising unemployment hits home. But a couple of other explanations occur to me. One is that however frightening redundancy is today, the modern labour market has changed beyond recognition in the last 25 years. Unemployment induced such despair in the 1980s because it affected millions of men (and it was mainly men) in traditional manufacturing industries who had assumed they were in jobs for life and saw no realistic alternative once those jobs disappeared. These days, there can be few people labouring (pardon the pun) under such illusions. Redundancy is still a nasty shock, but not necessarily a cause of despair.
It also occurs to me that some of the generation which grew up watching such TV programmes and listening to those records are now in senior enough positions to affect decisions about redundancy. They may be more inclined to look at freezing or cutting pay, or introducing part-time working as "least worst" alternatives to cutting jobs. Measures like these offer cold comfort to struggling families, of course. But it would be reassuring to think that the lasting impact of the work of Bleasdale and his contemporaries may have played some role in softening the impact of unemployment on today's workers.
AF
For those of us old enough to remember the 1980's, when unemployment was well over 3 million, one of the striking differences between then and now is the relative scarcity of cultural references to the jobless. Where is today's television equivalent of Alan Bleasdale's Boys_from_the_Blackstuff? Who is recording the noughties versions of The Specials' Ghost Town or UB40's One in Ten? (Admittedly "One in Twelve point Eight" doesn't scan well, but you get my drift.)
Perhaps the cultural references will follow in due course, as the full impact of rising unemployment hits home. But a couple of other explanations occur to me. One is that however frightening redundancy is today, the modern labour market has changed beyond recognition in the last 25 years. Unemployment induced such despair in the 1980s because it affected millions of men (and it was mainly men) in traditional manufacturing industries who had assumed they were in jobs for life and saw no realistic alternative once those jobs disappeared. These days, there can be few people labouring (pardon the pun) under such illusions. Redundancy is still a nasty shock, but not necessarily a cause of despair.
It also occurs to me that some of the generation which grew up watching such TV programmes and listening to those records are now in senior enough positions to affect decisions about redundancy. They may be more inclined to look at freezing or cutting pay, or introducing part-time working as "least worst" alternatives to cutting jobs. Measures like these offer cold comfort to struggling families, of course. But it would be reassuring to think that the lasting impact of the work of Bleasdale and his contemporaries may have played some role in softening the impact of unemployment on today's workers.
AF
Thursday, July 23, 2009
Explaining pensions in 140 characters or less
Social networking site Twitter has yet another fan, this time in the form of Dawid Konotey-Ahulu, the founder of pensions adviser Redington. Konotey-Ahulu has urged the pensions industry to start using social media to share ideas. In an article called Telling It Like It Is; The New Reality, posted online today by Financial News, Konotey-Ahulu says the lack of blogs from pension fund officials and investment consultants is a 'crying shame'.
Konotey-Ahulu writes: "It strikes me that there are hundreds of participants in the pensions and insurance industry who could benefit from using social media platforms...I hear so much wisdom from that “crowd” on my travels and very little of it makes its way onto the stage."
However he admits that the Twitter interface, requiring updates to be confined to 140 characters put him off at first. It's a common complaint, but something that Konotey-Ahulu has since come to embrace as it requires 'Tweeters' to distil their complex ideas into easy-to-understand bite-size chunks. In his own words...
"There are thousands of ordinary individuals out there who, between them, sift through thousands of articles, have myriad conversations with other people, and assimilate acres of information. Then they choose the best of the lot. They pore over information, distill the very best (in their own view, admittedly) and then serve it up for you on the plate that is Twitter.
"If you happen to follow those individuals, you have access to their condensed and distilled wisdom. In other words, Twitter aggregates relevant, useful information for you on just about every topic - around the clock. The crucial difference between Twitter and Google, is that Twitter is unnervingly real time, in a very different way to a search engine. They’re calling Twitter the super fresh web."
Self-styled "Pensionsguru", Steve Bee, is similarly enthusiastic. The fact that his Twitter moniker was still available to him, despite his relatively late entry to the world of Twitter, is, he points out, instructive – it seems the pensions industry is somewhat behind the curve in embracing new forms of communication. But with the next generation of pension savers learning about personal finance through the national curriculum, and highly literate in social media, he argues, "our future legislators and civil servants will come into the workforce trained up on Twitter, too. That could bring enormous advantages with it to our future pension legislation."
The rate with which defined benefit pension schemes are being closed appears to have escalated from a drip-drip to a gushing torrent in recent weeks. It seems that firms are taking advantage of the announcements made by their peers to wheel out their own reforms. This pushes the design of defined contribution plans to the fore. If we are to avoid another pensions crisis we need to wake employees up to the fact that the responsibility for a comfortable retirement is now up to them. We need fresh ideas, and perhaps Konotey-Ahulu is right to point to social media as the best forum for sharing these.
Can you recommend any pension-focused social media sites? Let Penrose know at: lisah@penrose.co.uk
LH
Konotey-Ahulu writes: "It strikes me that there are hundreds of participants in the pensions and insurance industry who could benefit from using social media platforms...I hear so much wisdom from that “crowd” on my travels and very little of it makes its way onto the stage."
However he admits that the Twitter interface, requiring updates to be confined to 140 characters put him off at first. It's a common complaint, but something that Konotey-Ahulu has since come to embrace as it requires 'Tweeters' to distil their complex ideas into easy-to-understand bite-size chunks. In his own words...
"There are thousands of ordinary individuals out there who, between them, sift through thousands of articles, have myriad conversations with other people, and assimilate acres of information. Then they choose the best of the lot. They pore over information, distill the very best (in their own view, admittedly) and then serve it up for you on the plate that is Twitter.
"If you happen to follow those individuals, you have access to their condensed and distilled wisdom. In other words, Twitter aggregates relevant, useful information for you on just about every topic - around the clock. The crucial difference between Twitter and Google, is that Twitter is unnervingly real time, in a very different way to a search engine. They’re calling Twitter the super fresh web."
Self-styled "Pensionsguru", Steve Bee, is similarly enthusiastic. The fact that his Twitter moniker was still available to him, despite his relatively late entry to the world of Twitter, is, he points out, instructive – it seems the pensions industry is somewhat behind the curve in embracing new forms of communication. But with the next generation of pension savers learning about personal finance through the national curriculum, and highly literate in social media, he argues, "our future legislators and civil servants will come into the workforce trained up on Twitter, too. That could bring enormous advantages with it to our future pension legislation."
The rate with which defined benefit pension schemes are being closed appears to have escalated from a drip-drip to a gushing torrent in recent weeks. It seems that firms are taking advantage of the announcements made by their peers to wheel out their own reforms. This pushes the design of defined contribution plans to the fore. If we are to avoid another pensions crisis we need to wake employees up to the fact that the responsibility for a comfortable retirement is now up to them. We need fresh ideas, and perhaps Konotey-Ahulu is right to point to social media as the best forum for sharing these.
Can you recommend any pension-focused social media sites? Let Penrose know at: lisah@penrose.co.uk
LH
Friday, July 17, 2009
Myners Retort
Hedge funds have had a tough year so far but things could get far worse if the EU draft directive on alternative investment strategies gets underway. Most European based hedge funds houses' funds are offshore, with many domiciled in the Cayman islands. The directive does not permit these funds to be sold to EU investors, a development which would be massively detrimental to the hedge fund business model and could mean the closure of masses of hedge funds. With 72% of European hedge funds and fund of funds based in London it looks like the UK asset management industry has the most to lose if the directive is implemented.
But has the EU considered the effect this would have on the underlying investors? Perhaps not but City minister Lord Myners certainly has, as this week's press reports reveal. Myners has urged investors to protest again the directive – he says the directive would "reduce choice" by preventing investors from investing in alternative investment funds run by non-EU managers. More than 70% of hedge funds and 2% of private equity funds are managed outside the EU.
The National Association of Pension Finds and European Federation for Retirement Provision have supported Myners' concerns. Lindsay Tomlinson, the incoming chairman of the NAPF, said: "There have been few EU directives that look worrying, but one could understand what they were seeking to achieve and it was possible to focus on particular clauses and seek to make them work better for investors. This does not seem to be the case with the alternative investment fund managers directive, which if implemented as drafted, would have many consequences that in aggregate do not seem to benefit investors."
Myers has revealed that the UK is working on proposals to iron out "deficiencies " in the EU directive and has confirmed that the Treasury has established seven working groups comprising Treasury officials and industry experts, to retool the proposed rules.
What is clear is that a lot of work needs to be done in achieving a united consensus on this directive – watch this space.
NB
But has the EU considered the effect this would have on the underlying investors? Perhaps not but City minister Lord Myners certainly has, as this week's press reports reveal. Myners has urged investors to protest again the directive – he says the directive would "reduce choice" by preventing investors from investing in alternative investment funds run by non-EU managers. More than 70% of hedge funds and 2% of private equity funds are managed outside the EU.
The National Association of Pension Finds and European Federation for Retirement Provision have supported Myners' concerns. Lindsay Tomlinson, the incoming chairman of the NAPF, said: "There have been few EU directives that look worrying, but one could understand what they were seeking to achieve and it was possible to focus on particular clauses and seek to make them work better for investors. This does not seem to be the case with the alternative investment fund managers directive, which if implemented as drafted, would have many consequences that in aggregate do not seem to benefit investors."
Myers has revealed that the UK is working on proposals to iron out "deficiencies " in the EU directive and has confirmed that the Treasury has established seven working groups comprising Treasury officials and industry experts, to retool the proposed rules.
What is clear is that a lot of work needs to be done in achieving a united consensus on this directive – watch this space.
NB
Lord of the Flies… 39 steps to enlightenment…?
Commentators argue in today's papers that the situation in financial markets is the result of the lack of an effective governance framework. The current environment puts Penrose in mind of the William Golding novel, Lord of the Flies and its message that a lack of rules can lead to mayhem and disaster. This analogy leads us to Sir David Walker's report on financial sector corporate governance, released yesterday, which has prompted a savage response from the banking community.
Closer scrutiny of remuneration was always going to be a key feature of the report, but some argue that the recommendations surrounding remuneration merely pander to populist outrage about bankers and their bonuses. Commenting in today's FT, the chief executive of one investment bank said Sir David had caved into populist demands: 'What purpose does this actually serve… it is fundamentally wrong to whip up this hatred of bankers?'
Sir David states that remuneration committees should worry less about whether levels of pay are too high in absolute terms, but rather whether employees are encouraged by bonus schemes to take actions that are not aligned to the long-term interests of shareholders. On the risk monitoring front, Sir David wants bank boards to set up a committee (separate from the audit committee) chaired by a non-executive director, to ensure that boards do not run amok. However one banker in today's FT argues that this will not be effective: 'Risks should be managed by non-executives hour to hour, not by non-executives month to month,' he said. The British Bankers Association, the Association of British Insurers and the Institute of Directors welcomed the vast majority of Sir David's recommendations, although the IMA said the regulator should not get involved in deciding the best way to manage money.
Arguably the main aim of Sir David's report is to change the culture of governance rather than the rules; he summed it up as an attempt to make the board 'a less cosy, comfortable place'. Indeed if these proposals eventually come into force it has been suggested that the UK is destined to have the toughest standards in the world…
EV
Closer scrutiny of remuneration was always going to be a key feature of the report, but some argue that the recommendations surrounding remuneration merely pander to populist outrage about bankers and their bonuses. Commenting in today's FT, the chief executive of one investment bank said Sir David had caved into populist demands: 'What purpose does this actually serve… it is fundamentally wrong to whip up this hatred of bankers?'
Sir David states that remuneration committees should worry less about whether levels of pay are too high in absolute terms, but rather whether employees are encouraged by bonus schemes to take actions that are not aligned to the long-term interests of shareholders. On the risk monitoring front, Sir David wants bank boards to set up a committee (separate from the audit committee) chaired by a non-executive director, to ensure that boards do not run amok. However one banker in today's FT argues that this will not be effective: 'Risks should be managed by non-executives hour to hour, not by non-executives month to month,' he said. The British Bankers Association, the Association of British Insurers and the Institute of Directors welcomed the vast majority of Sir David's recommendations, although the IMA said the regulator should not get involved in deciding the best way to manage money.
Arguably the main aim of Sir David's report is to change the culture of governance rather than the rules; he summed it up as an attempt to make the board 'a less cosy, comfortable place'. Indeed if these proposals eventually come into force it has been suggested that the UK is destined to have the toughest standards in the world…
EV
Thursday, July 16, 2009
Parental home is where the heart is - for 40% of young adults
Yesterday's unemployment figures made grim reading, especially for young adults, one in five of whom are looking for jobs. A recent survey revealed a growing generation of "little SHIDs" ('Still at Home and In Debt'), with as many as 40% of 18-35 year olds either still living with their parents, or considering moving back home as a result of debt.
But is this surprising? With the increase in competition for graduate jobs, the pressure to keep up with mortgage and rental payments, the burden of debt repayment, coupled with a nagging feeling that they should be saving for the future, no wonder many young adults are finding themselves in this predicament.
The Government recently revealed that it is considering dropping tuition fees for students who stay at home to study, in return for waiving their rights to grants and loans. While this is presumably supposed to address the issue of increasing debt, one can't help but think that by shifting the financial responsibility to the parents of these university students, the next generation is not going to learn how to adequately plan for their future. Education is key, and both Government and the financial services industry have a responsibility to help people understand the importance of providing for the future.
ELS
But is this surprising? With the increase in competition for graduate jobs, the pressure to keep up with mortgage and rental payments, the burden of debt repayment, coupled with a nagging feeling that they should be saving for the future, no wonder many young adults are finding themselves in this predicament.
The Government recently revealed that it is considering dropping tuition fees for students who stay at home to study, in return for waiving their rights to grants and loans. While this is presumably supposed to address the issue of increasing debt, one can't help but think that by shifting the financial responsibility to the parents of these university students, the next generation is not going to learn how to adequately plan for their future. Education is key, and both Government and the financial services industry have a responsibility to help people understand the importance of providing for the future.
ELS
Super-Calpers-go-ballistic-Ratings-are-atrocious
Who rates the raters? Perhaps the state of California if Calpers has anything to do with proceedings. The largest public pension scheme in the US is suing the big three credit rating agencies for awarding AAA grades to securities that suffered enormous subprime losses. Suffice to say, given the size and power of the scheme – it manages a massive $173 billion of pensions after all – when Calpers sneezes, the world pays attention.
The suit filed against Moody's, Fitch and Standard & Poor's at the Superior Court in San Francisco, could be a watershed moment. The raters, although bloodied and their reputation in tatters, have at least managed to prevail against similar legal challenges before. However, they may meet their match squaring up against the pension giant famous for its shareholder activism.
The Calpers lawsuit alleges that "wildly inaccurate" Triple-A ratings of structured investment vehicles (SIVs) contributed to losses of over $1 billion. Nothing particularly new here, but what's interesting is their allegation that the rating agencies not only rated the SIVs, but also the securities that the vehicles purchased, to the extent that they provided guidance to the banks on what they needed to do to obtain the crucial AAA ratings. Here lies the rub, as Calpers' objection goes to the heart of the debate around the shadowy relationship between the financial engineers and those who rate their products.
Conflicts of interest is a phrase never far from the table as Calpers contends the SIV rating fees, which it says range from $300,000 to $1 million per deal, were reliant upon the successful sale of SIV securities. It doesn't take Columbo to read the subtext suggesting that there were arguably one million different reasons why the agencies would do everything in their power to ensure SIVs got top ratings. Dwight Cass of breakingviews adds an important note: "If they assisted in structuring the SIVs, that undermines the raters' assertion that their ratings constitute opinions worthy of the same First Amendment protections afforded journalists." Fitch's then-general counsel told lawmakers investigating the Enron debacle that a rating was 'the world's shortest editorial'. That pretence doesn't hold up when you're commenting on something you designed yourself."
The case highlights just how reliant investors are upon ratings agencies for their investment decisions, even highly sophisticated ones like Calpers. Worryingly, Calpers also claim that they didn't receive enough information from the SIVs or the raters to adequately understand the vehicles. Well, surely if you don't understand a product then you shouldn't really invest in it? Caveat emptor anyone? That said, Triple-A ratings are supposed to be as safe as houses – sorry, poor choice of words given subprime.
Ultimately, the entire financial services industry must take its share of the blame for the situation we find ourselves in – from asset managers, investors, and banks right through to the risk profession itself. The ratings agencies are easy scapegoats (incredibly easy, I'll give you that) and whilst concerns about their operation and conflicts of interest might be quite correct, it was not they alone that failed to spot the looming spectre of subprime. It's ironic that at a time where liquidity is in such short supply (unless you're Goldman Sachs of course), everyone has been so quick to pass the buck.
JS
The suit filed against Moody's, Fitch and Standard & Poor's at the Superior Court in San Francisco, could be a watershed moment. The raters, although bloodied and their reputation in tatters, have at least managed to prevail against similar legal challenges before. However, they may meet their match squaring up against the pension giant famous for its shareholder activism.
The Calpers lawsuit alleges that "wildly inaccurate" Triple-A ratings of structured investment vehicles (SIVs) contributed to losses of over $1 billion. Nothing particularly new here, but what's interesting is their allegation that the rating agencies not only rated the SIVs, but also the securities that the vehicles purchased, to the extent that they provided guidance to the banks on what they needed to do to obtain the crucial AAA ratings. Here lies the rub, as Calpers' objection goes to the heart of the debate around the shadowy relationship between the financial engineers and those who rate their products.
Conflicts of interest is a phrase never far from the table as Calpers contends the SIV rating fees, which it says range from $300,000 to $1 million per deal, were reliant upon the successful sale of SIV securities. It doesn't take Columbo to read the subtext suggesting that there were arguably one million different reasons why the agencies would do everything in their power to ensure SIVs got top ratings. Dwight Cass of breakingviews adds an important note: "If they assisted in structuring the SIVs, that undermines the raters' assertion that their ratings constitute opinions worthy of the same First Amendment protections afforded journalists." Fitch's then-general counsel told lawmakers investigating the Enron debacle that a rating was 'the world's shortest editorial'. That pretence doesn't hold up when you're commenting on something you designed yourself."
The case highlights just how reliant investors are upon ratings agencies for their investment decisions, even highly sophisticated ones like Calpers. Worryingly, Calpers also claim that they didn't receive enough information from the SIVs or the raters to adequately understand the vehicles. Well, surely if you don't understand a product then you shouldn't really invest in it? Caveat emptor anyone? That said, Triple-A ratings are supposed to be as safe as houses – sorry, poor choice of words given subprime.
Ultimately, the entire financial services industry must take its share of the blame for the situation we find ourselves in – from asset managers, investors, and banks right through to the risk profession itself. The ratings agencies are easy scapegoats (incredibly easy, I'll give you that) and whilst concerns about their operation and conflicts of interest might be quite correct, it was not they alone that failed to spot the looming spectre of subprime. It's ironic that at a time where liquidity is in such short supply (unless you're Goldman Sachs of course), everyone has been so quick to pass the buck.
JS
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