UK Pensions in the Red
According to "Red alert for pension plans," The Scotsman reporter Teresa Hunter enlightens readers about mammoth losses for pensions run by some of the UK's biggest 100 companies (August 10, 2008). Describing the 41 billion pound sterling hit as "the largest downward swing since the dotcom bust six years ago," Hunter shocks by comparing the current status quo to a 12 billion GBP (Great British Pounds) surplus only 12 months ago. A collective infusion of 40 billion GBP and a reduction of "risk by cutting their exposure to the stock market from 59% to 53%" has done little to stem the tide. Recession, additional regulatory mandates, anemic stock market returns, new accounting rules (such as FRS 17 and/or IAS 19) and extended lifespans promise more pain.
Putting things in context, the reported loss is roughly 78 billion U.S. dollars (based on an August 8, 2008 GBP/USD exchange rate as reported by Oanda.com). Some significant takeaways from the 2008 report, published by actuarial firm, Lane Clark & Peacock, are telling:
- Like the United States experience, many British firms no longer offer traditional benefits to new employees.
- The pension IOUs for some plan sponsors exceed their respective market capitalization. (British Airways, BT and British Energy Group are examples.)
- Conflicts of interest arise between shareholders who seek improved pension plan expense managment versus plan participants who want more benefits (or at least do not want benefits to be cut).
- Trustees take a longer-term perspective than shareholders, often putting them at odds with respect to risk-taking.
- Accounting reports vary because of company-specific inputs that likewise vary such as discount rate, expected asset portfolio rate of return and longevity assumptions.
- Some companies do not use derivatives to manage risk, hoping for an improved funding situation in "due course" and/or wanting to avoid negotiating asset allocation with trustees (who have "unilateral control").
- "Most trustees are not investment experts" and require additional training before making a decision about swaps, pension buyouts and/or change in investment policy.
In the spirit of The World is Flat by Thomas L. Friedman, it is pretty clear that members of the global retirement fiduciary community share most of the same concerns and economic realities. There are few countries that are immune to the panopoly of factors that result in higher costs.
Editor's Notes:
- Click to access "Accounting for Pensions 2008: UK and International" (Lane Clark & Peacock).
- Click to read "Reforming Retirement-Income Systems: Lessons from the Recent Experiences of OECD Countries" by John P. Martin and Edward Whitehouse (May 2008).
- Click to read more about FRS 17, a UK accounting rule for retirement benefits.
- Click to read more about IAS 19 - Employee Benefits. (IAS = International Accounting Standards Board)
