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XMFSinchiruna (27.12)

Britain is no Las Vegas!

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18

July 13, 2009 – Comments (6)

You know the saying: "what happens in Vegas stays in Vegas".

Well, Britain is no Vegas, and what happens on the other side of the pond will infortunately be occuring in North America as well before you can say: "Allo, Guvnah".

Every glimpse of pension fund crises anywhere in the world from here forward will provide an important opportunity for Fools to study the impacts thoroughly ... since it most certainly will impact the U.S. economy with a vengeance. Those accustomed to ignoring international news will find themselves at a distinct disadvantage when it comes to anticipating major chapters in our unfolding crisis, so I recommend that readers start bookmarking some foreign media outlets (especially in Europe and Asia) for their daily news briefings. For Britain, I find the Telegraph's financial coverage very comprehensive. Also, please note that The Motley Fool also has a sister site in the UK, and they too have been following pension-related issues there.

As you read this article on Britains impending pension crisis, be sure to pause to picture similar developments here at home. I anticipate a flood of legal actions to clog the courts, increased financial strains upon family members caring for retired/retiring parents as their previous plans for the golden years turn to dust, negative feedback loop on consumer spending, etc. etc.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5811512/Pensions-experts-predict-horrific-news-on-funds.html

Pensions experts predict 'horrific news' on funds

For Adam Crozier, things could be about to get a lot worse. The chief executive of Royal Mail saw 10,000 of his workers strike last week, but Britain's top postie knows that could be just the beginning.

While postal workers are up in arms about job cuts and working conditions, their anger could soon pale into insignificance under the cloud of a far greater threat. At stake for many of them is their future financial security. The postal giant is considering whether to close the company's retirement scheme to existing members, forcing them to join a new pension pot with less lucrative benefits.

Pension industry insiders believe such a move could spark widespread strikes at Royal Mail. More worrying for British industry, trouble will not be reserved to the postal service. Over the next few months companies are expected to highlight the scale of Britain's pension crisis by revealing deficits on an unprecedented scale. Strikes and corporate failures could follow.

Company executives will be in the firing line, but many will choose to point the finger elsewhere. For Jane Newell, the chairman of Royal Mail's pension trustees, and the 100,000 or so other trustees around the country, life could get very tough. Traditionally the silent power brokers of corporate Britain, pension trustees are about to find themselves dragged kicking and screaming into the limelight.

"Over the next few months we are going to see some horrific news on pension funds," says Ros Altmann, a former pensions adviser to the Government. "Around half the pension funds out there have a three-year valuation cycle that ended in March 2009. Trustees will face some awful deficit challenges as the new valuations come to light."

The crisis is moving experts to call for change, arguing that the trustee system is no longer suited to the post-credit crunch world. "We need a radical overhaul of the pension system," says Ms Altmann. "There are no easy answers, but times have changed and so has the job of trustees. The complexity of investment means you have to question whether they are equipped for the task."

The job of the trustee is to protect the future livelihood of a company's current and future pensioners by investing a pension scheme's assets for sustainable growth and negotiating with the company over contributions to make up for any short-fall. Trustees should be the independent protectors of Britain's pension assets but in the wake of the collapse of the financial system experts are questioning whether they are up to the job.

"The challenge has become a lot harder, particularly on the investment side, because there are so many tools to manage risk," says Glyn Jones, managing director at P-Solve, the pensions consultant. "Twenty years ago it was a choice of equities or gilts. Now it's about how you use interest-rate swaps or other derivatives to manage risk. That is a different level of sophistication."

In a world where some companies boast multi-billion pound profits and tens of thousands of employees, and others operate at a loss with a staff of just half a dozen, sophistication and financial expertise among trustees varies enormously.

Pension trustees are a mix of the professional and the amateur, many of whom work part-time and are from non-financial backgrounds. Training is encouraged but not mandatory and there is no formal review process of a trustee or board's performance.

Many experts believe that while non-professional trustees have a part to play, they should avoid involvement in the more sophisticated investment roles.

In March this year a survey from Punter Southall, an actuarial consultancy, suggested nearly 50pc of pension trustees were unsure of how the recession was impacting their scheme's funding position.

The consultancy, which generates fees by advising trustees, said: "Significant gaps remain in trustee knowledge and understanding, suggesting that many schemes do not have effective governance structures in place." That might be the ideal, but for many small schemes it remains prohibitively expensive to employ external advice or independent trustees. However, the risk is that the ultimate cost of inexperienced trustees making poor investment decisions could be far higher.

The Pensions Regulator launched a three-month review of the trustee system in October last year and is next week set to release its final recommendations. While there will be some tweaks around the edges, the regulator is likely to give the system a clean bill of health.

Many in the industry take a different view, and point out that the respondents to the regulator's review constitute many of the current system's chief beneficiaries. "Actuaries, consultants and lawyers earn millions of pounds each year advising Britain's pension funds – why would they want to change that?" points out one expert.

While some are calling for more formalised training and performance reviews or better use of external advisers, there are more radical suggestions on the table. Ms Altmann believes pensions schemes should be encouraged to work together, while John Ralfe, an independent pensions consultant, is calling for the UK to adopt a more US-style system where the law stipulates a level of minimum scheme contributions and companies take a wider role in asset allocation. Mr Ralfe believes the sponsoring company should recommend asset allocation to trustees, since it is responsible for funding pension plans. "If the company recommends a high risk equity weighting trustees should expect a cushion to absorb the risk" he says.

Ms Altmann is wary of such a system, arguing that companies could look to take advantage of their trustees, but she agrees change is needed. "Unquestionably we need greater investment expertise, but that is expensive," she says. "One way around that is to find a way to join schemes together and allow the larger ones to take responsibility, at least on the investment side, for the smaller ones. At the moment every fund is trying to find a liability-led investment strategy and paying its own advisers to do that. It's uneconomical."

Many experts argue that the regulator should also be taking a more activist role. By failing to act, they say, the Pension Protection Fund (PPF) – the government pension lifeboat scheme for companies that collapse – and healthy pension schemes will be left carrying the can. "The longer we leave this situation, the worse it will be," says Ms Altmann. "The number of companies failing over the next few months will accelerate. If the regulator believes they are going to fail anyway, it may decide the PPF is better protected if the company fails sooner rather than later."

Trustee boards will have a vested interest in allowing a parent company leeway because the longer they wait, the better it could be for their members. Ms Altmann argues that is the wrong approach for the wider market. "The regulator needs to take the view of what is best for the PPF and other pension schemes," she says. "The regulator might not be relishing this, but what choice does it have? Some schemes are simply not going to make it."

Whether the regulator is prepared to take those tough decisions seems unlikely, but one thing is certain – desperate times call for desperate measures, and trustees will be growing increasingly desperate in the coming months.

 

 

 

6 Comments – Post Your Own

#1) On July 13, 2009 at 11:17 AM, 4everlost (29.61) wrote:

That article sure poses what seems to me to be a bunch of dumb ideas.  The Gov't should advise and regulate the investments of the pension funds?  Where would they get "greater investment expertise", the experts that just got trounced?  And wow, a PPF, a broke gov't protecting an insolvent pension.  Does it get any better?

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#2) On July 13, 2009 at 11:34 AM, XMFSinchiruna (27.12) wrote:

4everlost

Bravo for raising important questions. :) Glad someone is listnening.

And how convenient government-guided investments would be to the plunge protection team here in the U.S., if such a policy were ever adapted here.

 

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#3) On July 13, 2009 at 11:36 AM, portefeuille (99.66) wrote:

An article by your friend Ambrose Evans-Pritchard.

Europe digs its economic grave while the ECB answers to no one

What was your opinion on EUR/USD? I think it was that the EUR is worse off. Well, in that case the article might reinforce that thinking ...

 

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#4) On July 13, 2009 at 11:38 AM, portefeuille (99.66) wrote:

He (or maybe just the IMF) by the way appears to like the effects that QE measures are likely to produce.

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#5) On July 13, 2009 at 11:50 AM, mustbepatient (29.56) wrote:

The word "scheme" must have different connotations in the UK than it does it the US.

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#6) On July 13, 2009 at 2:15 PM, XMFSinchiruna (27.12) wrote:

portefeuille

While I have great respect for Ambrose Evans-Pritchard's contribution to coverage of macroeconomic events, I have stated before that I disagree entirely with many of his key conclusions. 

The Euro is a horribly flawed currency, to be sure, but to NOWHERE NEAR the degree of the USD. 

The ECB counts among its members nations that will not be party to reckless quantitative easing nor boundless stimulative measures as the U.S. has done. Germany, France, etc., will make sure the ECB's response to the crisis is far more fiscally realistic, and therefore the world will retain greater confidence in the future stability of the Euro relative to the greenback.

 

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