Posts by Alan

Alan Collins

Alan Collins

Head of Trustee Advisory Services at Spence he provides actuarial, funding and investment advice to trustees and sponsors of ongoing defined benefit schemes.
Alan Collins

I read a recent article on the investment returns achieved by the ICI pension fund . The ICI fund was one of the first funds to implement a Liability Driven Investment (LDI) strategy back in the year 2000.

The article was lauding the fact that the fund had returned an average of 5.5% per annum over the last 10 years compared to 3.7% per annum for the average UK defined benefit pension scheme, according to the WM All Funds universe. All good news you might say, but on closer inspection what is it actually telling us, other than that the 3.7% per annum achieved by the average pension scheme is lamentable?

As most readers of this article will recognise, the purpose of an LDI fund is to provide returns which match the timing and nature of the cashflows required by the scheme. In broad terms, the LDI fund should rise in value if interest rates fall, or inflation rises. This will “match” the rise in liabilities (if a number of other assumptions hold). The converse is expected if interest rates rise, or inflation reduces.

In my view the article is really telling us that the fund returns were positive because interest rates fell, (which is good, because that’s what it is supposed to do). It tells us nothing about the real success of the strategy, i.e. how did the fund return relative to the changes in liabilities which it was trying to match, or indeed would a simpler, less costly holding in long terms gilts be just as successful when set against the undoubted cost of this strategy?

Depending on the movements in interest rates and inflation, a very successful LDI strategy could be one which gives rise to negative returns, as long as it matches what it is supposed to match.

So while the article on ICI makes for interesting reading, would it have been more valuable if the apples it described had been compared to other apples rather than a wider selection of fruit?

Alan Collins

At Spence and Partners and Dalriada Trustees Limited, we have long been espousing the value of good recording keeping in relation to pension scheme administration, particularly in our call for action in relation to pension scheme data.

We therefore strongly welcome today’s consultation from the Pensions Regulator (TPR) entitled “Record-keeping: measuring member data“.  We endorse the view that “Trustees and those responsible for administering workplace pensions will need to improve standards of record keeping”.

I was certainly less surprised than TPR by the fact that only 19% of schemes surveyed had checked that they had all the fundamental common data and that over half of the surveyed schemes were missing more than one item of fundamental data.  My experience would indicate lower “success” rates than this.

We further support the proposal for TPR to set, monitor and enforce target levels of accuracy for the common data that schemes must hold and will be interested to see how this area develops.

We note further that TPR intends to work closely with the Financial Service Authority to monitor record keeping in contract based schemes.

Finally, we look forward to further developments in this area and would encourage all trustees to look out for and undertake the soon to be published e-learning module on this subject.

Alan Collins

If, like myself, the prospect of trawling through the 2009 Purple Book published by the Pensions Regulator and the Pension Protection Fund (the PPF) is a research step too far, you will most likely have turned to the Executive Summary.

Being short of time, I was then less than pleased to see the Executive Summary running to around 10 pages.

So having now briefly digested the aforementioned the following provides my executive summary of the Executive Summary –

– the end date for the reporting period was 31 March 2009 (the nadir of recent pension scheme funding dates with the combination of low gilt yields and pre-bounce equity markets).

– 37 percent of scheme members were members of open schemes at 31 March 2009, down from 44 percent at 31 March 2008;

– Aggregate Technical Provisions funding levels fell to 70.3 percent at 31 March 2009, representing a total shortfall of £329 billion;

– the level of corporate liquidations in Q3 2009 was over 50 percent higher than at the low-point in 2007, though not as severe as in the recession of the early 90s;

– average allocation in equity fell from 53.6 percent oto 46.4 percent (this may of course be due to the fall in equity values rather than any “tactical” shift);

– there was a marked rise in the long-term risk to the PPF between March 2008 and June 2009, as measured by the PPF’s Long-Term Risk Model;

– PPF expects to collect £651 million for the 2008/9 year. The average levy paid is unchanged at 0.08 percent of scheme assets.

– 564 schemes had their levy 2008/9 capped (it will no doubt be interesting to see how this figure changes in due given the reduction in the cap to 0.5% of scheme assets for 2010/11);

– the total number of contingent assets in place has risen by 30 percent from 452 in 2008/9 to 587 for 2009/10;

– Liability Driven Investment (LDI) strategies continued to take root. The National Association of Pension Funds (NAPF) survey data indicated that 26 percent of schemes had implemented an LDI strategy by 2009 up from 23 percent in 2008; and

– to end on a subject dear to our hearts here at Spence and Partners Limited as specialists in managing schemes during PPF assessment periods (and our sister company Dalriada Trustees Limited), there were 240 schemes (covering 201,000 members) in the PPF assessment period as at 31 March 2009. Also in the year to 31 March 2009, the PPF paid out a total of £37.6 million in compensation payments to eligible members.

Finally for a brief update of subsequent events (from a corporate perspective, though same could be said for scheme funding) –

While we spent late 2008 telling companies your FRS/IAS is not going to be as bad as you think (thanks in most part to sky-high corporate bond yields), we are now in the process of telling the same individuals the exact opposite. “Surely the funding level must be better this year?” – “Err, No” (thanks to higher expectations for long-term inflation and a correction in bond yields have more than offset the equity bounce in most cases). Further details of this were set in in an earlier article on the current state of play for accounting under FRS17 and IAS19.

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