Ruth Sullivan

Pensions bonanza cancelled

Pensions bonanza cancelled

Now it’s official – the much trumpeted pension buy-out market has fallen flat. And just to spell it out, a report by Punter Southall called the False Dawn reveals that most (about 84 per cent) pension schemes trying to transfer liabilities to an insurer through a buy-out would find it cheaper to just adopt the same low-risk investment strategy an insurer would use.

Pauline Skypala

Pension saving is too expensive. According to a report from the Royal Society of Arts, up to 40 per cent of pension savings disappear in fees and costs under the UK’s current system of private pension provision.

Personal accounts, the national scheme to be rolled out in the UK from 2012, are designed to tackle this problem. People will be automatically enrolled into the scheme, removing the marketing and selling costs that have helped make personal pensions so expensive.

But the £3,600 annual limit on contributions to personal accounts is too low, says the RSA report.

Ruth Sullivan

As the gold price tops $1000 amid worries over dollar weakness, many investors are piling into bullion as a safe haven.

But for those still not convinced try reading Reasons to Avoid the Gold Rush or Avoiding the gold trap  


Pauline Skypala

A press release from the TUC caught my eye this morning. Headed Taxpayers spending twice as much on private sector fat cat pensions than on public sector pensions, it contributes to the debate about the affordability or otherwise of public sector pensions in the UK.

Publicising a new pamphlet, Decent pensions for all, the TUC says taxpayers are spending £2.50 subsiding pensions for the richest 1 per cent for every pound spent on paying pensions to retired public sector workers.

Ruth Sullivan

Yet another sign that final salary pension schemes are heading for extinction dropped into my mailbox today, a gloomy reminder that fewer and fewer employees are going to enjoy the luxury of a pension linked to their salary and will be forced to head along the more perilous defined contribution route.

A breed at risk

A breed at risk

Billed “the end really is nigh”, a report from Pension Capital Strategies reveals only 20 FTSE 250 companies are still committed to final salary schemes for a sizeable number of employees. Only 140 have any final salary scheme at all and just 92 of these are providing more than a handful of current employees with final salary benefits.

It is easy to understand why. The total deficit of the companies’ schemes had risen to an alarming £12bn at the end of June, showing a deterioration of £6bn compared to a year ago. Even more worrying is the fact that the pension liabilities of 27 of the FTSE 250 companies are bigger than their stock market value, representing a risk to the business. GKN’s pension liability is more than treble its equity market value.

Many companies are trying to stem the growth of these pension liabilities by closing their defined pension schemes to new entrants, says PCS.

Just like the larger companies in the FTSE 100, those listed on its smaller sister index are reacting to economic challenges by reducing pension scheme costs and risks through closing DB pension schemes to new entrants or shutting them down altogether.

Expect very few private sector DB schemes to remain alive and well over the next two or three years.

Pauline Skypala

There is a chart in a new report from the World Economic Forum that should give anyone designing a pension plan pause for thought. It shows what a lottery defined contribution pensions can be, with Japan a particularly good example.

Based on certain assumptions, the chart (on page 48 of the report) shows a hypthetical Japanese worker retiring just before 1990 would have enjoyed retirement income equivalent to 60 per cent of earnings after contributing 5 per cent a year for 40 years investing in a 60/40 combination of domestic equities and bonds. But the unlucky one retiring 10 years later would have had to survive on 10 per cent.

Ruth Sullivan

Specialist pension buy-out companies will not be cheered by the latest analysis of their faltering sector.

Buy-out specialists that sprang up a few years ago to take over liabilities of defined benefit schemes got off to a strong start but the market has fallen flat in the financial crisis.

Ruth Sullivan

First there was the product, then the book and now the movie. Well at least a film of exchange traded funds, starring ETF queen Debbie Fuhr, Andrew Clare, asset management professor at Cass Business School and Justin Urquhart-Stewart, founder of Seven Investment Management. 

Ten months since announcing its opening of a London office, Dutch fiduciary management giant Mn Services has won a grand total of zero UK mandates.

Fortunately for the firm, it already has over €65bn in assets under management, so it can probably absorb one bad year.

The firm itself would never admit to it, but it has to be disappointing. A concept that has proven so popular and successful in the Netherlands has simply not taken off in the UK as they had hoped.

Why not? In the end fiduciary management is just a fancy term for financial service provision. Firms like Mn Services will usually take on an entire pension fund’s operations, managing everything from investment to distribution. Should a fund only require certain services, the fiduciary manager is happy to accommodate.

Several features were written about Mn’s UK move and the verdict was inconclusive. Schemes sounded interested, but were wary of giving away too much control and saw the possibility for conflicts of interest. Some simply didn’t see how it was any different from what was already on offer.

It is still early, and the Dutch manager has only recently finished recruiting for its six-strong UK team. In May 2008 its chairman Ruud Hagendijk said the firm was proceeding with caution. He called the UK a complex market, and said he would be content if they only won one new client in a year’s time.

In that case Mn may be on borrowed time.

Pauline Skypala

Legal & General Investment Management has commended the investment consultation paper from the Personal Accounts Delivery Authority to trustees of defined contribution pension schemes. It offers a level of insight “unparalleled in terms of quality and depth” and has the advantage of being free, says Ian Richards, head of DC strategy at LGIM.

Personal accounts will become the benchmark by which other DC schemes will be measured, he says.

It is encouraging to see life companies, which have dominated the DC market in the UK, taking an interest in Pada’s paper. There is much work to be done on designing default funds that have potential to offer reasonable return without high volatility and on the way retirement income is delivered.

Some life companies have already started down this path, but judging by a recent meeting I had with Scottish Life, have yet to work out how to communicate the benefits of their products effectively.

I was hopelessly confused by the presentation by two gents from Scottish Life, who wanted to tell me about their clever pension plans supposed to resolve the governance problems of contract-based DC plans, where no-one is looking after the interests of the members of the scheme.

The plans have some modern features, including a risk-profiling tool, multi-asset portfolios, rebalancing, and a lifestyle overlay that starts working 15 years before retirement. But they are designed to appeal to independent financial advisers rather than scheme members, and it shows.

Too many bells and whistles, I concluded, and some features that just seemed odd, such as moving the fund entirely into cash if a member wants to buy an annuity at retirement rather than draw an income from investments. Where is the protection against annuity rates moving to a member’s disadvantage in that? The aim is to maximise the real value of the pension pot at retirement, was the answer. I was none the wiser.

Maybe when IFAs have to be paid fees for their advice rather than taking commission from life companies, it will be what customers need that takes priority. Having to measure up to the personal accounts benchmark should also force a rethink.

About the blog

FTfm is no longer updated but it remains open as an archive.

FTfm's specialist writing team offer their insights into the global fund management industry.

About the authors

Pauline Skypala has been editor of FTfm for four years having previously been deputy personal finance editor. She joined the FT in 1999 and has been writing on savings and investment issues throughout her career.

Steve Johnson, FTfm deputy editor, has been a journalist for 17 years, 10 of which have been with the FT.

Sophia Grene, reporter on FTfm, has been a financial journalist in print and online for 12 years.

Ruth Sullivan has worked as a financial/business journalist and foreign correspondent and for the past 10 years has been at the FT.