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2 October 2007, It may be smoke and mirrors - Punter Southall responds to news that many
pension schemes may be in surplus
David Cule, Principal at consulting actuary Punter Southall comments on the
news that many pension schemes have moved into surplus:
“Since last December (when most FRS17 figures are calculated) changes in market
conditions have led to a favourable reporting climate for pension scheme liabilities in
company accounts. The is best illustrated by three key indicators the market level,
the interest rate and the credit spread. We have seen the market (as indicated by
the FTSE index) rise slightly (from 6200 to 6500) real interest rates rise slightly
(1.11% to 1.20%) and credit spreads widen significantly (85bps to 115bps). So while
asset values have remained largely unchanged the value placed on liabilities by the
accounting standard have fallen greatly - up to 10% in some cases. However the
liabilities to be met haven't changed nor has the value of the funds available to meet
them. So is this a real "gain"? However just as these gains have been made in a few
short months they could be just as quickly be reversed if credit ratings were to return
to their long term normal conditions, unless schemes "buy" into credit just at the time
when it seems risky to do so.
“The risks for companies (and Trustees) remain largely much as they were. Unless
the certainty of buy-out is sought (and this is still too an expensive option for most
schemes) then both parties carry some risk of non delivery of benefits and/or higher
costs. The markets currently rate the value of AA risk more risky than before so one
needs less assets to fund at this level of risk, if AA becomes a better bet in due
course then this "cheapness" will disappear. Or alternatively the market may
demand the rating agencies change how they rate - which could have the same
effect.
“Companies, their investors and trustees should all continue to study the wide
spectrum of different funding possibilities and not rely on the "one size fits all" mantra
of an arbitrary reporting methodology.”
For more information, or to speak to David Cule, please contact:
Penrose Financial
Notes to editors:
Punter Southall Group
The Punter Southall Group provides a complete range of employee benefit and investment-related services
for companies, pension scheme trustees and individuals. It incorporates the following businesses:
- Punter Southall – consulting actuaries
- Punter Southall Transaction Services – corporate transaction advice
- Punter Southall Financial Management – independent financial advice for individuals and corporate
benefits
- P-Solve Asset Solutions – investment advice and investment management for pension funds and
other large investments
- PSigma Investment Management – investment management for individuals
- PSigma Asset Management – institutional and retail asset managers
- PS Independent Trustees – independent trustee services
With 13 offices in the UK including London, Guildford, Wokingham, Edinburgh, Birmingham and Bristol, the
Punter Southall Group companies collectively have hundreds of corporate, pension scheme, charity and
individual clients.
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