UK – Smoothing of pension fund asset and liability values is not the answer to solving the pensions problem in the UK, according to Cardano.
The investment adviser and fiduciary manager argued that introducing smoothing into the UK regulatory framework would be a backward step, making it harder for trustees and sponsors to take intelligent decisions.
Kerrin Rosenberg, CEO of Cardano UK, said: “It also leads to an obscured picture of the health of the pension fund in both deteriorating and improving economic circumstances.
“This is akin to adjusting the thermometer when it produces an unwelcome reading, rather than trying to identify and combat the underlying fever.”
Rosenberg went on to say that smoothing had no impact on the total payments made to a defined benefit scheme, but only delayed the ability to recognise trends in the funding level and react with revised payment agreements and changes to investment strategy.
“Our view is that it is impossible to know, other than with the benefit of hindsight, whether an improvement or deterioration in funding is short-term noise or part of a long-term trend,” he said.
Cardano instead advocated for a more flexible legislative framework, which would, according to the firm, provide a solution for many schemes that are struggling to afford promised pensions.
In other news, the £60.8m (€70.5) Institute of Cancer Research Pension Scheme has completed a buy-in with Pension Insurance Corporation (PIC), transferring £30m of its liabilities to the insurance provider.
The agreement covers more than 40% of the scheme’s total liabilities, which stood at £69.3m at the end of December 2012.
John Roberts, chairman of the board of trustees, said the deal would put the scheme on a firm financial footing for the future.
“Like many organisations, we were facing potentially significant financial liabilities from our pension scheme as our retiring staff lived longer and drew their pensions over a longer period,” he said.
“We’re therefore very pleased to have insured ourselves against those financial risks and to have controlled the costs of doing so by taking advantage of the high value of Gilts.”
James Staveley-Wadham, senior consultant at Towers Watson, one of the advisers on the deal, noted that all parties agreed in principle and chose their preferred provider, but the funding strain was too big.
“Hence a monitoring mechanism was put in place, and when markets moved such that the price was acceptable to the Institute of Cancer Research Pension Scheme and the Institute of Cancer Research, the deal was done,” he said.
According to Matt Barnes, senior actuary at PIC, the scheme saw the buy-in deal as a “pure” investment decision, trading Gilts for a bulk annuity policy.
“Given the current value of Gilts, a buy-in will typically not result in a significant additional contribution cost for the sponsor,” he said.
“A large number of schemes are currently looking at the Gilts-for-annuities trade.”
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