James Moore: Pension funds, deficits and a bevy of financial snake oil salesmen

Some pension risk solutions are being flogged by snake oil salesmen and trustees taken in by them will be left counting the cost
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The Independent Online

Another deficit that's not going away anytime soon is that faced by Britain's private sector pension funds. According to Mercer, which is usually pretty reliable when it comes to this sort of thing, at the end of the first quarter the combined funding shortfall faced by companies in the FTSE 350 had mushroomed to an alarming £160bn. It looks even worse when compared to the £49bn estimated for the first quarter of 2009.

All this against a background of generally favourable investment returns which ought to have helped – the FTSE All Share Index, for example, posted an increase of 50 per cent, yes 50 per cent, between the two different sets of figures.

What's going on? Well, things are never exactly simple in pension land. There are any number of economic and market quirks that have a habit of cropping up to spoil things when you might think they ought to be getting better. This time it's (falling) corporate bond yields and expectations that long-term inflation is going to increase that are responsible for the depressing numbers.

It is worth noting that the combined deficit actually fell slightly quarter on quarter – it was £170bn at the end of 2009. But given the trends, it's no surprise that more and more schemes are seeking to address what is generally seen as the mismatch between their volatile assets, such as equities, and their inflation-linked liabilities. Get this right by "de-risking" and economic quirks are less likely to bite you.

On the same day that Mercer released its figures, Engaged Investor, a trade magazine aimed at pension trustees, released a survey that found three quarters of them were actively planning to "de-risk" their schemes, with the only real barrier being the cost of doing so. There are any number of clever people wandering around the City at the moment selling frightfully complicated "pension risk solutions". Whether they actually are any good for pension schemes is often hard to say, but what is very clear is that they are extremely good for their salesmen.

All the same, in many ways, this "de-risking" is only sensible. The trouble is that when funds' prescription for this is to reduce their equity holdings, they all too frequently do it at the wrong time – when stockmarkets are depressed.

Part of the problem is the "snapshot" approach to the way schemes are valued. Shifting sets of economic data can make you look good at some points, not so good at others. The current triennial valuations undergone by schemes – and surveys like the Mercer one – don't really give a good long-term picture of the health of schemes designed for a long-term purpose.

Another problem is the way that schemes have been strangled with an ever-increasing burden of red tape during the last few years. There's no doubt that some of the "pension risk solutions" out there are legitimate attempts to fix a nasty dilemma. But some are quite clearly being flogged by financial snake oil salesmen and the trustees that get taken in by them (and the companies that sponsor the schemes) are going to find themselves counting the cost for years to come. Addressing that regulatory burden should be a matter of urgency for the new Government, if only to give the industry time for a period of much-needed reflection. It's worth remembering that pension scandals have a habit of dragging in the public sector. Given the size of the public sector deficit, that's something we really don't need.

Business shouldn't cheer too loudly

The financial markets' reception to yesterday's cuts package might have been muted but business groups were cheering loudly. The CBI, the Institute of Directors and the British Chambers of Commerce gave the plans an all but unqualified welcome. The fact that the biggest victim is Vince Cable's Department for Business Innovation & Skills (BIS) bothered them not a bit. "Everyone has to bear the pain," the IoD said piously in response to cuts to business support.

There's never been much love lost between the business lobby and BIS, particularly in its previous incarnation of the Department for Trade & Industry. There are many that have called for the whole thing to be scrapped. Funnily enough, that's something the incumbent minister was once heard to suggest, while in opposition. All the same, perhaps the austerity champers should be put on ice. If we are to avoid the much feared "double dip" downturn, something's going to have to replace the contribution all that public spending made to the economy. Increasing exports would be a good place to start. Unfortunately an unintended consequence of a too credible deficit reduction would be the strengthening of the pound against the euro, already the basket-case of world currencies as Europe's economic pigs continue to squeal. There would be no cause for celebration among business groups or anyone else were that to be the case.

Chloride faces unequal fight with Emerson

The attempt by US predator Emerson to take over Britain's Chloride Group wasn't made any easier after the latter, which provides back up power for industry, produced what were by common consent an excellent set of results.

The City's forecasts were exceeded and the company was bullish about the future. The clear message to Emerson: pay up or go away. It will probably have to go hostile, but Emerson's advisers will be well aware that the deck is loaded in their favour if their client chooses to take that approach, as Kraft showed with its take down of Cadbury. Part of the reason for this is the decline in size, power and influence of domestic long-term investors such as the aforementioned pension funds together with life insurers. Tax and regulation have forced them into bonds, leaving good companies at the mercy of opportunists and short-term speculators.