As the market waits with bated breath for an update on British Airways’ triennial review of its pension scheme, we note some parallels with another leviathan of UK corporate pension deficits — BT. The telephone company released its second-quarter earnings last month, which showed its post tax pension deficit had increased from £2.9bn at the end of March 2009 to £6.8bn at the end of September. The post tax deficit now accounts for a whopping circa 60 per cent of BT’s market cap. Eek.
There’s a pretty big `if’ hovering over British Airways’ proposed merger with Iberia: Iberia will be entitled to terminate the merger agreement if the outcome of the discussions between British Airways and its pension trustees is not, in Iberia’s reasonable opinion, satisfactory because it is materially detrimental to the economic premises of the proposed merger.
Efforts by the world’s central banks to push down long-term lending rates has many benefits, but also some nasty side effects. Just ask telecoms company BT. From its second quarter results statement, published on Thursday morning:
The deep recession in the US has accelerated a trend toward late retirement, according to BNP Paribas analyst Julia Coronado. In the second installment of her series on how the financial crisis has changed the retirement landscape for the Baby Boomers, published on Tuesday, Coronado argued thus (emphasis ours):
Julia Coronado, senior US economist at BNP Paribas, this week issued the first in what promises to be an insightful series of notes on how the financial crisis has affected the baby boom generation. First order of business: quantifying the boomers’ lost wealth in economic terms and discussing how households are responding.
Surging equities markets last month failed to offset the effects of falling gilt yields, sending the aggregate shortfall of UK pension schemes towards £200bn. According to the Pension Protection Fund’s 7800 Index, a monthly tracker of pension funds’ assets and liabilities, the total deficit of schemes with shortfalls stood at £194.6bn at end-August, up from £179bn a month earlier. The PPF said that 85% of all UK schemes were in deficit. In August gains on world stock markets increased the value of total assets by 3.3%. But yields on UK government gilts fell, raising liabilities by a larger 5.2%.
As FT Alphaville noted last week, the percentage of British Airways’ shares on loan has been climbing, making it the short-sellers’ favourite airline. One theory behind the rise is that the carrier’s pension deficit will not make for happy reading when its trustees publish the results of their triennial revaluation sometime in September. The trustees last valued it at £1.74bn in September 2008, but it’s widely-expected to have jumped to over £3bn in 2009.
Royal Bank of Scotland, the part-nationalised bank that controversially gave Sir Fred Goodwin, its former chief executive, a pension pot valued at £16m, is scaling back pension benefits for about 62,500 employees. The bank is capping the portion of any salary rise that counts as final pay for pension purposes at 2% or the rate of inflation, whichever is lower. From December, it will also cut the lump sum for each employee taking early retirement. Unite, the trade union that represents some RBS workers, said the changes “add insult to injury”.
What’s this? Now the even the pension trustees have gone all theoretical on market prices. From the Marathon Club, comprised of trustees and senior executives representing pension schemes with £179bn of assets, and which has submitted a proposal to the International Accounting Standards Board recommending changes to the way pensions are accounted for:
The main conclusions of a new report by Greenwich Associates on how US institutions have responded to the global downturn are hardly surprising – that big US institutions used the the first half of 2009 to re-examine their investment policies, asset allocations and investment managers to determine what went wrong last year; pinpoint the policies, investments and managers that performed as expected through the market crisis; and to identify those that fell short. Nevertheless the report, based on what seems to be a fairly exhaustive survey of 152 US institutions, identifies some trends worth noting for the year ahead.
We’ve written about the relationship between corporate bonds and pensions fund a couple of times before, but now is probably a good time to revisit the issue, given that the credit team at Dresdner/Commerzbank have just published a pensions special. Recall that UK companies generally calculate their pensions liabilities using a discount rate-based on high-quality corporate bond yields (as opposed to say, the Netherlands, where they use the swap rates). Those yields have increased in 2008, resulting in a somewhat superficial accounting boost to companies’ pensions schemes. Just how superficial, you ask?
Preliminary results from BT were out on Thursday and proved to be pretty much in line with (low-ball) expectations. But a couple of points are worth picking up on. Although there is no official valuation of the pension fund deficit yet beyond the IAS 19 reading, there is an agreement that BT will pay £525m in pretax make-up payments over the next three year.
The aggregate deficit of corporate UK pension funds soared past £250bn in March, setting a record for a shortfall due mainly to the drop in gilt yields as the Bank of England’s quantitative easing commenced. According to the Pension Protection Fund, the aggregate gap between the value of scheme assets and the value of liabilities it guarantees rose to £253.1bn, reflecting the aggregate shortfall of schemes in deficit, which is 90% of all plans.
Employers will have to pay more into the Pension Protection Fund during good economic times to offset lower payments in a recession, under changes to the scheme set to be looked at by the body that provides the official safety net for pension schemes, the FT reported. Alan Rubenstein, new chief executive of the PPF, said “counter-cyclical” insurance premiums could provide a break for businesses, adding that the fund was sympathetic to complaints from employers about the rising costs of pensions. The PPF was created to protect pension promises made by employers that later become insolvent, leaving behind an underfunded scheme.
The Bank of England has a rather smart set of pension fund managers. Take the below snippets, from the BoE employees pension fund report, 2008. Major changes during the Scheme year2007-08 was a year of major structural change for the Fund:
Dan Loeb finally has a target who can’t argue back. The manager of Third Point, the New York hedge fund, and writer of famously rude letters to corporate management he doesn’t like, has plonked a big chunk of his $1.48bn offshore fund into gold, which now makes up the fund’s single biggest holding. Mr Loeb is far from alone in moving into gold amid widespread worries about the debasement of currencies by central banks expanding the money supply in an effort to combat deflation. New York-based Greenlight Capital’s David Einhorn made his first move into the yellow metal late last year, as Bloomberg reported, while a wave of other funds have since put at least some of their money into gold.
Pensions are interesting and topical things, especially the accounting for them. For instance, we see lots of headlines surrounding pension deficits. In fact, we were told earlier this week that the collective deficit of the 200 largest privately-sponsored pension schemes in the UK soared by a further £16bn in February to end the month at £45bn, the biggest deficit in a year.
So according to Sir Philip Hampton, chairman of Royal Bank of Scotland, Sir Fred Goodwin is “still thinking” about whether to renounce part of his pension. The bank’s former chief executive can take as long as he likes – after all, on £693,000 a year, why hurry? – but he really only has two possible models for his decision: 1. The Grasso. When New York state sought to claw back some of Richard Grasso’s $190m compensation, including retirement pay, the discredited former head of the New York Stock Exchange fought the claim. After four years, he won on appeal last July.
Below, via the Beeb, a full copy of the letter from Jane Newell, chairman of the trustees of the Royal Mail pension fund, written to the business secretary Lord Mandelson (emphasis ours). Further to our meeting of 13th February, perhaps I could confirm the Trustee’s views in respect of the Hooper Report, in so far as it affects the Royal Mail Pension Plan.
While we’re on the subject of airports, here’s a a little tidbit on British Airways’ pension deficit, sourced from a 52-page note by Citi’s airline analyst, Andrew Light: … BA had total pension assets of £12.3bn (of which roughly £5 billion in equities) and pension liabilities of £14.0bn as of end March to give an actuarial combined deficit of £1.7bn as at last March. With c.40% of assets in the form of equities and assuming a 30% fall in equities since last March, we estimate the combined actuarial deficit could well have risen from £1.7bn to as much as £3.2bn.
It’s crunch time for corporate pensions in the US, as companies start implementing the early stages of the Pension Protection Act of 2006 ( PPA) at what is quite feasibly, the worst possible time. To reprise, trillions have been wiped off the value of pension plans across the world this year as markets plummeted. According to Bank of America, US pension funds alone have lost $1-2 trillion — and as a result, “find themselves under-funded and mostly unprepared to begin meeting the requirements of the PPA.”
Pension funds, endowments and sovereign wealth funds were all enticed into increasing their investments in private equity and hedge funds when the rising tide was lifting all boats. But as the water level drops, there seems to be conflicting evidence about how those investors are now reacting. On the one hand, the UK’s biggest charity, the Wellcome Trust, and the Harvard University endowment are putting large parts of their private equity portfolios up for sale as the value of buy-out firms’ assets falls in the secondary market.
George Magnus, senior economic adviser to UBS, is out with a new book – “The Age of Aging: How demographics are changing the global economy and our world.” Its warning is pretty harsh. The next great financial crisis to hit the world will not be credit cards, revolving credit facilities or China. No, what the world should really be worrying about are pension deficits, as well as the demographics affecting pensions.
Cable and Wireless has paved the way towards a possible break-up of the UK telecoms group by offloading £1bn of pension liabilities. The purchase of an annuity policy by C&W’s defined benefit pension fund trustees with Prudential is the largest UK transfer of retirement liabilities to date. It highlights the growing determination of companies to shed pension risks relating to investment, inflation and longevity, which are difficult to control and expensive to hedge. C&W’s defined benefit pension fund trustees have bought a bulk annuity policy from Prudential under which the life assurer will cover the retirement benefits of 5,000 former staff at the telecoms group. Offloading the liabilities is significant step towards a possible break-up of the group because fund trustees could potentially scupper any restructuring that jeopardises pension entitlements.
Footnoted.org laments the final 10Q Countrywide will ever file. As usual, there’s plenty of insight, including the observation that the carrying value of Countrywide’s loans held for investment is $94.2bn. A loan book for which Bank of America – the new proud owner of the former mortgage giant – paid, of course, just $8.1bn.