Pensions - the bad news

There has been a string of stories in the news lately that point up the ongoing pain we are likely to face in relation to pension provision. Today's FT reports that life expectancy is rising more quickly than actuaries have allowed for. That's good news - obviously! But just as obviously it puts a further strain on the funding of pensions.

As the FT states -

A one-year increase in life expectancy could increase the total UK private sector pensions bill by £30bn-£40bn. It could also force life insurers to add £3bn -£4bn to their reserves. The projections could wipe out gains in pension scheme solvency that have come about through rising markets and increased provision.

Meanwhile occupational scheme membership is dropping. ONS stats show that membership dropped by 500,000 between 2004 and 2006, with 200,000 less active members of schemes in the private sector, and a slight increase in active membership in the public sector (remember this!). The remainder of the fall was in pensions in payment (you work it out...).

The decline in active occupational scheme membership is of course driven by the closure of such schemes to new members. According to the Association of Consulting Actuaries 4 out of 5 defined benefit schemes are now shut to new members. See this report.

More worrying is that the trend in employer contributions to the new DC schemes that are being set up is, apparently, downwards. From the ONS Stats -

From 2004 to 2006, total contribution rates to private sector open defined contribution schemes decreased by 0.2 percentage points to 8.9 per cent of pensionable salary. Member contributions increased slightly from 2.9 to 3.0 per cent while employer contributions declined from 6.2 to 5.8 per cent.

This suggests that the newer DC schemes being set up (as employers switch over from DB) are less generous. I wouldn't be surprised to see this continue going forward.

The labour movement is often very good at misinterpreting victories and defeats. Put simply, we got spanked in the private sector, and the collapse of DB provision there is a massive defeat. However, in contrast we have done well to hold the line in the public sector. We should keep this is mind, rather than seek to play down what has been achieved, or even suggest it's been a defeat. We would not have achieved what we have without a Labour government, and if the Tories get back in next time expect to face a major attack on the public sector schemes. One to remember next time you feel tempted to engage in a bit of "friendly fire" against Gordo over pensions.

New responsible investment website

A quick plug for a new website that will probably be interesting to quite a few of you. Here’s the blurb:

Welcome to the beta launch of Responsible Investor (http://www.responsible-investor.com), the first environmental, social and corporate governance web site focusing exclusively on the information requirements of institutional investors. If you’re reading this you are part of a global investment community that is increasingly aware of the need to balance investment returns with environmental sustainability, social concerns and best practice in corporate governance.

TUC & PE

The union campaign around private equity continues. The TUC has held a meeting with some of the key buyout firms, and a productive one by the sounds of it. Here’s the blurb!

At the invitation of TUC General Secretary Brendan Barber, this morning representatives from trade unions and the BVCA met for a roundtable discussion at Congress House. At the invitation of the BVCA, another meeting is planned for the autumn.

The tone of the meeting was positive and while there is much ground still to be covered, both parties believe a good start has been made.

TUC General Secretary Brendan Barber said: "I welcome the opportunity for dialogue between unions and private equity. Our concerns about the growth of private equity are well known, but with private equity now employing one in twelve of the private sector workforce it makes sense for trade unions to engage with an increasingly important group of employers."

BVCA Chairman Wol Kolade said: "Today's meeting is the first of two planned roundtables. We look forward to these meetings and to an open exchange of views. We hope they set a pattern of regular dialogue between the BVCA and the TUC."

The meeting involved representatives from 3i, Apax Partners, Bridgepoint, BVCA, CBI, CVC, Hermes Private Equity, ISIS Equity Partners, KKR, Lyceum Capital, Permira, ETUC, GMB, TUAC, UNI, Unite - Amicus, Unite - T&G and the Party of European Socialists.

Investor pressure over exec pay

There has been a string of AGMs lately where investors seem to be pushing back on executive pay arrangements. A fairly common problem is that companies are arguing that they need to pay their directors even more to stop them taking private equity's dollar. I'll write more about this when I have more time, but the bit below from The Grauniad sets the tone quite well. The Cable & Wireless AGM next week might see a bit of a spike in votes against management.

Investor pressure mounts to curb boardroom bonuses


· Pay schemes at M&S and C&W run into opposition
· Telecoms company fights to raise payout ceiling

Julia Finch
Thursday July 5, 2007
The Guardian


Some of the UK's biggest companies are facing pressure from shareholders to scale back directors' pay deals and set more challenging targets for boardroom bonus payouts.

Marks & Spencer has been forced to set a tougher target for its chief executive, Stuart Rose, to achieve maximum payouts and Cable & Wireless is facing a substantial vote against changes to its pay plan that could reward its chief executive, John Pluthero, with more than £20m and provide a bonus payout to the group's part-time chairman, Richard Lapthorne.

Last week some 18% of Tesco shareholders refused to back a new pay scheme for chief executive Sir Terry Leahy that could generate up to £11.5m if the grocer's new convenience store chain in the US proves successful. The Association of British Insurers, whose members speak for 20% of UK-listed shares, designated the Tesco scheme as an "amber top" on concerns that the scheme set a precedent in rewarding Sir Terry for the results achieved by only one part of the business.

The amber rating is the middle of three rating levels, between a blue for no problems and red, which urges investors to vote against. Amber urges shareholders to consider the issue carefully and make up their own minds.

Last year Mr Rose, who has engineered a turnaround of M&S, was handed a pay package worth £3.9m and promised shares worth four times his salary - an additional £4.5m. Together with two other board directors he was promised the same again this year if he produced a pre-set level of earnings per share. M&S introduced the scheme only a year ago and insisted at the time that the maximum payout was only to be used in "exceptional circumstances". A spokeswoman explained that the rewards were required "to ensure these people are retained".

After consultations with shareholders the eps target has been set higher and the ABI has awarded it a blue top. However, the shareholder group PIRC - which advises local authority pension funds - still opposes the scheme, describing it as "excessive".

The ABI has given the proposed C&W scheme an amber rating. The telecoms group introduced a new "private equity style" pay package for 60 senior executives last year, which could pay out up to £216m by 2010. Under the terms of the original scheme the two most senior men - Mr Pluthero and Harris Jones - stood to make more than £20m each if they more than doubled the C&W share price. After pressure from the ABI the company agreed to a £20m cap - but the company has asked shareholders to scrap that ceiling at its annual meeting on July 20.

PIRC is urging its members to vote against the scheme, saying the targets "are not considered challenging". It is also urging shareholders not to support the re-election of Mr Lapthorne, who is in line for a bonus of up to £10m if he meets performance targets.

Mike McKersie at the ABI said he did not believe pay was spiralling out of control but said investors had to be mindful that it could. "It is like inflation", he said. "If you are not vigilant in the early stages then it is difficult to pull it back."

He added that shareholders were not completely convinced by the "alleged pressure" on pay exerted by some of the "mind-boggling" rewards available in private equity. "More people think they could go off and earn large amounts [in private equity] than could actually do it".

Local authority funds probe BAE

From today's Observer, there's a mention of Unison in there too -

Defence firms face bribery probe by pension funds


Oliver Morgan, industrial editor
Sunday July 8, 2007
The Observer


Local authority pension funds are to tackle arms companies about their activities, including allegations of bribery levelled at the UK's biggest defence contractor BAE Systems.

The Local Authority Pension Fund Forum (LAPFF), which represents 40 funds with invested assets totalling £70bn, is drawing up a series of questions to put to defence companies as it seeks to encourage responsible investment by pension funds.

Among the areas to be probed will be the conduct of companies in winning contracts, including the use of bribery. Both BAE and the government are at the centre of a political storm over the issue, following the abandonment of an investigation by the Serious Fraud Office into bribery connected to the £40bn al-Yamamah arms deal with Saudi Arabia in the Eighties and Nineties.

The news comes as the pressure group Campaign Against Arms Trade (CAAT) publishes figures showing that 75 local authority funds have a total of £311m invested in BAE.

CAAT made requests under Freedom of Information rules for details of investments in BAE at the end of December last year from all of the UK's local authority pension funds. The results show holdings ranging from £27.9m by the West Yorkshire Pension Fund to an investment of £128,437 from the Powys fund.

Symon Hill of CAAT said: 'BAE's reputation has plummeted in recent months. Local residents and council employees have a right to know how employee pensions funds are invested.'

Hill pointed to a vote at the recent conference of public service sector union Unison, which represents local government employees, for an end to investment in arms companies. Unison said the amount of money invested was 'phenomenal' and that it was 'disgusting'. Hill added: 'Any council can enhance its reputation by getting rid of these shares.'

Of the 99 funds surveyed by CAAT, 24 had no investment in BAE.

The LAPFF will be seeking talks with defence companies in coming months to raise a wide range of concerns, including the allegations against BAE, as well as the relationship between arms companies and governments, the use of technology, and the way labour is exploited.

A spokesman said the forum's policy was still being prepared, but that engagement would begin later this year. He said LAPFF concerns were not rooted in pacifism but reflected its desire for 'responsible investment'.

The CAAT showed that West Yorkshire had the largest investment in BAE, with West Midlands in second place with £16.8m, Strathclyde in third with £11.4, followed by Kent with £11.2m and Aberdeen with £10.6m

Local government pension funds challenge Government's climate change targets

From the Professional Pensions website -

LAPFF urges government to toughen climate change rules
by Jonathan Stapleton 06-07-2007

GOVERNMENT should adopt more rigorous targets than those set out in the draft Climate Change Bill, the Local Authority Pension Fund Forum urges

The group of 40 council schemes, which together hold assets of around £75bn, said the proposed legislation calls for at least a 60pc cut in carbon emissions by 2050 – but called for a target of at least 80pc to be set.

It explained that the 60pc level did not reflect the current consensus – which includes the views of the House of Commons select committee on environmental audit and the Stern review.

The LAPFF also said the government should use the Bill to make corporate reporting on greenhouse gas emissions mandatory.

LAPFF chairman Darrell Pulk said: “The time for discussion about possible effects of climate change has passed. Companies should now have in place risk management procedures as part of their business strategies as well as identifying relevant business opportunities.

“They must then follow through with this and report on these to their investors in their operating and financial or business reviews. They will further need to demonstrate to their shareholders that the business is well placed to produce cuts that will be required as a result of climate change legislation.”

This follows an ongoing engagement programme by the LAPFF – action which has led to several FTSE100 firms starting to report emissions.

Another City investor trying to fund the Tories

Check out Caledonia Investments. The text below is a direct lift from the company's information backing its decision to seek authorisation to donate £60K to the Tories. Read the original here (resolution 15).

Resolution 15: Approval to make political donations

Part XA of the Act (as amended by the Political Parties, Elections and Referendums Act 2000) prohibits a company and its subsidiaries from making donations of more than £5,000 in any 12 month period to organisations within the European Community which are, or could be, categorised as EU Political Organisations (as defined in the Act) unless prior shareholder approval has been obtained to make such donations.

The Board has been concerned for several years by the increasing proportion of the country’s gross domestic product spend being taken up by the public sector with the resultant requirement for higher taxation and also by the increasing burden of legislation with adverse cost and operational effects on business. Both of these issues contribute towards making businesses in this country less competitive in world markets and have an adverse effect on the performance of Caledonia’s investment portfolio.

The Board believes that a Conservative government would seek to reduce both government expenditure and legislation, which would be of benefit to business in general and to the Group’s business and therefore Caledonia’s shareholders in particular.

Accordingly, the Board is seeking Ordinary Shareholders’ approval to make donations of up to £60,000 in aggregate to the Conservative Party, an amount which would represent less than one-third of one per cent. of the cost of the Company’s annual
dividend to shareholders.

This approval, if granted, will last until 1 January 2009 or, if earlier, the conclusion of the next annual general meeting of the Company.