CFA Pension Code of Conduct

The CFA Institute Centre is asking for comments on its Code of Conduct for Members of a Pension Scheme Governing Body until 15 August. The draft has been prepared with the assistance of the OECD and major trade associations from the Hong Kong, the Netherlands, Switzerland, the UK and the USA.

UK pensions to become mandatory?

In the first ever Summer Statement outlining the formal Gracious address which in turn contains the legislative programme of HM Government, Gordon Brown said the following:

The new Pensions Bill will ensure that for the first time not just some but all working people have the right to a workplace pension with a duty on every employer to contribute towards it.

We can only interpret this to mean that occupational pensions will go from contingent to mandatory for everyone in the UK. The implications of this change for the European first and second pillar classification, which critically relies on the non-mandatory nature of occupational pensions in contradistinction to social security, may be huge. This criterion, which is dispensable in our view, would be a major technical impediment to the eventual application of the Pensions Directive to Switzerland with its mandatory occupational pensions system.

2007 asset allocation survey

Mercer IC published its periodic asset allocation survey of European pension funds. Of the 651 funds surveyed, 75% still reside in the UK, thus the survey's cross country comparison may not be entirely reliable (via VF).

Cognitive dissonance in Germany

The cognitive dissonance refers to the results of the Fidelity REAL Index, a survey and comparison between effective and estimated retirement provisions in Germany. Whereas the Germans surveyed expect to achieve 70% of their final gross household income upon retirement, they will effectively only make 56%, which reveals a substantive gap between reality and expectations. Other interesting conclusions are available in the Executive Summary in English and the full brochure in German (both made available here with Fidelity's permission).

Similar surveys are currently being conducted in the UK and France. Watch this space.

Commodities investing

The UK Financial Services Authority has just issued a paper about risks and challenges in the growing commodities investment segment. Most of the paper is a wrap-up of conventional wisdom, but it is nevertheless worth mentioning that the FSA recognises the wide use of algorithmic trading (with associated technical risk) and that, surprisingly, UK pension funds are barely invested in this asset class to date. Consequently, the consensus view is that the growth of portfolio investment in commodities is set to continue.

The Purple Book

The UK Pensions Regulator in cooperation with the Pension Protection Fund has issued the first edition of the Purple Book, a comprehensive overview of the British DB pension universe risk profile which is to be updated annually. The overview is based on detailed information of ca. 5'800 schemes which represent about 50% of all schemes or 85% of members. It contains information about scheme demographics, funding, funding sensitivities, insolvency risks, asset allocation and short term risk concentration.

While the aggregate deficit is quoted as GBP 33.8 bio per 31 March 2006, this number needs to be seen in the context of its sensitivities:

"A 0.1% point increase (reduction) in gilt yields reduces (increases) aggregate scheme underfunding by around ?13bn. A 2.5% increase (reduction) in equity prices reduces (increases) scheme underfunding by around ?11bn. A 10% increase in equity markets would eliminate the deficit as would a 0.3% rise in gilt yields.

Each year added to the longevity assumption used in the s179 valuation would add 3 - 4% to pension scheme liabilities, raising the deficit by around ?20bn."

The aggregate asset allocation continues to show a massive concentration in equity (61%), although this has come down from 73% in 1997. The share of UK equity has fallen disproportionately, as shown in the chart.

FSA not to use XBRL [UK]

There have been a number of reports recently (example) that gave rise to the perception that the UK FSA "ditched XBRL" in the context of its new Mandatory Electronic Reporting (MER), and that this was new news. Given the FSA's weight as a leading European financial regulator, this would appear like a major setback to XBRL's global momentum.

However, this perception needs to be qualified. A recent FSA statement maintains that the stated position is a simple re?teration of a policy established earlier, hence the reports are repackaged old news. The FSA continues to develop its MER system using XML, which can be described as a related, but more generic file format version of XBRL. A later migration from XML to XBRL is thus by no means precluded, especially seeing the FSA's main concern that there is not "sufficient XBRL experience within the UK currently to develop this system without incurring additional cost and risk". This assessment is transient by nature.

That being said, it appears unfortunate that the FSA backtracks behind its 2004 committment to XBRL, namely to develop and publish an XBRL taxonomy. This would be a more appropriate way going forward, rather than deploying a mature technology in a newly implemented financial market infrastructure project, with which the FSA could play the rôle of an essential catalyst.

A Commissioner's philippic

Here is the text of Commissioner McCreevy's speech at today's IPE Awards. He expresses his disappointment in some member states' defective implementation of the Pensions Directive, especially with regards to national investment limits. He describes the Directive as a "harmonising framework" "to allow the best pension fund managers to administer pension schemes across the single market and pension providers to compete fairly on a pan-European basis". He also announced that court cases have been initiated against three member states today - these are probably Slovenia, the UK and Italy. Interestingly, he singles out Liability Driven Investment as a market innovation to better manage risks. Clearly, deficient implementation will not be cut a lot of slack.

The core focus of the speech was dedicated to the third pillar and forthcoming changes in the regulatory environment as well as existing challenges in the marketplace, such as insufficient availability of annuity products. (More from IPE)

Accounting for Pensions [UK]

The Economist has a summary of the recently published Annual Survey 2006 of Accounting For Pensions UK & Europe by actuaries Lane, Clark & Peacock. Unfortunately, the summary only covers the British part of the survey, which continues the proud tradition of differentiating between the UK and "Europe".


LCP has surveyed the component firms of the DJ STOXX 50 index. While the disclosure quality has risen overall, it is not yet at the same level as the UK's, which has been substantially improved following a recent appeal by financial analysts based in London. A similar appeal obviously is required at a pan-European level now! The common denominator of the survey's findings is that despite of a considerably more narrow basis of reporting standards (from 12 sets down to 4), the amount & quality of information vary as widely among the sample as the material information itself, as can be seen from the interesting table above (click to enlarge). Strangely though, an entire section of the report is dedicated to to the analysis of an unadjusted corporate average deficit per country. This ratio does not seem to have any relevance whatsoever.

Amplifying pension funds [UK]

(Via IPE) In the latest issue of its Financial Stability Report, the Bank of England refers to pension funds as amplifiers of financial market shocks in two instances: It quotes anecdotal evidence of a feedback loop between the prices of long term UK government bonds and of similarly long term liabilities of pension funds. The continuing duration mismatch between pension fund assets and liabilities leads to demand for long term bonds, driving down their yields, which in turn drives down the discount rate with which fund liabilities are valued, thus increasing that position.

The second, and novel, feedback mechanism referred to is described in Working Paper Nr. 289. This paper demonstrates a statistically relevant amplification mechanism of DB pension schemes in the UK stock market. The transmission works via a) the additional leverage provided by pension schemes to their sponsors' balance sheets, if those schemes' underfunded status is considered to be ordinary debt, and b) the substantial cross-holdings of equity of other UK corporations in pension funds. Very interesting!

Commission acts on laggards [UK] [SLO]

The EU Commission has decided to refer the United Kingdom and Slovenia to the European Court of Justice for partial or non-transposition of the Pensions Directive into their respective statute book. This follows its earlier reasoned opinion and is a swift consequence of those two countries not responding to the Commission's challenge. The other nine countries (Belgium, Cyprus, Czech Republic, Finland, France, Italy, Lithuania, Slovakia, Spain) at least seem to have sent a response, to which the Commission will react in the near future (via IPE).

Proposed changes to FRS 17 [UK]

The British Accounting Standards Board has issued for comment proposed changes to its FRS 17 Standard on Retirement Benefit reporting. These modifications would take into account recent changes in the UK regulatory environment and would align FRS 17 more closely with IAS 19, its international counterpart. Both IAS 19 and FRS 17 are subject to an ongoing fundamental review which is expected to result in the removal of valuation corridors. This will lead to a more faithful representation of the economic nature of the relationship between pension scheme and its sponsor.

Contingent assets in UK pensions [UK]

The UK Pensions Regulator has issued guidance today on the usage of contingent assets in funding pension schemes. This is of particular interest to pan-European schemes since they require full funding.

A contingent asset of a pension scheme generally will be treated as a contingent liability of the employer. According to IAS 37, such contingent liabilities usually will not need be recognised in the employer's balance sheet, but require disclosure only. Therefore funding pension schemes by means of contingent liabilities may be an attractive funding option for employers.

UK reforms

The British government has today presented proposals for a wide ranging reform of that country's retirement provision system (via BBC). At first reading, the reform seems to address improving retirement income by raising the first and the third pillar. This is to be achieved by introducing default personal accounts with an opt-out option, but also recognising the increased life expectancy by raising the so-called state pension age to 68. Changes to recently modified occupational pensions are not in evidence.

The BBC has an in depth dossier on pensions.

Directive to cause "significant disruption"

IPE recently reported this news item, which is based on an online survey of the UK Society of Pension Consultants. 52% of respondents indicated that the DIrective's implementation had caused significant disruption.

I just enquired about the background to this news item. The press release is based on 31 responses to a one question online survey sent to the SPC's membership base of about 130 members. While this is a pretty good response ratio, it is notoriously difficult to interpret. According to John Mortimer of SPC, those significant disruptions are attributable to the UK implementation of the Pensions Directive, and they are not indicative of a generic problem. Mr. Mortimer quoted a UK specific issue with foreign secondments of employees which, if handled wrongly, can cause the secondment to be treated as a cross border case the consequence of which would be that the IORP in question needs to be fully funded. That might indeed work out to be a severe disruption - but for the time being, this news item's impact is limited.

Commission takes action

The EU Commission has issued a reasoned opinion against Belgium, Cyprus, Czech Republic, Finland, France, Italy, Lithuania, Slovakia, Slovenia, Spain and the United Kingdom for non- or partial transposition of the Pensions Directive into their national law, thereby capturing all the member states that it has identified earlier for lagging. The next step in the infringement proceedings according to Art. 226 EU Treaty would be court action in front of the ECJ after two months time (via IPE).