BAA’s pension fund in deficit – yet regulator refuses to acknowledge QE’s effect on gilts

27 Apr

BAA’s pension fund has followed ITV in falling into serious deficit, blaming changes in forecast of inflation rates. BAA Airports’ defined benefit (DB) pension scheme has moved from a £38.7 million surplus on 31 December 2011, to a £103.3 million deficit on 31 March 2012.

Last year, ITV’s pensions deficit increased to £390m in the 12 months up to December. A £65m premium on a longevity swap last year added to the total costs. (In addition, ITV is liable for a Financial Support Direction (FSD) to five connected companies represented by the Box Clever pension scheme, which blames the broadcaster for a £62m deficit.)

More broadly, many pension funds are concerned about the long-term effect of the government’s QE policy. Inflation dramatically increases the price of Treasury gilts, and reduces their yield which is valued inversely.

These bonds are a mainstay of pension funds’ investments because of their relative security. A government report published last week called for a full assessment of quantitative easing’s effect on pensions, and suggested finding measures to alleviate its effects.

Yet the Pensions Regulator’s new report, directing valuation procedures for funds, did not take these effects into account. It expects that current deficit recovery contributions should be maintained in real terms. It said in a statement, “The regulator does not believe this is a prudent approach as it seeks to second guess future market conditions,” (reported Reuters, 27/04/12).

The measures which are recommended by the TPR, to enable employers to meet their long-term liabilities, include filling deficits over longer periods, and taking account of improvements to market conditions. It leaves little room for dealing with negative outcasts, despite the fact that the UK has now fallen into a double dip recession.

Instead it recommends general palliatives, like companies’ recognising shareholder’s subordinate position to the scheme, and prioritising employer contributions and support over paying out dividends to shareholders.

Joanne Segars, CEO of the National Association of Pension Funds (NAPF), which represents 1,200 UK pension schemes with £800 billion assets, said: “Whilst the Regulator is optimistic that the majority of pension schemes will not need to make significant increases in their contributions, it will need to stand ready to adjust its expectations if the real experience of pension schemes turns out to be far worse.”

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