Publications

Bulletin 11 Winter/Spring 1996

The Affluent Pensioner

Politicians all too readily like to refer to pensioners as being affluent. This may well be the case for some - but only a very few.

In the Central Statistical Office's latest survey of economic trends, State pensions accounted for almost three-quarters of the income received by retired households. In other words, for those already retired, occupational and other non-State pensions provide only a modest supplement to State pensions.

A similar picture emerges from the NAPF's research paper on long-term care. Figures provided by the Institute for Fiscal Studies show that only 34% of female pensioners and 66% of male pensioners are in receipt of any income from occupational schemes. The 90th percentile of pensioners receive income of £90 per week (female) and £155 per week (male). Only 10% of retired men who have an occupational pension receive more than £8,000 a year.

The occupational pensions industry has grown enormously over the past two or three decades. Those of us in it, as well as less informed commentators, should remember that the vast store of wealth is spread very thinly over a huge number of potential beneficiaries, the majority of whom have yet to retire.

The age of the affluent pensioner should come but, except for a very few, it has not yet arrived.

Sheila Gleig

We are pleased to announce the further strengthening of our team with the appointment of Sheila Gleig. Sheila's extensive experience as a leading pensions manager continues our tradition of providing high quality trustee services.

She is currently part-time Director of Pensions and Secretary to the TSB Group Pension Scheme. In 1994 she was appointed as the first independent trustee of the Mineworkers Pension Scheme and Coal Staff Superannuation Scheme of which she is now Chairman. She is also a member of the Nurses Pay Review Body.

In 1995, Sheila was named Pensions Manager of the Year by Pensions Management magazine and the Pensions Management Institute. She has served as a Council member of the NAPF and Chairman of its Education Committee. She has for many years been an OPAS Adviser, Regional Organiser and member of OPAS Council.

Emerging Markets

Many trustees are finding that a small part of their overseas portfolios contain an element of emerging market investments, generally through some sort of pooled fund arrangement.

"Emerging markets" come in all shape and sizes and from all parts of the globe; from the tigers of Asia to the mananas of Latin America; and from the reconstructions of Eastern Europe to the revolutions of Africa.

How safe are these emerging markets? Will they emerge? Indeed, are they appropriate investments for an occupational pension scheme? And if so, do they properly form part of the overseas portfolios or should they be treated as a separate asset class, a kind of global venture capital?

The comparison with venture capital is an appropriate one. They share the same volatility of returns, the same imperfect availability of information, and they both have the ability to attract - or repel - large flows of capital causing major liquidity crises within the market from time to time.

Emerging markets are considered as a fairly new phenomenon, a creation of the 1980s and 1990s. But is this actually the case?

"When people lend to Peru they are simply speculating in guano. We need not point out that such a speculation is not for private investors."

In 1876, four years after the above warning appeared in The Economist magazine, Peru went bust; it has done so a further three times in the ensuing 120 years. Peru is not alone, the walls of investment managers' offices are decorated with the relics of past failures, whether they be defaulted Chinese bonds or defunct American railroads.

Does it matter? The success or failure of individual investments should be tempered by different performance elsewhere within the portfolio, that is what diversification is all about. But diversification works because stocks and markets are not perfectly correlated, if they move together the benefits are lost.

Trustees should note that managers tend to emphasise their skills in stock picking and country selection over their timing skills. The analogy with venture capital is worth considering once more. Success in venture investing depends not only on picking the winners and avoiding some of the losers because it is a market subject to violent changes in sentiment, where investors tend to be fickle, timing is most important - as it is with emerging markets. To quote The Economist again, this time more recently, "booms have almost without fail ended in tearful busts - and a frantic flight of investors out of the region".

If the comparison with venture capital is appropriate and perhaps instructive, so is the analogy with a rollercoaster. It can be rewarding, but it is safer to climb aboard as it crawls slowly and painfully from the depths than when it is flying high and perhaps about to hurtle down into the abyss. And if you miss it, don't worry; you may be able to catch it next time around.

Whether pension schemes should be investing in such markets at all is a matter for discussion between individual trustee boards and their managers and should be subject to appropriate restrictions and guidelines.

Trustees should also consider whether, if they decide to permit investment in emerging markets, such "risky" investments warrant a specific mention in the Statement of Investment Principles that they will be required to make as part of their new responsibilities under the Pensions Act.

A Final Word on Maxwell

A decade ago the Financial Services Act was introduced. Its principal objective was to codify and regulate what should already have been regarded as best business practice.

The result, as we all know, is a vast panoply of detailed regulation, armies of compliance officers, miles of red tape, increased costs and little obvious benefit to the end user.

We now have a Pensions Act which, at 187 pages, is the longest piece of legislation for decades; and we are shortly to receive many hundreds of pages of regulations under the Act. Will it make pension schemes any more efficient or more secure, or will it, like the Financial Services Act, result in unnecessary bureaucracy?

A central plank of the Act is the establishment of compensation arrangements which are payable if there are " . . . reasonable grounds for believing that the reduction [in assets] was attributable to an act or omission constituting a prescribed offence" (Clause 81). But what if no-one is found guilty of a prescribed offence? What if a court decides that acts committed were immoral but not illegal?

Ken Trench of the Maxwell Pensioners Action Group in a letter to the Financial Times was quite clear "The two words 'not guilty' last Friday would have cost 20,000 pension scheme members their right to compensation". Is that really what the Pensions Act was all about?

Maintenance of Scheme Records

From 1st January 1996 pension schemes must ensure that certain records are maintained and make them available for inspection by the Inland Revenue for up to six years.

"Records" include actuarial valuations, contribution records, schedules of investments held, payments made or received etc.

The person responsible for providing the information is the Scheme Administrator and they can be asked to do so either on a regular basis or if specifically requested by the Inland Revenue. If, however, the Administrator cannot be traced or fails to comply, the responsibility falls on the trustees.

Don't lose track of your records or your Administrator!

NAPF Survey -Trustees

The latest NAPF Annual Survey provides some interesting statistics on the composition of pension trustee boards. In a sample of 669 private sector funds, 14% have individual trustees they considered to be independent while 47% have non-independent individual trustees. An independent corporate trustee is used by 14% of respondents while 46% have a non-independent corporate trustee. In 11% of funds the employer acts as trustee.

Some of the differences between the public and private sector are interesting and quite marked. Only 8% of public sector funds have independent individual trustees whereas 75% have non-independent individuals and only 2% employ an independent corporate trustee. The number using a non-independent corporate trustee is also low at 19% in comparison to the private sector, while employer/trustee is the same at 11%.

We reiterate our warning from earlier Bulletins that trustees and sponsoring companies should urgently address the issue of trustee board composition in order to ensure that they will have in place what is best for their scheme and will comply with the Pensions Act regulations when they come into force. In doing so they will no doubt wish to consider the advantages of independent trustees. April 1997 is only a year away.