Lucida PLC

The Pensions Pulse Survey, October 2009

In October 2009 Lucida published its second annual Pensions Pulse Survey.

More than 65 trustees and scheme managers completed The Pensions Pulse Survey, representing more than one million members and well over £100 billion of assets. Twelve months on from Lucida’s inaugural Pensions Pulse Survey, the 2009 report provides a great insight into how the past year has impacted trustees and what issues are concerning them most today.

According to Jonathan Bloomer, Executive Chairman of Lucida, “De-risking is becoming increasingly important as trustees come to terms with the fallout from the financial crisis. Funding levels and the overall security of the employer covenant are now major concerns. Trustees are now looking to de-risking solutions available to them in order to protect their members’ benefits. 2010 may well be the year when we start to see a real upsurge in the desire and ability to de-risk.”

Some of the main findings of the report are highlighted below. Should you wish to download a copy of the full report click here.

Highlights from The Pensions Pulse Survey

Concerns for the Future

As is to be expected in a year that witnessed the worst financial crisis since the Great Depression of the 1930s, struggling to match scheme liabilities through investment performance is the biggest concern for most trustees participating in our survey. Some 43%of our respondents ranked this as their highest concern.

Investment performance has leapt above last year’s top concern of ‘increasing longevity risk’, which now has only 28% compared with 38%in 2008. As many schemes are going through their formal valuation this year, and are adjusting their longevity assumptions based on advice from the Pensions Regulator, trustees may feel able to ‘tick it off’ for now.

Although remaining in the same position as last year (third), the sponsoring company’s commercial future has become the biggest concern for a greater number of trustees, up from17%to 23%. This is reflected in the increase in covenant reviews commissioned this year and is not surprising given the lack of confidence in the economy over the year.

Less than five per cent cited administration challenges as their key issue, but administration scores fairly highly on average, with most trustees citing it as of concern. This indicates that administration is an “always there” concern, but is not the biggest for most trustees.

Additional Resources

The financial crisis appears to have had a significant impact on responses this year, with 68% of respondents citing additional funding as the biggest requirement in managing their scheme more effectively, almost to the exclusion of everything else. Last year, additional funding was also the highest scoring factor, with 42% selecting it as their number one requirement. The 50% increase this year reflects the worry about deficits and concern that investment out performance on its own will not suffice. Interestingly, the survey revealed that trustees scored this highly, while lower scores came from pension managers, who generally have a more direct relationship with the employer. This result may also reflect the fact that the Pensions Regulator has strongly encouraged trustees to seek additional funding whenever they judge an employer can afford it, thereby raising the awareness of plugging deficits sooner rather than later.

Managing Liabilities

(N.B. Respondents were able to select more than one option resulting in a % higher than 100)

Looking at the de-risking options being considered by trustees, the biggest change has been the recent interest in longevity swaps or longevity only insurance, with 25% of respondents expressing interest in this area in our 2009 survey. This was barely on the horizon last year and didn’t even feature in our responses.

n exchange for a series of premium payments, a longevity swap removes the longevity risk for a specified period, but the investment risk remains with the trustees. The publicity generated by the 2009 Babcock longevity swap deal has created a flurry of activity, as schemes investigate whether or not a longevity only solution works for them.

Interest in enhanced transfer value and early retirement programmes has reduced slightly, while commutation exercises have declined in popularity from42% to 18%. The interest in buyout or buy-in remains high (31% and 37% respectively). This is relatively unchanged from last year, despite the economic turmoil, and supports our observation that schemes are still looking to remove all risks wherever possible.

To download a full copy of The Pensions Pulse Survey click here.

To find out more about the survey, please contact John Smitherman-Cairns by emailing: john.scairns@lucidaplc.com