The global banking and stock market crisis has had significant fallout for pensions and other benefits.
THE CRISIS hitting the financial services sector is not only set to result in a review of bonus structures in the City, but is also likely to hit defined benefit (DB) pension schemes and other perks.
The collapsed bank Lehman Brothers, for example, provided pensions risk solutions in the bulk annuity market. Rash Bhabra, head of corporate consulting at Watson Wyatt, said where employers and trustees are involved in a buy-in and the insurer then goes bust, the pension assets are lost and they retain the liabilities. Although the Financial Services Compensation Scheme is obliged to reimburse 90% of the value of the benefits in such cases, the remaining 10%, which can amount to millions of pounds for large schemes, falls to the employer.
However the recent turmoil has had a positive effect on the accounting deficit for FTSE-100 companies’ final-salary schemes, said Bhabra. At the end of August, Watson Wyatt estimated the average accounting deficit for these pension schemes was £12.4bn. By the week ending 12 September, this had changed to a surplus of £7.2bn, and on 19 September, five days after Lehman Brothers collapsed, the surplus had risen to £33bn. Bhabra said this was due to the falling price of corporate bonds, which attracted bigger returns because of turbulence in the markets. “Yields under corporate bonds have gone up, so these liabilities, for accounting purposes, have gone down. And they have gone down by more than the deduction of assets.”
But Bhabra said that due to uncertainty in the stock market he expected the funding conditions for DB pensions to worsen, and that this overall would be bad news for employers as they may be asked by trustees to stump up more cash for the scheme.
Employers offering defined contribution (DC) plans could introduce a lifestyling investment option, which automatically moves staff between a pre-determined range of investments. This would enable them to provide the option to move equities progressively out of an employee’s pension as they near retirement to reduce their liabilities, said Andrew Firbank, regional director of Jardine Lloyd Thompson.
The banking crisis has also caused uncertainty in other benefits areas, such as bonuses and fleet. As Employee Benefits went to press, the Lloyds TSB-HBOS merger was set to potentially bring together two of the UK’s biggest vehicle leasing companies: Halifax-owned Lex Vehicle Leasing, and Lloyds TSB Autolease. A fleet industry insider said: “Potentially, it creates one massive leasing company that, in theory, would dominate the market.” Jon Walden, managing director of Lex Vehicle Leasing, reportedly said consolidation was good for the customer because it would result in better services.
“Fat cat” City bonus structures are also set to come under scrutiny, after Adair Turner, the new head of the Financial Services Authority, said he will take action to curb “irresponsible” reward structures.