‘It has come to something when a boring actuarial investment consultant is invited to speak at an investor relations conference.’ Those were the encouraging words of Watson Wyatt’s Philip Robinson at the beginning of his presentation to the UK’s Investor Relations Society annual gathering in London in April. However, these days the thoughts and projections of pensions consultants are listened to with keen interest by those on the front line of investor communications.
The thrust of Robinson’s presentation was that there are significant changes occurring in asset management in the UK and beyond which will have a direct impact on who controls the shares of companies now, and in the very near future. For IROs, a particular area of concern is likely to be UK pension fund management.
‘Over the past 20 years, UK pension funds have, on the whole, been pro-equity because equities represent a good inflation hedge in an inflationary economy,’ explains Robinson. But there are a number of reasons why this attitude toward equities is likely to shift. First, UK pension funds are maturing. With more pensioners drawing on the funds, there are greater liabilities in the short-term. The vagaries of a volatile stock market are particularly unappealing to risk-averse pension trustees with growing short-term pension commitments.
Second, as Robinson suggests, ‘The performance of equities over the last three years has been a wake-up call to pension funds.’ In other words, the cult of equity has certainly taken a hit from continuing bear market sentiment. Third, as highlighted in Investor Relations magazine’s international leader in April, entitled Retirement planning, changes in accounting procedures in the form of FRS17 mean any shortfalls or surpluses of a corporate pension fund have to show up on the balance sheet of the parent company. So regardless of whether equities provide good returns in the long term, in the short term the ups and – perhaps more importantly – the downs have to appear on the books.
Out of equities
Despite this backdrop, it came as a shock when Boots announced last November that it had shifted its £2.3 bn pension fund 100 percent into long-dated AAA-rated bonds. According to John Ralfe, head of corporate finance at Boots, ‘The move is not anti-equity. Rather it is about reducing off-balance sheet risk for shareholders, allowing us to increase on-balance sheet risk through buying back shares and using debt, which is more tax efficient.’ Boots recently completed a £300 mn share buy-back made possible by the pension fund move.
The process began several years ago, before FRS17 sharpened focus on the subject and when the investment community seemed to have forgotten that the value of shares can fall as well as rise. Four drivers affected the move: reducing the risk to Boots shareholders who are backers of the fund; reducing the management fees and costs and fixing the permanent contributions at current levels; and increasing security for the pension scheme members.
Ralfe said that for trustees, the default position should be one of minimum risk to protect their beneficiaries. ‘The investment aim of the Boots trustees is to ensure the value of the assets of the fund is sufficient to pay all pension requirements, regardless of any movements in financial markets.’
So are we all doomed? Should the title of this publication change to Debt Relations magazine? Are UK pension funds really going cold on equities? The stark answer to the last question is simply yes. And the relationship has been cooling for some time. Figures from the UK Office of National Statistics show the proportion of the stock market controlled by pension funds has fallen steadily from a peak of 32 percent in 1992 to 18 percent in 2000. The total value of pension assets invested in UK equities has also begun to decrease from a peak of £353.8 bn in 1999 to £321.1 bn in 2000 (although the fall in value of equities accounts for some of this reduction, as does the rise in the holdings in UK corporates of foreign, especially continental European, pension funds). In the early 1990s a third of the shares in a typical UK listed company were controlled by UK pension funds; by the end of the century just under one in five shares were held by what were once regarded as the backbone of the UK stock market.
But it’s not all doom and gloom. While the UK’s mature pension funds migrate towards bonds, the reverse is happening in mainland Europe. ‘In European countries, excluding Switzerland, the Netherlands and the UK, pension funds are much younger and are these days more comfortable with the short-term volatility of the stock markets,’ explains Robinson. ‘These funds have also been developed in generally lower [than the UK] inflation economies and have traditionally relied on relatively higher yield bonds.’ The culture of bond-dominated pension funds is beginning to change across Europe as yields drop and restrictions on equity ownership by pension funds are relaxed.
This more upbeat outlook was confirmed in a recent study prepared by US-based Birinyi Associates, a stock market research firm. Pension reform and global equity markets suggest that equity funds will show ‘exceptional growth’ over the next decade with much of the new investment going into non-domestic markets. This study of the impact of pension funds in 41 countries found that institutional investors are set to play an even more crucial role in supporting equity prices in the longer term and are accelerating the shift towards global portfolios with greater cross-border investment.
So what are the implications for UK IROs? First, there will certainly be fewer UK pension fund managers to deal with. Second, as the chart suggests, UK shares will increasingly be owned by foreign institutions, in particular from continental Europe. Third, FRS17 may provide a new line of work for some UK IROs; they may have to start taking a closer interest in their company’s pension fund and, as John Ralfe suggests, ‘An IRO will need to be capable of robustly defending the pension fund position to the market.’ And it’s likely that the appearance of an actuarial investment consultant at an IR conference will seem a lot more exciting.
UK IR conference & awards
The implications of FRS17, the bear market and the pension industry in the UK and beyond will all be discussed at Investor Relations magazine’s forthcoming UK Investor Relations Congress, July 17 at Le Meridien Grosvenor House Hotel in London – the same date and venue as our UK IR awards. One session will include representatives from UK and mainland European pension funds, an actuarial investment consultant and a UK IRO. They will examine how changing asset allocation is likely to impact on the future profile of UK shareholders. Do IROs in the UK have the necessary skills and experiences to meet the new challenges of cross-border IR?
For further details contact Andrew Slavin, Investor Relations magazine’s head of conferences: [email protected]
Upcoming Investor Relations magazine events
The UK IR Congress & Awards
July 17, Le Meridien Grosvenor House Hotel, London
Investor Relations – South Africa
August 20 & 21,
Sandton Sun & Towers Inter-Continental, Johannesburg
including the first Investor Relations Magazine South Africa Awards
Investor Relations for Central & Eastern Europe
September 17 & 18, Hyatt Regency Hotel, Budapest
The 2nd Annual AIRA Conference
in association with Investor Relations magazine
September 25-26, The Westin, Sydney
The Amsterdam Conference & Eurozone Awards
October 14-15, Okura Hotel, Amsterdam
The Asian Investor Relations Summit & Awards
November 19, Hotel Inter-Continental, Hong Kong
German Investor Relations in a Global Market
December 9 & 10, Marriott Hotel, Frankfurt
