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  #711  
Old 05-25-2018, 03:28 PM
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UNITED KINGDOM

https://www.ai-cio.com/news/ftse-100...time-10-years/

Quote:
FTSE 100 Pension Plans Reach Surplus for First Time in 10 Years
Report estimates that pension plans’ funding status rose to 101% at year-end 2017.
Spoiler:
As of the end of 2017, the FTSE 100 pension plans were in surplus for the first time since 2007, according to a report from UK consulting firm Lane Clark & Peacock (LCP).

LCP estimates the overall accounting position improved to 101% in 2017 from 95%, turning a 31 billion ($41.4 billion) deficit into a 4 billion surplus by the end of the year. It also said it estimates that the surplus figure has improved even more since the end of the year to over 20 billion at the end of April.

“That’s good news, but funding deficits remain and company directors are under ever-increasing pressure to pay more contributions,” Phil Cuddeford, LCP’s head of corporate consulting, said in a release. “They need to balance this demand against the risk of adverse consequences on distributable reserves, credit ratings, or regulatory capital in light of the accounting surplus.”

The funding of the FTSE 100 pensions is ahead of the rest of the UK’s corporate pension plans, however, those have also steadily progressed toward a surplus. The funding level of the 5,588 corporate UK pensions plans in the Pension Protection Fund’s (PPF) 7800 Index rose to 95.1% at the end of April, from 93.1% at the end of March.

The LCP report attributed the funding improvement to three main reasons: increased pension contributions, strong investment growth, and updated life expectancy and inflation assumptions. It said that UK companies contributed 13 billion, which is more than twice the cost of the extra benefits members earned during the year. It also said companies adopted new methods to set discount rates to largely negate worsening financial conditions.

It also said the continuing declines in life expectancy assumptions are good news for company balance sheets, and for companies looking to secure benefits with an insurer, as insurers reflect these trends in their pricing.

“We show clear evidence that companies are increasingly using more sophisticated ways to set the most important assumption, the discount rate,” said the report. “Over the last two years, we estimate companies have used this to improve balance sheets by around 15 billion.”

LCP’s report cited the recent collapses of retailer BHS and facilities management company Carillion as having increased the focus on whether companies are skimping on their pension contributions in order to reward shareholders with dividends. It said that since the two companies failed with “significant pension black holes,” there has been a “quantum step-up” in scrutiny.

According to the report, dividends totaled more than six times the amount companies paid to pension plans in 2017, compared to four times in 2016.

“Despite The Pensions Regulator’s guidance for companies to pay contributions as quickly as is ‘reasonably affordable,’ traditional thinking has often been that strong companies can pay deficits off over longer periods—resulting in lower contributions each year,” said the report. “The fall of BHS and Carillion are all challenging this mindset.”

According to the report, companies continued to take action to manage their pension risk in 2017, with closures to future accrual, liability management exercises, insurance transactions, and investment de-risking. The proportion of assets invested in equities is now less than 25%, compared to more than 60% 15 years ago, said the report.

However, the report warned that the surplus status of the FTSE 100 pension funds could be fleeting.

“On the odd occasions there has been a combined surplus in the last 15 years, market conditions have quickly wiped it out,” said the report. “It remains to be seen if the current surplus is here to stay.”
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  #712  
Old 05-28-2018, 04:41 PM
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NETHERLANDS
DIVESTMENT

https://www.ai-cio.com/news/netherla...estments-coal/

Quote:
Netherlands Metal Workers Pension Fund Pulls Investments in Coal | Chief Investment Officer

Fund says its producers have a grim future as society abandons the fuel as an energy source.
Spoiler:


Pensioenfonds Van De Metalektro has chosen to stop investing in coal emissions companies.
The $55.4 billion Netherlands-based pension fund, which covers the retirement benefits for metal workers, said that coal-only companies no longer have “future-proof operations.” This led to the decision to exclude the stocks.
“That is why we ask companies in which we invest to actively contribute to a reduction in CO2 emissions and a cleaner energy supply,” said Eric Uijen, the chairman of the fund’s executive board, in a statement.
Basing its beliefs on the Paris Climate Agreement, the metal workers’ pension expects that coal will eventually stop being used as a means of energy. It called investments in coal producers “stranded assets” in a news release, where it added that it makes “no distinction” between metallurgical coal (which creates heat for steelmaking) and thermal coal (which generates electricity).
Metalektro plans to reduce the carbon footprint of all of its investments by 25% in 2021. It has been discussing its carbon dioxide stance with energy companies, particularly the top 10 carbon emitters, which exclude Exxon Mobil and Royal Dutch Shell. If the companies will not talk with the fund or do not meet its reduction requirements, they are placed on the fund’s exclusion list.
The fund also requires 10% of its portfolio across all asset classes to contribute to meeting the United Nations’ Sustainable Development Goals code. Pensioenfonds Van De Metalektro also does not invest in tar sand oil or tobacco.

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  #713  
Old 05-28-2018, 04:42 PM
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ALCOA

https://www.ai-cio.com/news/alcoa-co...pension-plans/

Quote:
Alcoa Contributes $500 Million to US Pension Plans | Chief Investment Officer

Spoiler:
Aluminum producer used proceeds from recent debt offering to fund contribution.
Aluminum producer Alcoa Corp. made discretionary contributions of $500 million to its US pension plans using the gross proceeds of a recently*closed debt offering.
“This discretionary funding is in complete alignment with our strategic priority to strengthen the balance sheet, as it reduces near-term pension funding risk using a fixed-rate, 10-year maturity instrument,” Alcoa Chief Financial Officer William Oplinger said in a release. “Further, because the debt increase is offset by a lower net pension liability, it is leverage-neutral and does not impact our 2018 capital allocation strategy.”
The company funded the contribution from a debt offering that closed last week that consisted of $500 million aggregate principal amount of 6.125% senior notes due in 2028. The notes were sold through wholly owned subsidiary Alcoa Nederland Holding B.V. in a private placement to qualified institutional buyers, and to certain non-US investors in offshore transactions.
During its May investor presentation, Alcoa said it would provide $300 million of additional funding into its pension plans during the year, on top of the estimated $450 million in required minimum contributions for fiscal year 2018. That would indicate that the company still plans to contribute another $250 million to its pension funds before the year is out. According to Alcoa, as of the end of 2017, its US pension plans had a funding status of approximately 83%.
Alcoa said it shed approximately one-third of its targeted $300 million in liabilities when the company purchased group annuity contracts and transferred approximately $555 million in obligations, and related assets, of defined benefit pension plans in Canada. As part of the annuity agreements, Alcoa contributed approximately $95 million to facilitate the annuity transaction and maintain the funding level of the remaining plan obligations.
For the rest of the year, Alcoa said it expects to achieve further liability optimization of approximately $200 million, either through discretionary contributions to its pension plans, reducing funded debt in Brazil, or a combination of the two.
In its investor presentation, the company said its 2018 capital allocation framework is to maintain liquidity with a cash balance greater than $1 billion; spend approximately $300 million in sustaining capital expenditures; drive value creation through approximately $150 million in return-seeking capital expenditures; and reduce debt and pension and other post-retirement employee benefits liabilities by a total of $300 million.

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  #714  
Old 05-28-2018, 04:44 PM
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HOSPITALS

https://www.truthinaccounting.org/ne...not-criticized

Quote:
Blame game: Why this accounting rule should be praised, not criticized : News : Truth in Accounting

Spoiler:
An article published in Bloomberg on May 9th highlighted the troubled financial condition of a hospital in northern Mississippi. *As the title, “Not So Great GASB: Accounting Rule Pushes Hospital Near Default,” suggests, the author puts most of the blame on an accounting rule implemented by the Governmental Accounting Standards Board (GASB) that requires public entities to disclose all of their pension liabilities on the balance sheet. The author states that the rule is “creating credit problems for hospitals even though their operations haven’t changed materially” and “they’re making required contributions to state pension plans.”
But saying this accounting standard is the reason for the hospital’s poor financial condition is like blaming your credit card company for your bad credit score while you have a huge outstanding balance on your account. You could argue that you’ve been making your minimum monthly payments, just as the hospital has been making its required annual pension contributions.
Instead of being criticized, GASB should be praised for requiring public hospitals, and state and local governments, to put their pension liabilities on the face of their balance sheets. If anything, I would criticize GASB for taking too long to make this change. The Financial Accounting Standards Board (FASB), which sets accounting standards for corporations, began requiring private hospitals and corporations to report their pension liabilities in 1980.
Four years later, GASB considered requiring the same, but didn’t want state and local governments to have a dramatic increase in their liabilities and a resulting huge decrease in their net positions. As a result, GASB decided to let governmental entities report their pension liabilities slowly over time. You could say that public hospitals have had an unfair advantage in the bond market when they didn’t have to report huge pension debt as liabilities.
In addition to letting governments amortize this balance over 30 years, governments were allowed to delay recognizing benefit enhancements and actuarial adjustments. Each year these increases in the pension liability were amortized and added to the employees’ current service costs and accumulating interest to calculate the government's’ pension expenses. If the government paid the pension expense in full, then no pension liability appeared on its books. The only time a pension liability would appear on the books is if a government didn’t pay the calculated pension expense in full; *then the cumulative deficits would appear as its “Net Pension Obligation.”
The result is most governments reported small or no pension liabilities on their balance sheets, while their actual pension liabilities were in the millions, if not tens of billions, of dollars. Truth in Accounting’s study of state governments’ 2014 balance sheets found that only $80 billion of Net Pension Obligations were reported, while in truth more than $632 billion of unfunded pension liabilities existed.
These pension accounting rules were so convoluted that when Detroit went bankrupt, its balance sheet reported a $1.3 billion “Net Pension Asset” despite the city really having $985 million pension liability.
If a governmental entity was part of a multi-employer plan, as most public hospitals are, then it was almost impossible to determine its share of the liability in its employees’ pension plans. Governmental entities and pension plans were not required to calculate, much less disclose, that information.
Every governmental entity, including each public hospital like the Mississippi hospital, knew it had some liability because its employees were participating in a pension plan and the government entities were paying an employer contribution. Employee compensation plans included accruing pension benefits. Each year employees were earning the right to receive these benefits and the hospital was incurring the related compensation costs and liability. Just because GASB didn’t require every hospital to record its share of the pension plan’s unfunded liability, that doesn’t mean the liability didn’t exist.
The various government employers involved in multi-employer plans seemed to think that they need only worry about making their contributions. Unfortunately, history has shown that even if the governments made the contributions the pension plan actuaries told them are required, the unfunded pension liability was increasing, not decreasing. This phenomenon is due to benefits enhancements, inadequate contributions and periodic adjustments to actuarial assumptions, such as the pension plan discount rates and mortality schedules. *
If unfunded pension liabilities would have been reported on public hospitals’ and government balance sheets, the elected officials and citizens would have known how much money was being charged to the pension credit card and adjustments could have been made.
Some government officials still tell me that they don’t understand why they have to put their pension liability on their balance sheet because, as the Bloomberg article points out, they have been paying their required contributions. *Again, this is like people not understanding why they should look at their credit card balance if they are paying their minimum payments. In fact, it is worse in the case of governments, because elected and employed government officials are not on the hook to pay the balance. Future taxpayers are going to pay the benefits for workers who are retired and not providing any services to those taxpayers.
Now public hospitals and other governmental entities have seen their reported debt go up significantly, which some, like the author, seem to think is unfair. *However, reporting the truth is vital to our democracy. Citizens, including taxpayers, deserve accurate information, so they can be informed participants in their governments’ financial decisions.

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  #715  
Old 05-30-2018, 08:36 AM
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UNITED KINGDOM
VALUATION

https://www.professionalpensions.com...m_term=CONNING

Quote:
Death by discount rate: The fundamental flaws of the accounting approach to pension scheme valuation

Controversy over the discount rate used to value defined benefit pension liabilities is nothing new but, as Tim Wilkinson and Frank Curtiss explain, the flaws may be more serious than many realise.

Spoiler:
The creation of an expert panel to review the valuation of the Universities Superannuation Scheme (USS) has kept the scheme open, at least for the time being. But for defined benefit (DB) provision generally, the picture is grim. No FTSE 100 company now has a DB scheme open to newcomers. BT and British Airways have recently closed large schemes citing, as did the USS before its reprieve, the impact interest rates have had on deficits.

Discount rate controversy is nothing new. One rarely, if ever, hears people in the industry say that using the yield on high quality corporate bonds (as accountants do), or a rate just above gilt yields (as most actuarial valuations do) is without problems. But the flaws are more serious than many realise. The theoretical case for these rates is acutely defective. They have wrecked company balance sheets, caused the misallocation of billions of pounds of corporate resources to plug illusory deficits, distorted scheme investment strategies, and played a major part in the collapse of private DB provision. If a disaster even a fraction of the size had befallen the state pension system, governments would have been voted out of office. It's a national scandal.

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Sometimes, good things come in small packages….
The rot set in in November 2000, with the publication of the accounting standard FRS 17, the spirit of which is still with us today in the form of IAS 19 and FRS 102. Both these standards require liabilities to be discounted by reference to ‘high quality corporate bonds'.

Plenty of people spotted there was a problem. The Confederation of British Industry (CBI) said FRS 17 would undermine final salary schemes, while Peter Thompson, who was chairman of what is now the Pensions and Lifetime Savings Association prophesied, correctly, that it would "drive many employers from providing defined benefit pensions".

Sir David Tweedie, the chairman of the Accounting Standards Board (ASB) while the standard was being developed, acknowledged the discount rate was an issue. Interviewed in 2006, he said the corporate bond rate was chosen because: "Everyone else around the world used it. We had given up by that stage; we had spent two years trying to find a discount rate."

It's not surprising that the ASB had difficulty finding a suitable rate. In reducing an entire pension scheme to two numbers, too much information has to be thrown away. The best tool for monitoring a pension scheme is a cashflow forecast. The conversion from forecast to balance sheet has to be done, but it should be done with due respect to the principle of neutrality. If a scheme has healthy cashflows in perpetuity it is simply bad accounting to do the arithmetic in such a way as to produce an illusory deficit.

With deficits being merely an artefact of measurement, rather than a reflection of underlying economic reality, the unfortunate outcome was poor decision-making. Some schemes altered their asset mix in an attempt to avoid volatility or hedge liabilities, turning away from investments that would almost certainly have given better returns in the long run. The resulting demand for a finite supply of bonds drove down yields, and hence discount rates, in a vicious circle that increased the (already overstated) liabilities. Even David Tweedie described this result as "daft".

The time value of money is an entity-specific, or even a project-specific, concept. It only makes proper sense when chosen relative to the time preferences of the entity concerned, and after due consideration of the alternative uses to which the money could reasonably be put. The most suitable choice in the case of a pension scheme is therefore the best estimate of its future investment return; and this also produces the result that corresponds most closely to a cashflow forecast. If a scheme is required to pay 100 in a year's time, and only has 91 today, it will still be able to meet its liability if it has an investment return of 10%. Divide the 100 liability by 110% and you get 91, so the scheme is fully funded.

A discount rate based on investment return was considered by the ASB, but rejected8. In fairness, there are complications. Future returns have to be estimated, and this introduces the opportunity for manipulation. Schemes may also be tempted to take on too much risk in order to suppress liabilities - the opposite error from over-investing in bonds. These are reasonable objections, but ultimately they fail. Society would have been better served by having auditors and regulators spend their time policing over-exuberant return assumptions than from having them preside over death by discount rate.

A factor commonly cited in support of IAS 19 is consistency - all companies have to use a similar rate. Because schemes do not all follow similar investment strategies, however, the additional cash they will need from their employers in the future will differ widely, even for those with the same deficit. Therefore, the IAS 19 rate is also inconsistent with the concept of a true and fair view, since IAS 19 liabilities do not legitimately represent a real future obligation to pay.

Another productive way of looking at the problem is to work backwards (as did First Actuarial's Hilary Salt and Derek Benstead in their September 2017 report for the UCU, Progressing the valuation of the USS) - asking questions such as ‘for past service, at what break-even discount rate will the liabilities have the same value as the assets?' and ‘for future service, at what discount rate will future inflows have the same present value as future service outflows?'. Though less suited to financial statements, these calculations can be an extremely useful tool for planning. If the break-even rates are less than the likely rate of future investment returns, there is no need for additional payments into the scheme.

Turning to actuarial valuations, the scheme funding regulations are superior to accounting standards, since they allow the rate to reflect the return on scheme investments. In practice however, according to data from The Pensions Regulator (TPR), the median scheme uses a rate of about 1.1 percentage points above 20-year gilts.

There are a number of reasons for this. The scheme funding regulations require assumptions to be chosen prudently. The regulator is also of the view that the rate should be lowered where the employer covenant is weak. The logic of the latter policy, however, is highly dubious. Boiling a pension scheme down to two numbers already means asking the discounting calculation to do more heavy lifting than it is really capable of. The starting point for a discussion on deficit correction should be a cashflow forecast, not a shortfall inflated by the risk of employer failure.

The result is that trustees, under pressure from TPR, have settled into overly prudent practices. A long run return one percentage point above the 20-year gilt rate, which is itself hovering just above historic lows due to quantitative easing, is completely at odds with what trustees believe when they are devising investment strategies, appointing investment managers, and setting benchmarks. For example, despite the bursting of the dotcom bubble in 2000, and the financial crisis of 2008, the total return on the FTSE All Share Index from January 2000 to April 2017 was 4.6% per annum.

Returning to the USS, according to its reports and accounts for the year ended 31 March 2017 it has achieved a return of 12% per annum over the last five years, while the total value of the fund, net of contributions and benefits, increased from 34.2bn to 60.5bn between 2012 and 2017.

Yet here - almost unbelievably - is an extract from the 2017 report and accounts: "…the deficit on the technical provisions basis … has increased from 5.3bn in 2014 to 12.6bn at 31 March 2017. The investment performance … has not outweighed the effect of the fall in discount rates which has led to the liabilities increasing at a faster rate … over the period."

There is an elephant in the room. What we are witnessing is not prudence; it is prudence gone mad.

First Actuarial, on behalf of the Universities and Colleges Union, has developed a USS cashflow forecast, and also calculated the scheme's break-even discount rates of the kind alluded to earlier. The results are striking. Despite its supposed 12.6bn deficit, at current contribution rates the scheme can pay benefits until at least 2068 with virtually zero reliance on either capital gains or investment income. Furthermore, the break-even discount rates for both past and future service are well below the expected returns on equities and property. On any reasonable calculation, the USS is in perfect health. The biggest risks it faces are bad accounting and poor regulation.

Fortunately, there are signs that the industry might be receptive to change. Michael O'Higgins, who was chairman of TPR from 2011 to 2014, is open to the idea that cashflow forecasts might be a way forward, writing in Professional Pensions that they make it "much plainer what incremental investment return would be needed to close any cash flow gaps, and trustees and employers could together consider whether any additional investment risk to achieve that increment was worth taking, or whether additional contributions would be preferable".

Perhaps the elephant is visible after all. But changes to the accounting and regulatory framework need to be made quickly, while there is still something left to save.

Frank Curtiss is the immediate past president of the ICSA and the former head of corporate governance at RPMI Railpen. Tim Wilkinson is the former chief accountant at RPMI Railpen


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  #716  
Old 06-13-2018, 07:45 AM
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UNITED KINGDOM
WORKCHAIN
FRAUD

https://www.ai-cio.com/news/recruitm...kers-pensions/

Quote:
Recruitment Firm Staff Posed as Temps to Opt Workers Out of Pensions
TPR says the company tried to deny workers’ pensions to avoid benefits payments.


Spoiler:
Senior staff at UK recruitment firm Workchain have pleaded guilty to impersonating temporary workers in order to opt them out of the company’s pension plan, according to The Pensions Regulator (TPR).

TPR said Workchain owners and directors Phil Tong and Adam Hinkley encouraged five senior employees to get the temporary workers out of the pension so the company could avoid having to make payments on their behalf. It also said financial controller Hannah Armson, human resources and compliance officer Lisa Neal, and branch managers Martin West, Robert Tomlinson, and Andrew Thorpe conspired to opt workers out of the National Employment Savings Trust (NEST) pension using its online system.

“Workchain’s directors saw denying their temporary workers pensions as a quick and easy way to save the company money,” Darren Ryder, TPR’s director of automatic enrollment, said in a release. “Both they and their senior staff thought nothing of misusing NEST’s online portal. Thanks to the vigilance of NEST, their attempt to cheat the automatic enrolment system failed.”

TPR, along with the Employment Agency Standards Inspectorate, Derbyshire Constabulary and Nottinghamshire Constabulary launched a joint investigation into Derby-based Workchain after NEST reported concerns about Workchain to TPR in May 2014. NEST is a defined contribution workplace pension that was established to facilitate automatic enrollment as part of the government’s workplace pension reforms under the Pensions Act 2008.

TPR prosecuted Workchain, the two directors, and five senior employees for unauthorized access to computer data, contrary to section 1(1) of the Computer Misuse Act 1990. TPR said it is the first time the regulator has launched prosecutions for the offense.

All of the defendants pleaded guilty to the offense when they appeared at Derby Magistrates’ Court. The judge committed the case to Derby Crown Court for a sentencing hearing on June 28.

A conviction for computer misuse carries a maximum sentence of six months’ imprisonment, and/or an unlimited fine in a magistrates’ court, and two years’ imprisonment, and/or an unlimited fine if the case is committed to the Crown Court.

“Automatic enrolment is not an option,” said Ryder. “It’s the law and the law is clear—no one can opt a worker out of a pension scheme, even if the worker agrees. Those who try to avoid their pension responsibilities in this way face prosecution.”

Tags: Adam Hinkley, pension, Phil Tong, The Pensions Regulator, UK, Workchain


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