Saturday 26th July 2014
slib33
FRIDAY ANALYSTS TICKER: July 25th 2014 - According to Adam Cordery, global head of European fixed income, Santander Asset Management, and fund manager for the Santander Euro Corporate Short Term and Euro Corporate bond funds, “Pricing of risk assets doesn’t offer much of a margin for error at the moment. And now Europe is starting to go on holiday, market liquidity may get poorer than normal, and any buys today may well have to be holds until September. It is always interesting to note what yields are required to attract clients to financial products. Twenty years ago, bond funds offering yields of 10%+ could generally attract lots of client interest very quickly. However as rates have come down over the years, so the yields clients demand have fallen. Now 4% seems to be the new 10%, he say. Cordery thinks that unfortunately, investors often want today the yield/risk mix that was available last year, so the products that get launched, sold and bought in size may be more risky than people think. “Products with 4% yield will sell well today, but to get to a 4% yield in Euro you need to invest in a portfolio with an average rating of single-B, and that is far from being risk-free. I get the impression the conventional wisdom today is to think that interest rates must surely go up soon and the main risk to bond portfolios is an increase in bund yields. Because of this many investors are buying short-duration products and floating rate notes, perhaps viewing them as a safe choice, almost like cash. It is possible however that these products may yet prove to have a considerable sensitivity to changes in credit market spreads and/or bond market liquidity, and may prove to be no protection at all.” - Commenting on the RBS share price jump, Dr Pete Hahn of Cass Business School, says “It's hard to tell whether the RBS share price jump today is more about relief or optimism. The former is about fewer fines, fewer losses on loans, and fewer costs in a shrinking business and possibly dividends for shareholders. And there's the rub, owning shares (as opposed to interest bearing debt) should be about optimism and long-term growth in dividends. But from a shrinking business? Few would argue that RBS' retail and corporate bank had efficiencies to be gained and cash flow that might be converted to dividends; yet like most banks, RBS' cost of equity remains stubbornly and appropriately above its ability to provide a return on that equity. For shareholders, current improvements should mean dividends in the medium term but a recognition that RBS may lack any merit for new investment and delivering any long-term dividend growth - not good. While many large retail banks are getting safer, in some aspects, and we often speak of them in terms of moving toward utility type models, banks take risks, are cyclical, face competition, have new business challengers, and are simply are not utilities. Investors shouldn't get ahead of themselves here.” - According to the monthly survey held by the central bank of Turkey, the country’s capacity utilization (CU) rate declined slightly to 74.9% in July from 75.3% in June. Meanwhile, seasonally adjusted (SA) CU also declined to 74.3% from 74.7% in June, writes Mehmet Besimoglu at Oyak Yatirim Research. As for manufacturing confidence, the index declined to 109 from 110.7 in May. On SA basis, the index also edged down slightly to 106.4 from 107.2. SA capacity utilisation was broadly stable in 1H14, averaging at 74.7%. This is the same level with the 2013 average. Despite the political turmoil and volatility in financial markets, activity has been relatively resilient. Export recovery & government spending supported production in 1H. Following the elections, public spending relatively decelerated. The turmoil in Iraq also decelerated export recovery from June. Nevertheless, we still expect 3.5% GDP growth in 2014, writes Besimoglu.

Is trustee confidence in managing DB risks waning?

Monday, 23 July 2012
Is trustee confidence in managing DB risks waning? As Defined Benefit (DB) scheme sponsors and trustees in the UK work to put their schemes on a more stable footing amid continued market volatility trustees' confidence in their ability to successfully manage the DB risks facing their plans may be waning, according to MetLife Assurance Limited’s 2012 UK Pension Risk Behaviour IndexSM (UK PRBI).   http://www.ftseglobalmarkets.com/

As Defined Benefit (DB) scheme sponsors and trustees in the UK work to put their schemes on a more stable footing amid continued market volatility trustees' confidence in their ability to successfully manage the DB risks facing their plans may be waning, according to MetLife Assurance Limited’s 2012 UK Pension Risk Behaviour IndexSM (UK PRBI).  

As Defined Benefit (DB) scheme sponsors and trustees in the UK work to put their schemes on a more stable footing amid continued market volatility, scheme trustees’ confidence in their ability to successfully manage the DB risks facing their plans may be waning, according to MetLife Assurance Limited’s 2012 UK Pension Risk Behaviour IndexSM (UK PRBI).   The study of 89 sponsors and trustees analysed how each group viewed 18 investment, liability and business risks that affect their pension schemes, and assessed how well they believed they were managing those risks.

The overall index value of the 2012 UK PRBI,which measures the importance that sponsors and trustees ascribe to each risk, their perceived success at managing each risk and the consistency between the two,remained consistent from 2011 to 2012 at 79 out of 100. However, the Index value for trustees fell another two points year-on-year to 78 in 2012 from 80 in 2011 and 82 in 2012. Conversely, the Index value for scheme sponsors is steadily rising, increasing by two points to 80, from 78 in 2011 and 75 in 2010. These movements, taken together, account for the overall 2012 Index value remaining level.

The drop in self-reported success at managing several key DB-related risks, including Scheme Governance and Inflation Risk, helps to partially explain the inverse relationship of the Index values between sponsors and trustees over the past three years.  In 2012, trustees rated their overall success at managing risks a 4 or 5 (out of a scale of 1-5, with 5 indicating success) 77% of the time, down from 80% in 2011 and 83% in 2010.

“Constant regulatory changes appear to undermine trustees’ confidence, as evidenced by the fall in the reported success of Scheme Governance and Inflation Risk.  Increasing levels of uncertainty being generated by issues such as Guaranteed Minimum Pension (GMP) Equalisation and Solvency II for pension schemes are impacting trustees’ confidence in managing some of the critical risks facing their schemes. Where once there was a degree of certainty, the revisiting of GMP Equalisation by the Department for Work and Pensions now requires that trustees again reconsider and tackle this issue,” holds Wayne Daniel, chief executive officer of MetLife Assurance Limited. 

Funding deficits is the most important risk facing scheme sponsors and trustees for the second year in a row, according to the 2012 UK PRBI. The ranking of Funding Deficits as the most important risk for the second year in a row reflects significant fluctuations in scheme assets and liabilities, mainly as a result of the volatility in equities and rising bond prices. At the same time, schemes may have also seen their liabilities grow due, in at least part, due to corporate bond and gilt yields, and continued uncertainty around the Eurozone.

Scheme sponsors and trustees continue to face unprecedented challenges on the economic and regulatory front. Volatile markets, driven in part by the Eurozone crisis, have demonstrated how quickly and significantly pension liabilities (and funding deficits) can change. "As a result, we expect sponsors and trustees to pay even greater attention to the connection between investment strategies and the risks that impact a scheme’s funding status. Additionally, scheme sponsors and trustees should consider incorporating triggers for de-risking the scheme in order to protect it.,” adds Daniel.

To ensure the viability of their schemes and safeguard members’ benefits, sponsors and trustees, says the report, are continuing to closely monitor the Employer Covenant. This risk ranked second among trustees for the second year in a row, and third among scheme sponsors.  Interestingly, the Importance Selection Rating, or the number of times the risk was selected by respondents when presented alongside other risk factors, for Employer Covenant is rising considerably among scheme sponsors: from 41% in 2011 to 49% in 2012. This may reflect the increased focus among scheme trustees on the Employer Covenant following The Pensions Regulator (TPR) guidance issued in November 2010.

The results of the 2012 UK PRBI demonstrate that scheme sponsors and trustees are continuing, and strengthening, their focus on a handful of key risks.  The overall Importance Rankings for the top four risks remained consistent from 2011 to 2012.

2012 vs. 2011 UK PRBI Overall Importance Ranking

RISK FACTOR                   

2012 RANKING

2011 RANKING

Funding Deficits

1

1

Employer Covenant

2

2

Asset and Liability Mismatch

3

3

Meeting Investment Return Targets

4

4

Measurement of Technical Provisions/Liabilities

5

7

In addition, the range between the Importance Selection Rates for the most important risk and least important risks this year is 66 percentage points, compared to 57 percentage points in 2011. This continues the trend established in the inaugural UK PRBI in 2010. 

Scheme sponsors and trustees continue to move toward a co-ordinated holistic approach to pension risk prioritisation, according to the 2012 UK PRBI. The importance rankings between trustees and sponsors are aligned within one or two ranking spots for all but one risk factor:  Asset Diversification. Trustees rank this fifth in importance whilst sponsors rank it 10th.

More details on the 2012 UK PRBI can be found at: www.metlifeassurance.co.uk/knowledge-centre/research

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