The big issue

JONATHAN STAPLETON: How will the pensions industry change over the next five years?

RAJ MODY: I see the pensions picture in five years’ time actually being a bedded down version of what we are seeing now. In five years’ time I suspect that many corporates and trustees will want to feel the dust has settled somewhat on the issues that are troubling them.
The key overall issue is simply that pensions are a corporate issue and not just a pensions issue and it was not like that 10 years ago.
Although pensions have always been complicated they were much more tried and tested, they were low profile and they were financially less material.
Today, I think that many corp-orates feel they are in uncharted territory, clearly pensions issues are high profile and they are financially material.
Pensions are now inextricably linked with various aspects of corporate life – such as corporate finance, tax and corporate structure. Pension scheme funding is now as much a question about corporate financing and the questions are around what is the most efficient way for the corporate overall to be financing its pensions arrangements.
Scheme financing has moved on from the black and white issue of the assets in the fund and is now much more about the strength of the employer behind the scheme.
Tax is another area which is heavily influenced by pensions with A-Day being a classic example. It started out as a pensions design issue and ended up being, particularly when you included some of the cross-border regulations that came in at about the same time, as much a tax issue.
Companies also have to consider their corporate structure when thinking about pensions. Firms can minimise Pension Protection Fund levies by structuring their firm carefully and also pre-empt issues around clearance procedures by making the best use of their corporate structure.

JS: Is it going to take long for corporates to get used to all the new flexibilities and rule changes of A-Day?

RM: We should not just look at A-Day in isolation. In the last couple of years we have seen a raft of new guidance, legislation, rules and procedures.
It is quite possible that this body of changes will take a few years to bed down. However, with regards to A-Day, companies and trustees need to be looking at aspects of their scheme such as auto-enrolment, how they provide life cover.
The other interesting A-Day area which companies had to address is executive reward. There are still opportunities for companies to look again at the executive reward picture and look at it from a wealth management perspective – asking broader questions along the line of what is the best way to reward our executives in terms of the balance of short, medium and long-term reward, the balance between certain and variable rewards.

JS: How have scheme deficits had an effect on corporate merger and acquisition activity? Has the presence of The Pensions Regulator complicated things?

RM: There is no question that scheme deficits have brought pensions to the front of the M&A process. I think that a year to 18 months ago there was a sense that companies were worried about the impact that the new pensions rules would have on their M&A activity.
However these worries have proved unfounded and the clearance approach has worked very well. It has worked well as a process in terms of giving companies and trustees certainty around what would happen after the transaction.
It has also allowed all the relevant parties to understand and focus on what the issues are – actually looking at some of the areas I mentioned earlier around corporate structure – and has given both companies and trustees a positive opportunity to gain an under-standing of how deals affect the pension scheme and the position of trustees as creditors from that perspective.
I actually get the sense that dealmakers are learning to live with the new environment and are actually treating clearance as a positive move.
Transaction levels are at their highest since 2000 so the chances are that, while you have to do M&A differently now, it is happening and it is happening with greater clarity and certainty around pensions than might have been the case historically.

JS: The number of providers in the scheme buyout market is increasing substantially. Is there an interest on the corporate side for getting liabilities bought out?

RM: There is increasing interest. But it is one thing to have an interest it is quite another thing to moving that interest forward.
The issue for companies is deciding the relative security and cost of their options before and after a buyout. It does seem that there are going to be an increasing number of options when it comes to a buyout but what you need to look at is whether the arrangement is more secure than it would have been otherwise. π