UK- Companies who fail to adopt liability driven investment strategies for their pension funds could face a higher Pension Protection Fund levy in future, Merrill Lynch has suggested.
Speaking at the National Association of Pension Funds (NAPF) conference in Edinburgh today, Gareth Derbyshire, head of the pensions team within Merrill Lynch’s insurance and pensions solutions group, warned delegates of the potential repercussions for pension funds if the PPF went ahead and allowed for investment risk in its levy from 2007 onwards.
“It is very logical that companies who hold more equity, and more equity risk implies a higher levy, may find that becomes factored directly into the risk based levy,” he said.
“In other words, if you don’t adopt an LDI approach you might find yourself paying a higher levy from 2007 onwards.”
Derbyshire said there was a misconception that equities were a good hedge for bond-like liabilities.
“Equities are not a good long term hedge for liabilities, if the equity/bond correlation was positive, that might be true, but as we have seen in the last five years, that correlation has been negative.”
However, Richard Barlow, chief executive of the Electricity Supply Pension Scheme, warned pension funds to be wary of “following the pack”.
“Government should give trustees room to breath and make their own decisions, and recognise that one size fits all solutions won’t fit all. They need to recognise that investment and risk go hand in hand, if they try to eliminate the losers there won’t be any winners.”
He added that trustees should make their own decisions, ensure their solutions were relevant to their own scheme, and remember the benefits of diversification.
The key catalysts for the growing LDI trend had been FRS17 accounting standards, the Pensions Regulator, and to some extent the PPF, Derbyshire said.
These catalysts were unlikely to wane in the near term, he added.
Regarding the Pensions Regulator, he said: “It is conceivable there might be some relaxation in terms of clearance procedures, but to me that seems quite unlikely.”
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