LONDON - U.K. pension plans are expected to ask regulators to temporarily relax funding-shortfall rules for defined benefit plans following the global slide in equity markets over the past year.
Plan sponsors have become increasingly concerned about their funding positions in the wake of recent upheaval in the equity markets following the Sept. 11 terrorist attacks, according to U.K.-based actuaries.
"Schemes' ongoing funding positions would have been really dented over the last few months," said Raj Mody, an actuary and associate at Bacon & Woodrow, London.
The National Association of Pension Funds is considering asking the Occupational Pensions Regulatory Authority to extend the time limits under which plan sponsors have to make good their funding deficits, said NAPF chairman Peter Thompson.
The government in mid-September started consultations with the local pensions industry about extending the minimum funding requirement deficit correction periods to give pension plans three years and 10 years to reach the 90% and 100% funding levels, respectively. Well-placed sources speculated that at this stage, the new rules are unlikely to be implemented until at least the end of this year at the very earliest.
Local sources say more immediate action is necessary.
According to current OPRA rules, U.K. pension plans that are "seriously underfunded" - at less than 90% in terms of the statutory funding test - have to make up the deficit to 90% in one year. They then have three years to lift funding levels to 100%.
Very large, mature plans that have relatively high equity allocations would have the most difficulty making up funding shortfalls under the rules, he said.
"Even plans that thought they were avoiding any MFR-related problems may be facing one at the moment," said Andrew Green, head of investment strategy for William M. Mercer Ltd., London.
Research published in September by Deutsche Bank, based on figures provided by Bacon & Woodrow, shows a number of large British pension plans with high exposure to equities that are close to or below the 90% funding level.
These companies are include: Vodafone Group PLC, Newbury; Tesco PLC, Cheshunt; and British Telecommunications PLC, London.
The research showed the Vodafone Group Pension Scheme is only 87.6% funded and had an equity allocation of 90%. According to Pension Funds & Their Advisers 2001, the plan has a capital value of L180 million ($264 million). So, in late September, the pension plan represented 0.1% of the sponsoring company's market capitalization. It is generally assumed that a plan sponsor would be able to comfortably meet its pension obligations if the pension plan is smaller than the sponsor's market capitalization. Vodafone's funding position should not be cause for alarm, as the company likely could afford to make good the deficit, said Bob Semple, market strategist at Deutsche Bank, London. Plan officials did not return calls by press time.
The L29 billion BT Pension Scheme presented a very different picture, however. Its funding level is 96.8% and its allocation to equities is 71%, according to the report, and the pension plan represents 71.4% of the sponsoring company's market capitalization. Plan officials did not return calls by press time.
Position at Tesco
The Tesco Pension Scheme is 96% funded, according to the report. No allocation to equities was given, and plan assets were recorded at 7.5% of Tesco's market capitalization.
Tesco spokesman Chris Leake said the L1.3 billion plan had reported a deficit in 1999, which subsequently had been made good. He would give no further details but said a "substantial amount" of plan assets was invested in equity.
Leading U.K. plan sponsors such as International Power PLC, Marks & Spencer PLC and Sainsbury PLC, all of London, are conducting their three-yearly plan valuations and expect figures within the next month.
Karen Hollingworth, group administrator to the L2.7 billion International Power Electricity Supply Pension Scheme, said plan members had been told to expect the scheme to be funded at more than 100%. The last valuation was done in March 1998, when the fund was 103% funded, she said.
The Marks & Spencer Pension Scheme was underfunded at 97% when its last valuation was done in March 1998. John Peachy, group pensions manager for the L3 billion plan, would not speculate on the current funding position. The plan had an equity allocation of 80% in 1998, but it has reduced that position by 15 percentage points and upped its fixed-income allocation correspondingly since the end of last year, said Roger Platt, investment adviser to the plan.
In its last MFR valuation, the Sainsbury fund had a "comfortable" funding margin, said Geof Pearson, secretary to the plan. He would not give details.
OPRA has the power to extend funding programs for individual plans on a case-by-case basis. It also can issue a blanket extension if exceptional economic or financial circumstances trigger a fall in plan assets that might threaten the profitability of the plan sponsor, said OPRA spokesman Nick Edmans.
He said OPRA has not yet received applications from plan sponsors for extensions following the Sept 11 attacks because it is too soon for companies to have prepared the paperwork.
But, he said, a blanket extension is unlikely because the funding rules might change next April, which is when he expects the government to enact amendments to the MFR.