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Final countdown

Finance directors have been getting a string of conflicting messages on pensions lately, but their gut reaction to what the financial turmoil means for defined-benefit pensions is likely to be to “get those liabilities off my book”. For all but the bluest of blue-chip firms, private sector final-salary schemes are now entering the last chapter.

Some finance directors may have heard that the Armageddon on Wall Street is actually good for their balance sheet pension liabilities because rising corporate bond yields have wiped out huge shortfalls.

The more optimistic will also be cheered at The Pension Regulator’s decision to backtrack on mortality assumptions. Rather than make all schemes adopt the most up-to-date longevity figures for their final salary pensions, as had been mooted by the TPR, they can now continue to pretend staff who are likely to die at 88 will die at 84.

But if I had a multi-million-pound pension scheme on my books, I would be suspicious that if millions of pounds worth of liabilities can disappear so mysteriously during financial adversity, surely they can reappear with equal ease. In these troubled times, management will be demanding a contraction of DB liabilities, however it can be achieved.

Bulk annuity purchase will likely play a reduced role as a result of the worsening conditions. The ink was barely dry on the biggest-ever deal to date, Pru’s 1bn bulk buy-in of the Cable & Wireless superannuation fund, when markets started going into freefall. The same day that Lehman Brothers filed for bankruptcy, all bulk annuity providers stop offering guaranteed quotes. And while there have been some big deals since, notably TI Group’s Paternoster deal, fewer contracts will be signed until things look rosier. C&W must be breathing a sigh of relief.

Market capacity dictates that bulk annuities were never going to be a cure for all ills, leaving two avenues open to most employers offering DB – closure to future accrual and incentives to members to leave.

Closure to future accrual is yet to kick in but pension consultants are seeing a growing number of employers ready to take this unpopular step. Meanwhile, enhanced cash-equivalent transfers are playing a larger role. Concern over exposure to DB liabilities has already prompted two-thirds of firms offering final-salary schemes to increase financial incentives to deferred members to leave, according to a recent Aon survey.

Recommending acceptance of such offers is one of the most toxic forms of advice an IFA can give, and no adviser worth his corn will be doing so without covering his recommendation with caveats in capital letters.

The potential pitfalls of transferring out have been clarified in spectacular fashion, as anyone who has left a final-salary scheme recently will tell you. Someone who transferred out 12 months ago could easily be sitting on a pension fund worth 25 per cent less than when they decided to take control of their assets, even more if they went for an aggressive portfolio. These people are now facing a steep climb back to the target value on their transfer paperwork.

IFAs who carried out the transfer on the basis that it was against their advice will still have the respect of their clients. Any advisers who have encouraged clients to transfer on the other hand will have some relationship rebuilding to do.

But this collapsing market could work in favour of CETVs. The sales pitch sounds more compelling than it did at the top of the market as investors are now buying into equities at a 25 per cent discount on a year ago. This argument will only stand up for the bravest of investors, but those taking transfers tend to be the sort of people who know their own mind.

However, I cannot see CETVs being widely accepted right now. With talk of recession, the prospects for equity returns remain uncertain. What’s more, until there is a single high- profile figure in the financial services community to announce they have transferred out of their own final-salary pension, the media and public will remain suspicious of employers’ motives for offering inducements to leave.

John Greenwood is editor of Corporate AdviserMoney Marketing


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By Ali Unwin, head of technology sector research

Apple recently announced the highest-ever recorded quarterly net profit ($18bn), with the sale of 74.4 million iPhones helping the company deliver $74.6bn of revenue for the quarter ending December 2014. These sales were largely driven by strong demand for the new iPhone 6 and iPhone 6 Plus. Highlights included Chinese iPhone sales doubling year-on-year and unit growth of 44% in the US — supposedly a well-penetrated market. Apple ended the quarter with $178bn in cash on its balance sheet, having generated a staggering $30bn in free cash flow during the quarter.

At Neptune, we have been long-term believers in the Apple story, and continue to hold the stock in a number of our portfolios based on the company’s long-term growth prospects. This is predicated on our belief that Apple has proved thus far that it can — unusually for a consumer electronics company — maintain high margins for a sustained period of time, even as adoption of new technology slows down and competitors produce similar-specification products.


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