The pension consultant says many firms are struggling to raise capital as well as having difficulties selling their goods which suggests more and more will follow in the footsteps of Woolworths and MFI and be forced to shut their doors.
If many more firms go bust the PPF would be lumped with a mass of pension liabilities, which would give it only two options, says the former managing director of insurance and pensions at Merrill Lynch. One of which is knocking on the Government’s door.
“The PPF was only really designed to help the occasional pension fund in distress, it was never supposed to provide assistance to a host of broke pension funds. But it could find itself in that position and if it does one of two things will happen, either it shares what it has across all schemes – meaning everyone gets less – or it goes to the Government and asks for additional funding. While the Government is in the mood for cutting cheques maybe Mr Darling will look favourably on a request for a few billion pounds but it’s far from certain. However, if you are ever going to pick your moment to ask for funding, now would be it.”
Konotey-Ahulu says The Pensions Regulator is also in a tricky position now that sponsor companies are facing problems.
“Historically it was typically the pension fund that was in the intensive care unit whilst the company was fit and healthy, in many cases they are both now in the ICU. The Pensions Regulator has to strike a tricky balance because pension funds definitely need more security but at the same time the Regulator needs to make sure the demands of the pension fund do not have the potential to tip the company over the edge. This is real knife edge stuff and it will be interesting to see what the regulator does.”
He says funds are facing a “perfect storm” at the moment – on top of a weakened sponsor company, many have experienced losses across almost all their assets as well as increased liabilities.
To help their cases, funds will need to increase the dialogue they have with their sponsor companies going forward, according to Konotey-Ahulu.
“If people are not buying your products and you do not have reliable funding and liquidity, companies can find themselves in trouble very fast. As such, pension funds cannot assume their sponsor company is necessarily going to be in a position to provide assist over the long-term. Until recently, you could reasonably have expected that Lehman Brothers, RBS, AIG, etc, would always be there but now it’s clear they have survived only with Government help and, in the case of Lehman’s, not at all. Those days are over and assessing sponsor covenant and understanding your sponsor’s plans and how much risk they are taking on their own balance sheet is going to become critically important.”
Diversification has failed pension funds, says Konotey-Ahulu who adds that funds will have to look harder to find good value next year.
“The basic principle of asset diversification really has not worked in 2007/2008 and has, at least for now, been suspended as a working proposition. In 2009, the search for true diversification benefit will mean pension funds will need to be much more discerning and discriminating as they look for returns out by spreading their eggs across several asset baskets. There are still diversification opportunities but the rules have been completely rewritten over the past year. For example manager skill in the Credit markets is going to mean the ability to anticipate and avoid defaults rather than seek alpha returns. The hunt for this type of manager skill is going to intensify in 2009.”
He says trustee boards will have to up their game if they are going to snap up the investment opportunities that present themselves in 2009.
“Next year there will be lots of opportunities but they will come and go quickly and pension funds will have to grasp them immediately or miss them. The problem usually is that trustee boards meet one month but then may not meet again for another quarter. I think going forward funds will upgrade the level of skill on the trustee board and will try to find ways of taking decisions quicker and more accurately.”