Seeking Alpha

Leo Kolivakis'  Instablog

Leo Kolivakis
Send Message
I am an independent analyst with a Master's in Economics from McGill University and over ten years experience in the buy and sell-side. I was a senior investment analyst at two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec (Caisse) and the Public... More
My blog:
Pension Pulse
  • Pension Black Holes Set to Explode?

    The Times featured an article by Jane Bradley, Pension black holes could swallow growth:

     

    The recession may be almost over, but the nightmare effects of the market fluctuations of the past two years are only just starting for Scotland’s pension funds. It emerged this week that the public sector is to be hit by a £4 billion gap in Scottish council pensions, with some funds losing as much as a fifth of their value.

    Luckily for civil servants, any shortfall in the amount needed to provide them with a guaranteed amount in their pension pots has to be made up with public money.

    The private sector is unable to tackle its problems by dipping into government coffers. In the past month, telecoms giant BT has announced plans to tackle its £9 billion pensions deficit, while BAA, which owns Edinburgh, Glasgow and Aberdeen airports, made a £217.8m exceptional charge relating to its final salary pension scheme.

    On a smaller scale, the Kinross-based textiles firm Dawson International is this week expected to announce a black hole in its pension scheme along with its annual results. Current pension liabilities are believed to be around £7m, but next week is likely to see that figure more than double as the valuation is reassessed.

    Dawson said in a statement last month that the increase in liabilities was due to lower corporate bond yields and increased estimates of life expectancy. Many companies also believe that the pensions regulator looks at the problem from a worst-case scenario perspective, pushing pension trustees to be conservative in their estimates. Dawson’s management is in talks with the pension fund’s trustees and hopes to announce a revised recovery plan in the next few months. The problem is that Dawson’s pension scheme has 3,500 members, but only about 100 are paying in anything.

    Dawson, which manufactures cashmere and knitwear and has a home furnishings arm, is looking for growth in the form of an acquisition in the US, which the company admits could be delayed by the pension fund wrangle.

    In a period where expansion and investment is much needed, any further blows to company balance sheets are not welcome. But one thing is for sure: this problem is not going to go away.

    Standard lift Benefiting from the downfall of company and state final salary pension schemes are those life and pensions companies that offer defined contribution policies.

    One such firm is Standard Life, the market leader in the corporate pensions sector. It is due to report its results this week, with analysts forecasting a near 30% drop in operating profit on a European embedded value basis (NYSEARCA:EEV)[which includes the future income expected from current policies], to £933m.

    Comparing the performance of insurance companies is tricky, with many having moved to the International Financial Reporting Standards (IFRS) measure, which recognises future profits from new business.

    The Edinburgh-based Standard Life last month issued upbeat business figures for the final quarter of 2009. UK sales were up 38% in the final quarter on a year earlier, although a lower average market level meant the overall 2009 sales figure finished 10% down on the previous year.

    Since his succession to the post of chief executive at the turn of the year, David Nish has embarked on a policy of accelerating the strategy put in place by Sir Sandy Crombie, his predecessor, rather than making radical changes, and he is expected to reiterate Standard Life’s focus on the UK markets.

    The strategy is in stark contrast to that of Prudential, which last week announced plans for the $35.5 billion (£23.4 billion) purchase of the American insurer AIG’s Asian life insurance arm, while Aviva has made it clear that its focus is on the European markets.

    Of course, Standard Life will not forget its own overseas markets, particularly its long-established Canadian business.

    Although it may seem to be out on a limb in its sector, the argument that the UK market is saturated appears to be on shaky ground when you consider that more companies are moving away from the unaffordable final salary pension schemes and towards defined contribution versions, a stream of potential new business for Standard Life. At least someone is happy.

    Ports in a storm It wasn’t exactly a massive shock. If a consortium snaps up a 27% stake in a company, there is always a fairly strong chance that it will want more.

    So when Forth Ports admitted it had received such a bid — in fact, two of them — in an announcement sneaked to the Stock Exchange after close on Friday, nobody was too surprised.

    The European Infrastructure Fund of Australia’s Babcock & Brown bought a 20.4% stake in the company in January 2008. The fund, now called Arcus Capital, has joined forces with privately owned Peel Ports and Rreef, a fund managed by Deutsche Bank, to form bidding consortium Northstream. The other two organisations own around 3% of the shares.

    The bid is not technically a hostile one, but it would be fair to say that Forth Ports is feeling quite hostile to the idea, while Northstream also sounds slightly peeved.

    The consortium has made two offers — one of £12.85 and a higher one of £13.40 — which Forth Ports rejected as too low.

    The company claims that its property assets are undervalued and Northstream’s bid does not reflect a possible return to form. A fair argument. But Northstream is not a naive bidder. Already a significant shareholder in Forth Ports, the consortium presumably knows every nook and cranny of the company.

    I predict that, while Northstream has not said that its last offer is a definitive final bid, it is not likely to up its price much further. It insists it will consider a bigger offer if it finds “additional areas of value”, but its already close relationship with Forth makes that unlikely.

    Forth Ports needs to decide whether it is calling Northstream’s bluff in a bid to squeeze out more cash — or whether it really wants to remain independent. Could be an interesting game of chicken.

    Meanwhile, the Irish Times reports that one of the country's leading trade unionists has accused the Government of plundering the National Pension Reserve Fund to appease zombie banks:

    The Government is deliberately cutting pay and allowing unemployment to rise in a bid to drive down private sector wages, Irish Congress of Trade Unions and Siptu president Jack O’Connor told delegates at the Sinn Féin ardfheis in the RDS today.

    He said social cohesion in Ireland had been sacrificed on the “altar of appeasing the financial markets in the interests of rebuilding bondholder confidence,” and added that the country had swapped subservience to British rule to that of the financial markets.

    A guest speaker at the ardfheis, Mr O’Connor congratulated the party in its role in successfully concluded talks on devolution of policing and justice to the power sharing Executive in the North.

    “It is a tribute to your political leadership and skills and to those of the other party and Government leaders involved that this vital part of the architecture of the Good Friday and St Andrew’s Agreements is close to completion.

    “It is also necessary because it is critical to ensure that there will be no return to the atrocities and violence which have so marred the past and which, fortunately, only a misguided few appear determined to repeat.

    “We in the trade union movement are steadfastly opposed to any course of action that threatens the lives and welfare of citizens and those tasked with their protection.”

    He accused the Government of following policies that were aggravating, rather than addressing, the current economic, fiscal and banking crises.

    The Pension Reserve Fund was being “plundered to appease the insatiable appetites of the zombie banks” he said.

    To combat this he said the trade union movement with embarking on “an intensive campaign of industrial action to leverage a fair agreement”. On Monday Ictu will meet to discuss the next stage of escalation in its campaign against the public sector pay cuts introduced in the Budget.

    “Quite apart from any dispute about public service pay it is quite simply mind-boggling that a Government faced with the requirement to do more with less refuses to engage with the trade union movement in this regard.”

    On Thursday, I took the train to Ottawa and caught up on some reading. I read an excellent article in the February 8th issue of Forbes magazine on the global debt bomb (a must read) and also read Absolute Return Partners' March letter on the retirement lottery from which I quote:

    For all the reasons mentioned above, the P/E bear market which has been running since the spring of 2000, is likely to continue for several more years. This doesn’t mean that you cannot hold equities in your portfolio. There will be periods where equities do just fine. However, it does mean that a buy and hold strategy is likely to yield very disappointing returns.
    When it comes to pensions, disappointing returns and exploding liabilities are a recipe for disaster. So while many pension funds, including Norway's Government Pension Fund, performed well in 2009, the next few years will be far more challenging. The media's focus remains on sovereign debt and Black Swans, but the real worrisome trend is what I have dubbed the Black Sloths festering around global pensions. When these black holes explode, they will swallow growth for decades.
     

    Mar 07 2:42 PM | Link | Comment!
Full index of posts »
Latest Followers
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.