In 1988 the Victoria & Albert Museum ran an advertising slogan “An ace caff with quite a nice museum attached”. To update and translate the slogan you could say that some companies are in danger of becoming known as “An awful pension scheme with quite a good business attached”.
Pensions have emerged as one of the big issues facing corporates today. And the impact will not diminish quickly. Any major financial transaction that a company is contemplating now has to be considered from the pension angle as a large part of the strategic planning. This does not mean that pensions will necessary alter or prevent every action, but a wise corporate would discount the pension risk. We have already seen that mergers and acquisitions have fallen because of fears over the unknown and unquantifiable cost of filling in the pension black hole. Treasurers know that other examples abound – debt management and taxation structures are just two aspects. Plus, of course, there is the little matter of running the pension funds themselves – a task made no easier by the introduction of new laws from the government aimed at stiffening the resolve of any board which feels that the pension burden is becoming too much.
The pension problem and the presence of the pension regulator (who is due to write in a forthcoming issue of The Treasurer) means that pensions, however unwelcome, are likely to stay high up the corporate agenda. And that presents both a challenge and an opportunity for the treasury profession. Because at the moment it is not obvious who in the company should be in charge of the company’s overall pension strategy. Perhaps not surprisingly, those involved with the treasury profession are beginning to put forward treasurers as the financial professional best placed to have the vision to see where pensions are touching company plans and the technical skills to understand, explain, communicate and implement the sophisticated solutions which corporates will have to take on board. Certainly the treasurer’s interest in the subject, as witnessed for one in the editorial coverage in this magazine, is rising sharply1. The challenge is that treasurers looking to seriously involve themselves with pensions may have to update and broaden some skills, but that should not be too onerous.
A few years ago treasurers may have looked askance at taking on the role of championing the corporate pension, but that was in the days when pensions seemed to be the sleepy backwater. Any such hangovers don’t apply these days. Treasurers are ideally equipped to lead the corporate pension challenge; they should do it.
1. See Forging the pension trustee p18, A flea-bite p22, The right balance p26 and Technical Update p52.
PETER WILLIAMS
Editor
Treasurers should look at emerging issues Business and financial issues are emerging where treasurers can make a valuable contribution to their organisations, according to Stephen East, Group Finance Director, Woolworths Group. East, who is also Deputy President of the Association of Corporate Treasurers (ACT), said: “It is possible to take the financial skills and the skill set that are so important to the treasurer and apply those skills in another area.”
How should treasurers be dealing with the impact of high energy prices?
In the last few years inflation has crept up and fiscal deficits soared, yet the bond market has allowed yields to fall and credit spreads to narrow. The data does not support many of the arguments put forward to explain Alan Greenspan’s “interest rate conundrum”. The answer to disappearing bond market vigilantes and the interest rate conundrum may lie in monetary policy.
Treasurers need to check that their funding policy and interest rate risk management guidelines are up to date and in line with current business objectives. Treasurers are in a position to define and manage funding and interest rate management strategies which are optimal in respect of the profile of the business. The last few years have seen strong levels of liquidity and a good appetite in the market for funding, so companies should look at the mix of funding options available to ensure that they are taking full advantage of current conditions.
At this time of year, as the build up to Christmas gets under way, it is hard to switch on the TV or open a newspaper without seeing an advert for Woolworths. One man who will be watching the Woolworths’ ads with more interest than most is Stephen East. As Group Finance Director he will be paying even closer attention to the sales figures. East only joined Woolworths a few months ago, but he gives the impression of a man who has firmly grasped the essentials of the role of the Group Finance Director at one of Britain’s best known stores and best loved retail brands.
The Pensions Act 2004 created the Pensions Regulator and the Pension Protection Fund. The former told trustees to begin to think like any other unsecured company creditor – in other words like a banker. The latter was required to base 80% of its levy on a risk basis of assessment. At least initially, risk will be measured by the scale of any deficit and a company’s creditworthiness. Credit risk mitigation techniques include funding, document enhancement, third-party financial support and the use of market instruments.
The Pension Protection Fund Board (PPFB) is proposing that the levy on eligible companies should be risk-based. The proposals ensure that the greatest levy is imposed on the schemes that pose the greatest risk to the Fund. The cost is based on the price a company would have to pay to shut down a scheme and walk away from its pension obligations. A scheme has to satisfy several conditions but the PPFB has already agreed that several schemes can enter assessment periods.
The Pensions Act 2004 includes moral hazard provisions to reduce the risk of pensions schemes falling into the new Pension Protection Fund. The Pension Regulator has the power to issue a contribution notice to say a person is liable to pay the full s75 debt. The s75 debt triggers a statutory debt on an employer when it stops participating in a multi-employer scheme; the debt is a share of any total funding deficiency in the scheme. The power of the Regulator has major implications for employers.
Under IAS 39 Financial Instruments: Recognition and Measurement there is a disconnect between the accounting and economic reality. A fundamental issue is that derivatives which guarantee a worst case rate but allow some element of participation often fail the strict criteria of hedge accounting.
Problems encountered by treasurers include RPI-linked derivatives, the derivative-on-derivative rule, currency swaps on net investment hedges, the private equity fund and written options.
Liquidity management is vital for both corporates and banks, but there are differences. The key difference is the strict regulatory control regime which applies to banks. The banks desire to constantly seek to obtain diverse sources of funding has led to opportunities for the corporate sector and while flexibility is vital for treasurers there is potential value in devising a deposit strategy.
The euro and the internet have been key drivers changing the cash environment. After in-country cash pooling, many multinationals are now examining centralised payments. Centralised payments reduced Dana’s bank charges by 30%. Tax is a major consideration for both cash ooling and centralised payments.
Chairman of the panel Matthew Hurn introduces the categories and the nominations for this year’s Deals of the Year.
Secondary bond market pricing
The FSA is investigating whether the secondary bond market is sufficiently transparent as regards pricing. Is there sufficient price information available pre-trade along with firm price quotes and is there sufficient post-trade data available so that market participants can assess market levels and activity?
A growing trend in the treasury recruitment market over the last 18 months to two years has been a marked increase in demand for treasury professionals who are also qualified accountants and for newly qualified accountants who are looking to make a move from finance into treasury. As this trend continues unabated, it is worth asking the question: is it a fad or is it here to stay?
