Security of the RO Pension Scheme Fund
Maintaining the security of the pension fund is ROPA's prime and overriding objective. Our main concerns over recent years have been the stability of the Company and the investment strategy adopted by the fund trustees.
By and large, when occupational pension funds fail it is because the employing Company has failed. During 1999 we were concerned at press reports indicating that RO. was to be broken-up or sold-off or simply closed-down. At this time RO plc, not BAe plc, was the named sponsoring company of our scheme. RO plc was by now little more than a shell company. We therefore wanted the parent company to be clearly identified as the underwriter of our fund. We suggested to the trustees that BAe should be identified as the "principal employer" on the schemes trust deeds. They did not take kindly to our impudence in making proposals to them, but within a year the change was made. We now have occasional concerns about BAe. (share value drops by 70%, falls out with MOD etc.) but they are still the UK's largest manufacturing company and should be around for some time.
Also in 1999,we expressed concern to the trustees that the fund's assets were too heavily invested in shares. The trustees did not take kindly to this suggestion either. "You seem to be criticising us" was the reaction. We were. Again, within twelve months the trustees announced that they were transferring 10% of the asset value from equities into bonds.
In our view the new ratio of 65% equities : 35% bonds was still wrong and we continued to demand that the balance should be reversed. It is generally agreed that as a scheme's population becomes "mature" ( i.e. there are more pensioner than employee members) then investment policy should favour bonds. The situation in RO is that there are around 15,000 pensioners to 2,000 employees. Companies however favour equities because the returns are generally higher and consequently they have less to pay. Whilst world stock markets were booming and pension funds were in surplus it was difficult to get employers to accept that mature schemes should be in bonds and not the more volatile equities.
In 2001 equity markets went into decline. This decline deepened after September 11th 2001 and the revelations in the USA about Enron. Even after its "Baghdad Bounce", the UK's FT. 100 Index still shows a 30% reduction in value over the last three years. Some pension funds were less exposed to this fall because they had adopted the more conservative policy of investing more in bonds. One group of trustees, Boots, took the decision in 2001 to sell all of their shares and buy bonds. Their last actuarial review showed a healthy funding surplus and experts suggest that but for the actions of their trustees the result would have been a deficit in excess of £500 million. ROPA wrote to the RO Pensions Manager in 2001 asking if our trustees intended to follow the Boots example. The reaction was "we will look at this in twelve months time". Twelve months later the FT. Index was 1,500 points down.
The promised review has however resulted in a welcome change to investment policy. Over the next five years there is to be a gradual reduction in equity investment and an increase in the bond holdings. The target ratio is 45% equities to 55% bonds. By the time this target is achieved another 20% reduction in equities will no doubt be overdue. We shall therefore continue to press for an investment policy suited to the demography of the schemes' membership. A leading firm of investment advisers recently indicated that a scheme which is closed to new entrants (as the RO scheme is) is on an inevitable path towards bonds.
Finally, on the subject of fund security, we believe that greater pensioner representation on a Trustee Board is likely to encourage their trustee colleagues to adopt a more conservative investment policy. When you are totally reliant on your pension you are less likely to take risks with your pension fund.
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