FTSE Top 100 Pensions Show a Funding Deficate
Pension funds of firms listed in the FTSE 100 stock index are back in the red after big annual swing in funding levels the largest since 2002.
Actuarial group Lane Clark & Peacock (LCP) found that the pension funds had a net deficit of £41bn in mid-July.
This compared with a £12bn surplus in mid-July 2007, which had been the first surplus for five years.
But the report said that the deficit could have been far worse but for firms re-stocking their pension schemes.
‘Volatility’
The actuaries said that the past year had been one of the most remarkable in the 15 years in which they had been producing their annual report.
“Not only have we had fears of rising inflation, which has driven up the liabilities of pension funds and the amounts companies need to hold, but the stock markets have been volatile, and recent falls have reduced the value of the assets,” said Bob Scott, a senior partner at LCP.
Last year’s ’surplus’ lulled people into a false sense of security
Dr Ros Altmann, Pensions expert
The position could have been worse, but for these companies pumping nearly £40bn into their pension schemes over the past three years and taking some steps to reduce risks.
The analysis by LCP suggests that the pension schemes of big firms quoted on the stock market are in an unhealthier position than final salary schemes generally.
Each month the Pension Protection Fund publishes an analysis of their financial position of nearly all 7,783 such schemes in the UK, which are mainly in the private sector.
In June they had a collective surplus of just £8bn, down sharply from £53bn at the end of May and far worse than the position a year ago when the schemes enjoyed a surplus of £130bn between them.
The PPF said 71% of schemes were in deficit while 29% were in surplus.
Warning
Mr Scott said that the brief period of surplus until early 2008 had allowed some companies to take the opportunity to cut down on their pension risks, by offloading their schemes or investing less in shares.
But he was keen to give a warning about the future for pension funds.
“No sooner have companies breathed a sigh of relief about returning to surplus but they are back to multi-billion pound deficits,” he said.
“With a possible recession looming and the threat of further regulatory intervention, the outlook for continuing defined benefit provision seems rather bleak.”
Dr Ros Altmann, a former government adviser on pensions, commented that the LCP report was worrying reading.
“Last year’s ’surplus’ lulled people into a false sense of security but was probably an illusion,” she said.
“The research shows pension contributions fell from £13.4bn to £13.1bn over the year and suggests that most companies have not done much to reduce their pension risks.
“It is inevitable that employers will keep on closing schemes to both new and existing members, especially in the face of so much uncertainty around the funding and costs,” she added
End Of Mortgage Deals Could Mean Huge Hikes For Homeowners
A recent report has shown how many homeowners in the UK are set to be faced with crippling rises in their mortgage repayments as a result of their special mortgage deals, such as cheap fixed rate loans, coming to an end.
Once the mortgage deal expires, homeowners will either have to remortgage to find a more affordable deal or will have to move on to their lender’s standard variable rate (SVR). The SVR can be very expensive, but on the other hand finding an affordable mortgage elsewhere is becoming increasingly difficult.
Even if homeowners do find another mortgage deal to switch to, they will most likely have to pay expensive mortgage arrangement fees, which can run into thousands of pounds in some cases. Almost a million homeowners are expected to face mortgage repayment hikes of up to 40% if they have to switch to their lender’s SVR, and those set to be affected included younger homeowners who purchased their homes within the past couple of years and those that took out 100% mortgages.
One broker said that the situation was very difficult, stating: ‘In the old days, competitive mortgage rates were typically available to anybody with more than five% equity. Now to get the best rates you need 25% or more.’ Another said: ‘There is a growing number of borrowers for whom there is little choice. They will simply have to pay more.’
However, one official said that some may prefer to switch to their lender’s SVR, stating: ‘The advantage of the SVR is that there is no fee to pay - and with some fixed and discounted deals coming with fees of about £1,000 or more, it is easy to see why some borrowers prefer their lender’s SVR for now. The idea is that once a competitive fix or discount becomes available the borrower can then move on to that without paying a penalty or having to give any notice.’
Credit Cards Offer Ease and Flexibility
Over recent years credit cards in general have received a lot of bad publicity, and have been blamed for adding greatly to the UK’s personal debt mountain, with high interest rates and various charges being blamed for consumers falling into debt and being unable to afford their credit card repayments. Credit card fraud levels have also resulted in bad press for credit cards over recent years, and there is no doubt that many people have got themselves into a financial pickle as a result of overspending on their cards or failing to take care with their cards and account details.
However, one industry professional has recently stated that despite this bad press credit cards do still provide consumers with a very useful financial tool, offering ease, flexibility, and convenience, and enabling consumers to manage their finances more effectively. However, he also said that it was important for consumers to be sensible and responsible about using their credit cards and making repayments in order to avoid spiralling debt levels.
The official, from Sainsbury’s Credit Cards, stated: "A credit card is, despite press comment to the contrary, an incredibly flexible and user-friendly way of managing your finances. In terms of spending responsibly, if you’re looking to buy something for £1,000 - a piece of furniture…or a couple of white goods - this weekend…the card gives you the flexibility of making that purchase…and paying it off when you get paid."
He also said that the global credit crunch was unlikely to stop many consumers from spending money, which has been backed up by recent data that showed nearly half of consumers were not going to cut back on spending. However, an official from the British Banker’s Association said that whilst people spent more on credit cards in May repayment figures were lower than expected: "People spent more on credit cards, but repayment levels were lower than expected in May."
EDF Raise Prices For Domestic Customers
EDF Energy has announced it is putting up gas prices by 22% and electricity prices by 17% for domestic customers.
EDF have blamed the increase, which comes into effect on 25 July, on record wholesale energy costs.
Energy companies have been expected to raise the costs of utility bills this summer, as wholesale prices have been rising.
EDF is the first of the major suppliers to raise prices this summer but others are expected to follow suit.
The company said it had been absorbing higher costs over recent months but it now needs to pass on costs to domestic and small business customers.
Customer Savings Set To Be Safer In UK Banks
Chancellor Alistair Darling has proposed new measures to protect savers in the event of a bank falling in financial difficulties.
The plans are intended to increase public confidence in the banking system following the near collapse of Northern Rock in September last year.
As part of the plans, the threshold of deposit guarantee is expected to rise by £ 35000 to £ 50000.
Any changes will come into force in autumn or early 2009.
The chancellor has submitted its proposals in writing to the House of Commons, in preparation for a consultation period.
The measures are not set to costs the banks cash in advance, which only be addressed if something goes wrong.
Need for Speed
It calls for an increase in the current system of deposit protection to be changed after the problems in Northern Rock led to a run on the lender with customers lined up to withdraw their savings.
If a bank run into difficulties, the words of ‘current system means that it may take weeks or even months before getting the savers their money.
Despite saying that banks would not have to put immediately into a cash compensation fund, the Treasury is keeping options open and could insist on pre-financing in the future, whether it was appropriate.
However, the British Bankers Association (BBA) has claimed that up front payments into compensation fund could bind capital and would be a further drain liquidity on the already stretched credit crunch.
“It ‘important that people can quickly reach their cash”, Angela Knight, BBA, told the BBC.
Ms. Knight said that banks had always and would continue, to pick up the cost of the system.
He added that there was a strong banking sector in the UK, but that the refund of deposits should be given priority if a bank went under.
In its proposal, the chancellor said the government was committed to savers to obtain at least a portion of their funds “within seven days of a bank to strike problems with the balance paid in the” after a few days “.
‘Vital’ situation
During the crisis Northern Rock, many savers questioned whether £ 35000 was a sufficient threshold in terms of compensation.
The National Consumer Council (NCC) repeated concerns as on finding out the the £50000 figure had been chosen.
Jill Johnstone spokesman said the NCC was concerned about the people who would still lose, although the Financial Services Authority (FSA) is to study ways to cover those whose savings are greater than the limit set for compensation.
However. Ms. Johnstone has welcomed the plan for quick payment of compensation.
“It ‘much better that the situation is currently,” he said. “A bank account is so vital to everything we do in our lives.”
‘No guarantee’
Only the document outlines the issues of consultation and so changes could be made in the coming months for the plans.
The system was amended to facilitate the crisis Northern Rock
Mr Darling said: “No regulatory system can or should prevent the failure of each institution, but we must do everything possible to prevent problems that could pose a wider threat to stability”.
A large part of 167 pages report goes into detail about how you’re planning to prevent another scenario Northern Rock.
There will be consultation on whether banks that receive a bail-out by the Bank of England should have declared this immediately.
The proposal also seeks to bring construction companies in a scheme that allows the authorities to take control of a financial institution if it is to be judged and in the absence of other options are insufficient.
Conservatrice Treasury spokesman Philip Hammond welcomed the initiatives, arguing that they copied his party proposals.
He said that pre-financing of the compensation scheme was not an option as it would only worsen the banks’ current lending squeeze.
Bank Mortgage Lending Falls By 20%
The British Bankers Association (BBA) said that in May, the number of new approvals for mortgages to home buyers fell to just 28,000.
This is a drop from 20% in just one month and 56% below May last year.
The BBA said the number of new approvals was the lowest since record began in 1997 and warned that the market remains weak.
“Measures were lower mortgage activity in May as a result of tighter lending criteria and economic pressures on households,” said David Dooks, BBA.
“Only remortgaging business is the conclusion, where people need or want to take advantage of agreements with other lenders,” he added.
BBA members represent about two-thirds of total mortgage lending in the UK.
Contraction
The UK housing market is undergoing a rapid and unprecedented decline in activity and sales.
The supply of mortgage funds, which largely comes from lenders in international financial markets, has been largely turned off due to the continued credit crunch that began almost a year ago.
Many participants in the real estate market, as house builders, mortgage lenders, house builders, realtors and experts have been telling the same story, with widespread predictions that sales will fall between 35% and 45% in the course of 2008.
The effect has been that housing prices have fallen in recent months, with many experts now expect a fall of over 10% at the end of the year.
Mortgage approvals are widely seen as a good indicator of sales in the coming months.
The BBA figures suggest the most dramatic contraction in loans so far.
However, their data does not include the construction of societies. Figures for all lenders will be published by the Bank of England on June 30.
‘Deep correction’
Howard Archer, chief UK and European economist at Global Insight, said: “More data on the housing market, much more disturbing news that raise concern that we are in for a long, deep correction in the market housing.
“The BBA data graphically emphasized that the activity in the housing market is being throttled by stretched affordability and tight lending conditions.
“Very low activity in the housing market seems certain to feed through to further depress already significantly weaken house prices.