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Warning Signal From Markets (UK)
By Evening Standard (UK), Investing-News.Com
Apr 20, 2005, 22:36
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Pension "poison chickens" have been coming home to roost in the world's stock markets these past few days. Having spent months ignoring the fact that the boom in America, and to a lesser extent the continued prosperity in Britain, were built on the unsustainable provision of endless cheap credit, markets seem suddenly to have woken up to the fact that it can't go on.
Every economist and central banker has been saying for months that the "imbalances" in the major economies were a risk to the system and would have at some point to be corrected because countries can no more endlessly increase their overdrafts than can individuals. Now, after months of deafness, markets appear to be listening.
Despite this concern, the central banks' strategy, whether it be of US Federal Reserve chairman Alan Greenspan or Bank of England Governor Mervyn King and the monetary policy committee here, has been to take things gently.
Adjustment has to take place but neither was prepared to tighten policy to achieve it if it looked like provoking too dramatic an economic slowdown.
Thus the Fed only edged interest rates up in America when it was sure this would not jolt consumer confidence and spending. In Britain, the MPC has avoided any drastic rate rise that might provoke a collapse in the housing market.
One of the questions raised by the stock market shakeout is whether they will be able to continue the slow march to probity. As American bank State Street pointed out in a survey of investor confidence yesterday, the fact that investors have reduced their holdings of risky assets, even though interest rate and inflation expectations have fallen, suggests they are now mainly worried that US economic growth is slowing.
This it says "sends a veiled warning to central banks, the Fed in particular-that markets may be less preparedto absorb the impact of tighter policy." In other words, any further raising of interest rates might provoke a widespread sell-off and market crash precisely as it did in 1987. That would make an interesting backdrop to the election.
THE suggestion by Elliott Associates, the hedge fund that was wrongfooted when private-equity house Apax decided not to proceed with a bid for Woolworths, that the Woolies management should adopt some of the tactics of a private-equity house to deliver speedier returns to shareholders, should not be underestimated.
Elliott is one of the long-established hedge funds and, as it showed in taking on Procter & Gamble and forcing it to pay substantially more for the non-voting shares when it was bidding for German cosmetics company Wella, it is tenacious in pursuit of a principle.
For the moment, both sides are sizing up each other. What has been overlooked by the market, however, is that changes in pension law give companies a new escape route which, even if not applicable to Woolworths, will provide ammunition for others having to deal with difficult shareholders.
The responsibilities of pension fund trustees under the new Pensions Act have been extended and, they must now monitor management to spot any move that might weaken the company's ability to support the pension fund in future. When they see any such action, trustees are required to beat on management's door and request that the fund is secured against the greater risk of default by the sponsoring company arising from this weakening.
If Woolworths, or any other company-were to do what the hedge fund wants and sell off assets or take on additional debt, it would run the risk of provoking a confrontation with its pension fund trustees - even where it is a direct benefit scheme closed to new members.
Trustees should, in theory, demand that much of the money raised by sell-offs and extra gearing should be paid into the pension fund to insure it against the financial weakening of the parent company this restructuring would imply. Whether the trustees would be alert enough to make waves, given the newness of the legislation - or indeed have the stomach for such a fight - is, of course, an issue. But the principle is clear: they have an obligation to act.
The position of trustees when management voluntarily gears up is not wildly different from where they would be if a private-equity bid went through. They might well be obliged to seek additional funding or guarantees from the new owners.
So thanks to the new legislation, direct benefit pension schemes could take on a new role. They clearly have a future as a poison pill which management can use to show predatory shareholders the door.
By Evening Standard (UK), Investing-News.Com
Apr 20, 2005, 22:36
Email this article
Printer friendly page
Pension "poison chickens" have been coming home to roost in the world's stock markets these past few days. Having spent months ignoring the fact that the boom in America, and to a lesser extent the continued prosperity in Britain, were built on the unsustainable provision of endless cheap credit, markets seem suddenly to have woken up to the fact that it can't go on.
Every economist and central banker has been saying for months that the "imbalances" in the major economies were a risk to the system and would have at some point to be corrected because countries can no more endlessly increase their overdrafts than can individuals. Now, after months of deafness, markets appear to be listening.
Despite this concern, the central banks' strategy, whether it be of US Federal Reserve chairman Alan Greenspan or Bank of England Governor Mervyn King and the monetary policy committee here, has been to take things gently.
Adjustment has to take place but neither was prepared to tighten policy to achieve it if it looked like provoking too dramatic an economic slowdown.
Thus the Fed only edged interest rates up in America when it was sure this would not jolt consumer confidence and spending. In Britain, the MPC has avoided any drastic rate rise that might provoke a collapse in the housing market.
One of the questions raised by the stock market shakeout is whether they will be able to continue the slow march to probity. As American bank State Street pointed out in a survey of investor confidence yesterday, the fact that investors have reduced their holdings of risky assets, even though interest rate and inflation expectations have fallen, suggests they are now mainly worried that US economic growth is slowing.
This it says "sends a veiled warning to central banks, the Fed in particular-that markets may be less preparedto absorb the impact of tighter policy." In other words, any further raising of interest rates might provoke a widespread sell-off and market crash precisely as it did in 1987. That would make an interesting backdrop to the election.
THE suggestion by Elliott Associates, the hedge fund that was wrongfooted when private-equity house Apax decided not to proceed with a bid for Woolworths, that the Woolies management should adopt some of the tactics of a private-equity house to deliver speedier returns to shareholders, should not be underestimated.
Elliott is one of the long-established hedge funds and, as it showed in taking on Procter & Gamble and forcing it to pay substantially more for the non-voting shares when it was bidding for German cosmetics company Wella, it is tenacious in pursuit of a principle.
For the moment, both sides are sizing up each other. What has been overlooked by the market, however, is that changes in pension law give companies a new escape route which, even if not applicable to Woolworths, will provide ammunition for others having to deal with difficult shareholders.
The responsibilities of pension fund trustees under the new Pensions Act have been extended and, they must now monitor management to spot any move that might weaken the company's ability to support the pension fund in future. When they see any such action, trustees are required to beat on management's door and request that the fund is secured against the greater risk of default by the sponsoring company arising from this weakening.
If Woolworths, or any other company-were to do what the hedge fund wants and sell off assets or take on additional debt, it would run the risk of provoking a confrontation with its pension fund trustees - even where it is a direct benefit scheme closed to new members.
Trustees should, in theory, demand that much of the money raised by sell-offs and extra gearing should be paid into the pension fund to insure it against the financial weakening of the parent company this restructuring would imply. Whether the trustees would be alert enough to make waves, given the newness of the legislation - or indeed have the stomach for such a fight - is, of course, an issue. But the principle is clear: they have an obligation to act.
The position of trustees when management voluntarily gears up is not wildly different from where they would be if a private-equity bid went through. They might well be obliged to seek additional funding or guarantees from the new owners.
So thanks to the new legislation, direct benefit pension schemes could take on a new role. They clearly have a future as a poison pill which management can use to show predatory shareholders the door.
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