Thales commits £1.6bn to scheme after funding drop

Poor markets and longevity risk since the financial crisis has increased the number of defined benefit pension schemes in deficit.

Thales UK Holdings and Thales SA have agreed to make recovery plan payments of £52.6m each year until 2028. Member contributions have also increased to fill the deficit and are under review.

Scheme chair Lord Freeman said in a letter to members that low interest rates since the financial crisis had led to “deterioration of the funding position of both sections due to liabilities increasing significantly”.

The aerospace company has also committed to increase recovery plan payments if certain conditions are met by set dates in 2014 and 2017. The payments will be guaranteed by Thales Holdings up to an initial amount of £875m and by Thales SA up to an initial amount of £750m.

The scheme declined to comment further.

A large proportion of pension schemes completing triennial valuations have had to negotiate a situation to plug deficits, with funding levels at historic lows over recent years.

Steve Hitchiner, a partner at consultancy Barnett Waddingham, said: “It’s very common; pension schemes without plans are unusual with funding levels over the last few years.”

Schemes generally calculate their deficits based on interest rates, but given low government bond yields some believe schemes would be better basing the calculation on the expected investment return from assets.

“We think the rates should be closer aligned to what you’re expecting to make from the assets you’re investing,” said Paul Kitson, a partner at PwC.

However, there are concerns that changing the way deficits are calculated would lead to methods that could misconstrue the funding levels and make schemes look more secure than they are.

“You have to meet the ultimate requirement that benefits are put first,” said Zoë Lynch, a partner at law firm Sackers.

The Pensions Regulator is carrying out a consultation on regulating DB schemes, aimed at revising the code of practice for DB scheme funding, regulatory strategy and funding policy.

The consultation is leaning towards a more formalised process of covenant review, experts said. Historically, schemes and employers have held covenant reviews as and when circumstances dictated.

This could be used to ensure covenant arrangements are properly established before situations arise. “The regulator has put it on companies in the past and they look to be moving away from that,” said Lynch.

Kitson said the consultation also encourages schemes to think about employer covenant, investment strategy and recovery plans in a more integrated manner.

“It needs to be done in a much closer-together way and I think that’s what the regulator is looking at,” he added.