Irn-Bru owner AG Barr’s pension scheme deficit deteriorated by £18.4m in the year to January, but it anticipates key manoeuvres including an asset-backed funding plan will support its long-term funding position.
The Scottish drinks company is one of a dwindling number of UK companies choosing to support ongoing accrual in a final salary defined benefit arrangement after closing its scheme to new joiners in 2002.
The pension scheme is costing us a lot of money... It’s an evolution, you just keep looking at the next thing to help you manage the risks
Stuart Lorimer, AG Barr
During the year to January, the £112.5m scheme’s deficit grew to £18.5m on an accounting basis, an £18.6m deterioration from the £0.1m surplus recorded 12 months prior.
A credit of £0.5m arose during the year after a reorganisation of supply chain employees from the company’s Middlebrook site reduced the number of employees accruing DB benefits to 113, according to Julie Barr, AG Barr’s company secretary.
But Barr said a £33.7m rise in scheme liabilities during the year had more than offset strong asset returns of £15.4m.
“The pension scheme commitments and risk position are under continual review as part of the group’s ongoing strategic risk management framework, and the group believes that the overall pension deficit is supportable given the historically low gilt yields which underlie the liabilities valuation,” said Barr.
Assessing the options
Stuart Lorimer, AG Barr’s group finance director, said the company is constantly looking at ways to fund the scheme, assessing derisking options en route to its ultimate goal of buyout.
Deficit measures
In this week’s Technical Comment piece, Richard Farr from law firm BDO assessed the merits of the IAS 19 international accounting standard as a true and fair reflection of UK corporate DB scheme funding.
Farr said the “majority of UK companies with DB schemes now have technical provisions materially in excess of the equivalent IAS 19 figure”.
At the April 2014 triennial valuation, the AG Barr scheme surplus was measured as £12.2m on a technical provisions basis, compared with an IAS 19 surplus measure of £0.1m as at January 2014.
Farr said: “In a nutshell, the reason why [technical provisions] are normally lower/better than the accounting number is because the scheme views the sponsor’s credit rating as strong enough to support a higher return assumption than the prescribed AA bonds assumption used for the accounts calculation.”
“It’s a fact of life,” said Lorimer, “the pension scheme is costing us a lot of money.
“We closed [the scheme] and that helped, we did an asset-backed [funding arrangement] and that helped, and now we’re looking at the next thing.
“It’s an evolution, you just keep looking at the next thing to help you manage the risks.”
Nick Griggs, head of corporate consulting at Barnett Waddingham, said it was not unusual for companies to close their DB sections to new joiners and wait for a smaller number of active members to eventually leave the company.
“The extra liabilities they’re taking on each year because they’re having to provide extra accrual in the grand scheme of things probably isn’t massive given the liabilities these and other people have already built up,” he said.
“[It’s] quite a common approach people are taking to capping the risk in their scheme, you’ve made that change to close to new joiners but for employee relations issues you don’t make that change [to close to future accrual].”
Asset-backed security
During the year to January 2014, the company established the AG Barr Scottish limited partnership and entered into a long-term funding arrangement with the pension scheme.
Under this arrangement, the ownership of a number of company offices was transferred to the SLP.
Leased back to the company under a 21-year agreement, the property assets generate an inflation-linked annual income of £1.1m for the scheme.
Charles Cowling, managing director at consultancy JLT Employee Benefits, said asset-backed arrangements were a “logical option” for corporate sponsors to consider.
“Where there are assets around it’s entirely sensible – we expect to see more of these,” he said.
“With quantitative easing, deficits are at all-time highs. Companies want to shore up deficits but don’t want to put a lot of cash into pensions. Asset-backed structures make an obvious solution.”
