Airport owner puts LGPS membership under review in cost-cutting drive

Details of planned changes to Durham Tees airport employees' pension benefits, which were leaked to the local press earlier this week, are another example of employers seeking to quell the volatility and risks associated with defined benefit pensions.

Peel Group confirmed in a statement this week that the continued provision of DB pensions to staff was under review. 

It said: “The final salary pension scheme represents a significant cost and therefore has to be considered within the overall strategy for the airport and the ongoing drive to reduce losses and bring the airport back to a sustainable position.

“A key factor in considering the scheme’s future is to manage the significant risk presented by the possibility of a short-term deficit which the airport may be required to fund."

The final salary pension scheme represents a significant cost and therefore has to be considered within the overall strategy for the airport and the ongoing drive to reduce losses and bring the airport back to a sustainable position

Peel Group

Peel Group said it had been advised that should the airport close following implementation of the proposed change, the £6.5m pension debt would not be transferred to the local authorities.

It added: "Currently, a short-term deficit funding requirement, caused for example by a downturn in investment markets, could cause the airport to close and the risk would in this instance fall on the local authorities.

"However if the proposal is implemented, it is very likely that the long-term funding position of the restructured scheme will result in a favourable position for the local authorities."

Matthew Harrison, managing director at covenant specialist Lincoln Pensions, saidDB pension risks are potentially magnified when the sponsor does not have full control of the scheme benefit structure or the contribution levels, as in local government pension scheme arrangements or sector-wide multi-employer schemes.

"As a result, we may see an increase in the number of employers looking to reduce the uncertainty of participating in these arrangements," he said.

Consultation terms

Glyn Jenkins, head of pensions at trade union Unison, said the precise terms of the proposal from Peel were not yet clear.

However, he said regional Unison officers would be pressing for a full and open-minded consultation on the terms of any changes to pension benefits proposed by the company.

Jenkins said: “All we have at the moment is their intention to try and leave the LGPS for the members who still contribute to it.

“Certainly we want a proper consultation. Obviously if they want to go down this route we will check its legality [and] equality and if they want to go for a [defined contribution] scheme we would want a DC scheme where the contribution is comparable."

He added: "Before we get there we are going to argue very strongly for the continuation of membership of the LGPS – that will be our first position.”

Exit debt

In 2002 Peel Group bought a 75 per cent stake in the airport, which was previously owned by local authorities in the north-east region.

Obviously if they want to go down this route we will check its legality [and] equality and if they want to go for a [defined contribution] scheme we would want a DC scheme where the contribution is comparable

Glyn Jenkins, Unison

Today, the group holds an 89 per cent stake, with the remaining 11 per cent held by six local authority shareholders.

In the interim years, airport employees transferred to Peel Group have continued to accrue DB pension within Teesside Pension Fund under the LGPS umbrella.

John Hanratty, head of law firm Nabarro’s northern pensions practice, said local authorities have a statutory duty to provide protection for members who are transferred out.

“To do that they have to enter into a contract under which the incoming [company] will undertake to provide local government admission body status," he said.

"Effectively the terms are governed by that contract and an agreement with the pension fund – if the contracts have a termination clause in them anywhere then Peel could invoke the termination clause and take people out.”

Hanratty said such a move would trigger a “sizeable exit debt” for which Peel would initially be liable.

However, he added if the group had insufficient assets to meet the debt or if the authorities had given Peel any guarantees relating to exiting the pension fund, it would fall back upon the local authority.

A spokesperson for the six local authority shareholders said they are doing all they can to support the airport to enable it to stay open.

“In the coming weeks, the appropriate cabinets and committees of each of the authorities will… consider a further proposal from Durham Tees Valley Airport and Peel concerning the airport company," the spokesperson said.

"Details of this proposal are commercially sensitive and so, in line with standard exempt information procedures, cannot be considered in public.”