BAE sees four in 10 agree to give up pension increases

Pie exercises offer members the chance to increase their initial pension in exchange for future rises, and can be used by employers to decrease the cost of future pension promises and manage longevity risk.

Such exercises have been criticised, though, by industry commentators such as ex-Pensions Regulator chair David Norgrove, who in 2011 called them “another pensions mis-selling train crash that we can see happening in front of our eyes”. An industry code published in 2012 sought to protect vulnerable members from bad practice.

The defence company's main scheme contacted 17,800 of its pensioner members over state pension age and below 80 years of ageand who had built up a certain level of exchangeable pension before April 1997, according to the scheme's 2014 summary report. 

Holly Hook, pensions actuary at BAE Systems, said the exercise was not driven by the intention to reduce the scheme’s liabilities.

“We have set out with it mainly with the aim of achieving inflation certainty,” she added.

Members had to be in receipt of a minimum of £600 a year of pre-1997 eligible pension to be offered the Pie, in order to make it sufficiently beneficial to them, she said.

Fifty per cent of members got in touch with the independent financial adviser made available to them.

If you are doing a Pie exercise where the employer says it’s going to share 70 per cent of the [fair] value, which is more common, then it’s not just giving information to members, you have to make financial advice available

Kirsty Bartlett, Squire Patton Boggs

These members were offered the chance to elect to receive a higher pension from May 1 this year in exchange for giving up future increases on part of their pension.

The company has been working to reduce the risk of its £11.6bn pension scheme, with its funding level having decreased to 72 per cent at March 31 2013 from 79 per cent at the same time in 2011.

In December 2013 the company announced it had agreed a £1.7bn longevity swap with insurer Legal & General, covering approximately 17,000 members in its Royal Ordnance Pension Scheme and the Shipbuilding Industries Pension Scheme.

This followed a deal with the insurer in February of that year covering £2.7bn of liabilities in its 2000 Pension Plan.

As well as offering current pensioner members a Pie, consultants have urged schemes to consider contacting members at the point of retirement.

Bob Scott, partner at consultancy LCP, said a good time to complete such an exercise may be when a pension scheme is cleaning up its data with a view to buying a bulk annuity. “Insurers no longer provide for complex pension increase guarantees and if they can be exchanged for something more straightforward that can lead to a better price,” said Scott.

In February BT reported 30, 000 of 120,000 pensioner scheme members had opted to receive a higher pension in exchange for future increases.

Communication good practice

The industry’s Code of Good Practice for incentive exercises, published in June 2012, established safeguards to protect vulnerable scheme members.

One such protection is that members older than 80 should only be offered a Pie on an opt-in basis. BAE took several additional measures to ensure it complied with the code:

• It offered 100 per cent fair value;

• It gave members access to independent financial advice;

• Advisers had the power to exclude anyone they felt was not able to understand the offer;

• Member communications were checked by lawyers and independent advisers to ensure clarity.

Kirsty Bartlett, partner at law firm Squire Patton Boggs, said the information the scheme has to provide members depends on the level of Pie offered.

“If you are doing a Pie exercise where the employer says it’s going to share 70 per cent of the [fair] value, then it’s not just giving information to members, you have to make financial advice available,” she said.

Bartlett said conducting a Pie can be less costly than other incentive exercises such as enhanced transfer values since there can be less upfront costs for the employer.

This can especially be the case if the Pie offers members 100 per cent fair value and the scheme is well-funded.

Scott said since this year’s Budget announcements many schemes have turned their focus onto reviewing their retirement processes and away from one-off exercises.

“Most schemes are reviewing their rules, looking at their processes, looking at their communications so they can advise members clearly on what their options are,” he said.