Carr’s Group has reeled in its scheme deficit after years of steep cash contributions and restructured the scheme’s matching portfolio to shore up funding on the road to buyout.
The Cumbria-based agriculture, food and engineering company has put significant work into improving the position of its £62m UK defined benefit arrangements over recent years, after the scheme’s 2011 actuarial valuation recorded a £9.9m deficit.
To address the funding gap, in August 2012 Carr’s agreed to pay contributions of £195,000 a month under the terms of a new recovery plan, aiming to eliminate the shortfall by December 31 2015.
We know our funding position on a pseudo buyout basis would have worsened more significantly without the redesigned matching portfolio which was put in place when we began the fiduciary arrangement
Neil Austin, Carr's Group
The most recent actuarial valuation, at December 31 2014, showed the recovery plan is on target, according to the group’s latest annual report. An IAS 19 accounting surplus of £1.8m was recorded at August 29 2015 and deficit recovery contributions, which totalled £2.3m last year, ceased on December 31.
Neil Austin, finance director at Carr’s Group, said the series of cash injections has been the primary driver behind the scheme’s improved funding.
However, alongside a prolonged commitment to cash contributions, the company and trustees have collaborated on a number of strategies to tackle Carr’s pension risk, notably in the decision to implement a fiduciary management arrangement with consultancy Mercer – appointed following a competitive tender process.
Fiduciary arrangement
The fiduciary arrangement has enabled the group to protect the scheme’s improved funding position amid falling asset values through a redesign of the matching portfolio, previously 40 per cent in bonds and corporate bonds, to incorporate a series of triggers and liability-driven investment strategies, Austin said.
“We know our funding position on a pseudo buyout basis would have worsened more significantly without the redesigned matching portfolio, which was put in place when we began the fiduciary arrangement,” said Austin.
“The fiduciary model and derisking plan will really deliver more value as and when we are ahead of our overall path to buyout funding, and can therefore afford to switch assets from the growth portfolio to the matching portfolio.”
The group is targeting buyout over the long term and monitoring pricing in the insurance market closely.
Nearly half (49 per cent) of schemes under £100m, like Carr’s Group, view buyout as their ultimate funding objective, according to consultancy Aon Hewitt’s 2015 Global Pension Risk Survey.
By contrast, fewer than one in 10 schemes (8 per cent) with assets worth more than £1bn ranked buyout as their final goal; nearly two-thirds of them (63 per cent) favour a self-sufficiency target.
Liability management
Carr’s has also agreed a number of steps to manage scheme liabilities with trustees, Austin said, including a well-subscribed pension increase exchange exercise at the end of 2014 and closure of the scheme to future accrual in December 2015.
The statutory consultation and closure were a fairly smooth process, Austin said, eased by the fact the scheme had just 40 active members.
“We could get round and talk to everyone individually,” he said, adding that a third party had been appointed to provide independent advice to those affected.
To compensate members who were affected by the closure, Carr’s increased its contributions into the group’s defined contribution arrangement over an agreed transitional period.
Locking out risk
Calum Cooper, partner and head of DB trustee consulting at Hymans Robertson, said a fully funded position, even on an accounting basis, is an unusual and positive place to be in the current environment.
A continued shift out of growth assets can help lock out risk from the balance sheet, Cooper said, enabling schemes to avoid becoming forced sellers of assets.
“Once you’ve got your asset strategy in place it’s about mapping a route to buyout,” he said, adding that a series of incremental transactions can allow schemes to tackle risk bit by bit.
Charles Cowling, director at consultancy JLT, said the focus around “endgame planning” also needs to balance managing liabilities alongside asset performance.
“Focus on the liabilities and… things you can do to take out risk,” he said.
Cowling added that transfer values are an increasingly attractive proposition for those aged over 55 in the new era of freedom and choice.
