CYBG scheme closure highlights industry's 10-year funding headache

An actuarial valuation of the Yorkshire and Clydesdale Bank Pension Scheme revealed a £290m deficit, while the IAS19 position of its FTSE 250 parent group is expected to improve by £86m during the coming quarter.

The closure comes as further evidence emerges of the high cost of DB arrangements for employers, with a Lane Clark & Peacock report finding that FTSE 100 companies have paid £150bn in contributions over the past 10 years, only to see funding levels worsen.

Just 5 per cent of FTSE 250 employers were still providing DB benefits to a significant number of staff in April this year.

The fact that they could, if they wanted to, pay off their pension deficit with just one year’s dividends should give some reassurance to members of those pension schemes

Bob Scott, Lane Clark & Peacock

CYBG’s quarterly trading update alerted investors to the closure, which took effect from July 31 2017, and highlighted the financial impact of doing so.

“The scheme's closure to future accrual reduced the liabilities in the triennial valuation by approximately £131 million,” the company wrote.

“These and other actions undertaken in finalising the triennial valuation represent a significant de-risking of the Group's pension scheme obligations and will further underpin the accrued benefits of all of the members of the scheme.”

Historical derisking actions include shifting future accrual to a career average basis, and a watering down of the inflation-linked revaluation used for those benefits.

Bob Scott, senior partner at LCP, said the continuing stream of DB closures reflects the high cost of future accruals to sponsors, which can often surpass 50 per cent of salary.

“The case for keeping [schemes] going is a very hard one to make when you’ve got younger employees coming through, probably getting defined contribution benefits at far lower rates,” he said.

Going backwards

However, LCP’s Accounting for Pensions 2017 report showed that scheme closure is no magic cure for the pain inflicted by falling interest rates.

While trustees will pay little attention to accounting figures, financial directors and wider society often focus on them, as seen with the Universities Superannuation Scheme’s disclosure of a £17.5bn IAS19 deficit in July.

Those figures could be pushed even higher if the Internatonal Accounting Standards Board pushes on with changes to the IFRIC 14 asset-ceiling guidance, the LCP report claimed.

One positive consequence of sky-high liabilities is that it focuses the minds of corporate sponsors on taking proactive steps to manage their obligations, thereby addressing intergenerational unfairness, according to Scott.

The report also found that 39 companies with December 31 year-ends paid out more in total dividends than their combined deficits. However, this did not present an immediate concern to Scott.

“Another way is to say, well, these are big strong companies, and the fact that they could, if they wanted to, pay off their pension deficit with just one year’s dividends should give some reassurance to members of those pension schemes,” he said.

Consolidation revisited

Concrete solutions to the DB funding headache are few and far between, but consolidation is regularly mooted as holding potential for increased efficiency.

The Financial Conduct Authority has recently asked the Department for Work and Pensions to remove barriers to consolidation, and the Pensions and Lifetime Savings Association expects to publish a final paper on its superfunds proposal in September.

Graham Vidler, director of external communications at the PLSA, said: “There’s an increasing political acceptance that for many schemes… consolidation can significantly improve performance and significantly improve the prospect of members seeing their benefits paid.”

He confirmed that while open schemes might be able to pursue asset and governance pooling initiatives, companies would have to follow CYBG’s example before entering a superfund.

With no sponsor to back the liabilities, superfunds will have to hold capital instead. But Vidler said that while the prospective sector would have to be tightly regulated in the vein of DC mastertrusts, it should not be bound to the same low-risk investment strategies as insurers.

“It’s like buyout but with a less certain outcome for the member, [but] a significantly more certain outcome than staying in their current scheme,” he said.

However, Spence & Partners' Alan Collins said it was “nigh on impossible” that superfunds could work in practice without legislative change such as modifying section 67, a political decision he thought unlikely.

“The green paper tiptoed around that… giving a fairly strong indication to me that there’s absolutely zero chance of that happening any time soon,” he said.