Johnson Service Group has seen its defined benefit scheme deficit more than quadruple after a reduction to the discount rate and the closure of the scheme to future accrual.
The rise comes amid growing deficits for many DB schemes as they battle the effects of low yields on their liabilities.
The textile company’s scheme deficit rose to £14.8m at December 2014, from £3.4m the previous year, which the company described as “disappointing” in light of steps it had taken in previous years to get the deficit under control.
In its year-end results, the company said: “The increase is due to a combination of a significant reduction in the discount rate applied to liabilities, being only partially offset by the impact of an outperformance of returns on scheme assets.”
Johnson merged its three DB schemes into one in 2013. The closure of the scheme to future accrual resulted in a past-service cost to the company of £4.7m.
But Alan Collins, head of trustee advisory services at consultancy Spence and Partners, said closing the scheme was a lesser factor in the rising deficit.
When you’re quite a well-funded scheme like this, small changes in liabilities can have a big effect on the deficit
Alan Collins, Spence and Partners
“The biggest factor was market conditions, which added £11.4m [to the liabilities],” he said. “When you’re quite a well-funded scheme like this, small changes in liabilities can have a big effect on the deficit.”
Collins predicted many similar cases would emerge as more companies published their full-year results for 2014.
Johnson Service Group did not detail what steps were being taken to remedy the rising deficit, but the company results showed a £2m contribution paid to the scheme during 2014.
Hugh Nolan, chief actuary at consultancy JLT Employee Benefits, said low bond yields were driving down the discount rate for many schemes. This leads to lower return expectations and forces schemes to set more money aside to cover future liabilities.
“The discount rate is set off the corporate bond double-A-rated yield, which is down quite dramatically,” Nolan said.
“You might be talking about falling from 5 to 4 per cent. That’s an increase of 20 per cent [to the liabilities]. Everyone’s getting hit to some degree by that.”
Curtailment gain
Nolan said closing a pension scheme to future accrual usually resulted in a “curtailment gain” for the employer, but some schemes have guaranteed increases for deferred members that seem high compared with the current environment.
“When you’re an active member your pension is linked to salary, but when you leave it’s usually linked to RPI or CPI and can be more,” said Nolan, adding the company would still save on contributions by closing the scheme.
He said this is more common among “old fashioned” schemes. These often have revaluation of at least 5 per cent a year, as they may have been set up when inflation was at 12 per cent and was not expected to dip below 5 per cent.
Jeremy Goodwin, partner at law firm Eversheds, said the Pensions Regulator’s integrated approach to risk management would have a further effect on how companies and schemes deal with growing deficits.
It states trustees should take into account employer covenant, investment strategy and funding level when assessing scheme risk.
Goodwin said this means a growing deficit would have a knock-on effect on the investment strategy and employer covenant.
“If each pound you put in is getting lower returns, you then have to put more cash in,” he said.
