Northern Ireland Water could have to pay an additional £4.6m a year in deficit repair contributions to its scheme, but uncertainty about how Covid-19 has impacted its investment and ongoing negotiations with trustees makes it hard to gauge its recovery plan.
At its last valuation in March 2017, the Northern Ireland Water Limited Pension Scheme had liabilities of £249.6m, was 97 per cent funded, and had a deficit of £8.3m.
A deficit recovery plan for the defined benefit was implemented at that time. However, an interim funding test was carried out in March this year and has led to an updated deficit recovery plan, albeit one that will eventually be superseded following the results of the actuarial valuation of the March 2020 funding position.
The figures were published in a report from the Government Actuary’s Department, which has supported the Utility Regulator for Northern Ireland in the review of pension costs for NIW. These will be necessary in establishing the scheme’s next price control period, which will run from April 2021 to March 2027.
Clearly, Covid has meant that many employers will have found themselves in markedly different circumstances to those that applied when their existing recovery plans were set
Steve Delo, Pan Trustees
The interim funding test showed the funding level had declined to 92 per cent, leading to an extra £4.6m being required in the next five years from April 2020.
The GAD review stated that, based on the interim funding test, the contributions in 2021-22 and 2022-23 are likely to be in excess of the £1.8m annual scheduled payment.
This new recovery plan is being negotiated with the trustees of the scheme, and the review noted that “this amount can be adjusted if NIW and the trustees agree”.
“In practice, the trustees have acknowledged that this outcome has been driven by a fairly unique set of circumstances caused by the Covid-19 pandemic, and NIW is in discussion with the trustees with a view to agreeing a lower contribution amount,” the document read.
Questioned about the progress of the discussions with the scheme trustees, a NIW spokesperson said the company “has still to finalise its triennial valuation at March 31 2020 and it is therefore too early to comment on any recovery plan that may be required”.
The NIWLPS trustees declined to comment on this matter.
Trustees should be vigilant but ‘open-minded’
Previous analysis from the Pensions Regulator has showed that deficit repair contributions may need to increase by 75 per cent if DB schemes are to meet their recovery plan end dates, with the need for trustees to understand the business side of things never more apparent.
Steve Delo, chairman of Pan Trustees, noted that “trustees can be open-minded to requests from sponsoring employers for restructuring contributions in situations like we find ourselves in today”.
“Employers should, of course, also be open-minded to trustees’ counter positions and appreciate that this is not an easy thing for them to grant.”
Mr Delo argued that where trustees are “willing to step in and be flexible when employers are facing financial hardship, employers should be willing to share the upside benefits with their trustees should their businesses recover”.
“Such ‘profit-sharing’ arrangements ensure that the relationship between trustees and employers is balanced and also in partnership for both the good and the bad times,” he said.
However, he added it is likewise important that trustees are robust in handling any request to repair an existing deficit repair plan.
“Clearly, Covid has meant that many employers will have found themselves in markedly different circumstances to those that applied when their existing recovery plans were set,” he said.
“This is the challenge for trustees, ensuring that reduction or rephasing of deficit recovery contributions is not seen by the sponsor as a quicker or easier option than action with other parties — banks, suppliers, equity holders, other creditors, etc.”
Superfunds would help
Alistair Russell-Smith, head of corporate DB at Hymans Robertson, agreed with Mr Delo on the need for trustees to truly understand their sponsoring employers.
It is in “both parties best interests to have a viable ongoing employer, even if that means paying a lower level of domestic contributions into the pension scheme”, he said, adding that trustees “are normally pretty cognisant of the employer covenant”.
Covid-19 forces half of DC schemes to review objectives
The coronavirus pandemic has compelled more than 50 per cent of defined contribution schemes to review their objectives and 20 per cent to alter their short-term plans, according to a report by Aon.
But he added that the pandemic is throwing up one or two peculiar circumstances, in which a well-funded scheme is still facing the prospect of its sponsor becoming insolvent and triggering a wind-up.
The always-imminent arrival of superfunds “provides quite an interesting solution, because they are insolvency-remote”, he said.
“If you’ve got sufficient funds to go into a superfund and you’re worried about sponsor insolvency, you should be thinking about them because it mitigates that risk of sponsoring solvency and forcing a wind-up.”
Though acknowledging that the process by which superfunds gain authorisation has been and looks set to continue to be a long one, Mr Russell-Smith is nonetheless confident that, with the publication of ever more guidance, “the direction of travel is definitely the right one”.
