De La Rue cuts pension increases to ease funding pressures

Members of the £964.7m scheme will now have their pensions uplifted in line with the consumer price index instead of the retail price index.

The company’s half-year results revealed an accounting deficit of £182.5m. The indexation switch is expected to bring this down to about £112m, to be confirmed in the company’s full-year results in June.

De La Rue expects to continue with a 12-year recovery plan based on an actuarial deficit of £252m in April 2015.

You try and take benefits away from people, you’re going to have people up in arms

Charles Cowling, JLT Employee Benefits

In an announcement to shareholders, the scheme's trustees were said to have decided that CPI was a “more suitable” index for the calculation of increases and in line with government policy, but the sponsor’s appetite for deficit funding is evidently wearing thin.

“Since 2009 we’ve contributed over £140m to the final salary pension scheme and in spite of that the deficit has increased,” a spokesperson for the company said.

The adoption of CPI “puts the scheme on a stronger foundation for the future”, and will ensure that the sponsor is able to continue investing in its current staff and in research and development, the spokesperson added.

The DB scheme was closed to future membership in 2010, and to future accrual in 2013.

Funding uptick is not enough

Scheme funding levels have improved in recent months, as still-buoyant equity markets have lifted asset values. Slowing longevity improvements have also given scheme balance sheets some respite.

On the gilts-plus basis used by most actuaries, PwC’s Skyval index revealed a UK aggregate deficit of £410bn at the end of October.

But according to Charles Cowling, director at JLT Employee Benefits, these recent gains will not be enough to persuade companies not to consider cutting members benefits.

“For people doing actuarial valuations now, deficits are still worse than they were three years ago,” he said, adding that the cost of accrual for schemes that are still open has worsened significantly over the same period.

This slump in funding levels leaves trustees with a difficult choice at the time of valuation.

“Either you’ve got to go to the company and say, ‘Well, you’ve got a lot more money to put in'... or in the case of De La Rue, they’re looking at making changes to their indexation of pension increases,” said Cowling. He predicted that most schemes with the ability to change indexation methods would look at doing so.

The rules lottery

However, the option to change the measure used to calculate pension increases is not a luxury all schemes are afforded.

Depending on whether scheme rules specify a particular index of inflation or not, trustees may be tied to RPI, as the Barnardo Staff Pension Scheme found last year.

“One of the reasons why pension increases have attracted so much attention... is that whilst it’s perfectly usual that pension plans are differently drafted, on this issue there is quite a range of drafting,” said Mark Smith, partner at law firm Taylor Wessing.

That creates potential confusion for members trying to understand their benefits, but Smith said that “once the trustees and employer have recognised what their plan’s rules say”, the decision should be treated like any other scheme management decision.

Override is unlikely

Calls have been made for the government to provide a statutory override to this ‘rules lottery’ in its forthcoming white paper on DB schemes, but Smith said it was unlikely this would happen.

“There’s a weight of history against it in the sense that there is a lot of recognition that with pensions sometimes the law does change, but where that’s happened it has been for future service only,” he said.

Schemes are already able to cut benefits if they can convince their membership that the scheme’s future demands it, and convince them to consent to a cut, said Smith.

Cowling agreed that a change in the law looked unlikely: “You try and take benefits away from people, you’re going to have people up in arms.”