On the go: Manufacturing company Morgan Advanced Materials has agreed to make an accelerated contribution of £67mn to its UK defined benefit pension schemes, as part of a deal that will see the trustees increase inflation and interest rate hedging levels.
DB sponsors began to face calls for advances on contributions in the autumn after the government’s September “mini” Budget, which was followed by a liquidity crisis and rafts of collateral calls for schemes from their liability-driven investment managers.
The spike in gilt yields led to an improvement in funding levels and trustees saw a window of opportunity to lock in improved funding, with additional contributions helping them to lock in hedging ratios and preserve funding surpluses.
On December 6, Morgan Advanced Materials announced that “the trustees have agreed to move to full hedging of inflation and interest risk” as part of the deal.
The trustees will aim for a level of leverage on the scheme’s LDI portfolio of less than a multiple of two. The Work and Pensions Committee has recently heard in its LDI inquiry that the industry broadly expects lower leverage levels and more secure liquidity buffers in the aftermath of autumn’s turbulence.
“This will benefit both the schemes and the company by significantly reducing the volatility of valuations in the future, and represents a significant milestone towards being able to secure member benefits by means of annuities with insurance companies,” the company said.
It predicted that it would experience an improvement to its free cash flow, aided by a reduction in its annual pension contributions equating to around £17mn for at least the next three years, eventually reaching a point of limited or no contributions.
