The £1.9bn Pearl Group Staff Pension Scheme has renegotiated a series of funding conditions with its sponsor to improve security, reflecting greater innovation in how schemes are protecting members’ benefits.
One of these conditions is a sharing mechanism which speeds up employer contributions to its closed defined benefit section if certain payments are made to other company stakeholders, and firmer consequences if the sponsor fails to meet its promises.
Pearl's final salary section
Deferred members: 10,799
Pensioners: 9,849
Total members: 20,648
DB and DC assets (at June 30 2012): £1.9bn
Funding level (at 2009 valuation): 67 per cent
Source: Pearl Group Staff Pension Scheme.
Schemes that build up such protections stand a better chance of weathering insolvency and other corporate activities with a larger part of their retirement promises intact, insolvency experts have said.
The insurance workers’ scheme has “tightened” the terms of enforcing the legal security it holds in certain group subsidiaries, if the company does not meet its funding promises, according to a summary document issued to members last month.
“With some contingent assets, the time that trustees are likely to be able to get their hands on them is in an insolvency,” said Simon Kew, director of pensions at covenant specialist Jackal Advisory. “This allows the trustees to do that prior to an insolvency event, should the employer fail to make its payments.”
The deal also includes a mechanism to share payments made by the company, Phoenix Group Holdings, between its legacy DB scheme and the company’s other stakeholders.
In the event of any payments to shareholders, contributions to the scheme will be accelerated, according to the agreement. “Schemes should be doing this up and down the country,” added Kew
The renegotiated agreement also included:
A new intermediate funding target to be 100 per cent funded by June 30 2022, with liabilities calculated using gilts “plus a prudent margin”;
The company has accelerated its contributions to the scheme with £70m to be paid in 2013 and 2014, and £40m each year from 2015 to 2021;
A test that no payments can be made that would reduce the company’s value other than those agreed as acceptable by the scheme;
A new liability-driven investment strategy, with 25 per cent of the scheme’s assets to be used to hedge interest rate and inflation risk.
The Pearl scheme has not yet completed its 2012 valuation. At its last triennial valuation in 2009, the DB section had £1.5m in assets and a funding level of 67 per cent.
A spokesperson for the company said greater certainty over future contributions and the lower-risk investment strategy adopted by the scheme reduces the volatility of its individual capital assessment, a measure required by the Financial Services Authority.
“As a consequence, the [group’s] ICA surplus will now be significantly less sensitive to market movements,” said a spokesperson. The scheme declined to comment further to the published documents.
Mark Butler, a principal in consultancy Mercer’s covenant team, said mechanisms for sharing company payments and profits were “increasingly used” by schemes to shore up their funding agreements.
