An electronics company pension scheme has agreed a new recovery plan and increased member contributions as its deficit more than doubled in an 18-month period, in part due to longevity risks.
Low gilt yields have hit the funding levels of many defined benefit schemes, forcing them to explore new ways to reduce deficits.
Electrocomponents’ scheme deficit on an IAS 19 basis rose to £33.8m in September of last year, from £12.4m in March 2013.
In its most recent annual report, the company attributed the rise to “higher liabilities (due to the use of updated census data for the current triennial valuation and higher life expectancy assumptions) together with actuarial losses to returns on assets being lower than expected”.
The employer consulted on making changes to the scheme between March and May last year.
As part of the changes, active members will receive no increases to pensionable earnings, reducing the potential amount members can receive in retirement and therefore limiting the liability.
Hannah Absolom, group pensions manager at Electrocomponents, said: “All future increases to basic pay are pensionable under the [defined contribution] section of the scheme.”
Absolom said contributions will also be increased for some members; those in the 1/60 accrual category will see an increase to 9 per cent from 7 per cent, while those who accrue at 1/80 will continue to contribute 5 per cent.
She added no further changes were planned for the scheme.
Recovery plan
The actuarial valuation in March 2013 showed a deficit of £35.8m. Following last year’s consultation, the company agreed a new recovery plan with the scheme trustees in which it will contribute £1.3m in the second half of the 2015 financial year and £2.6m in the 2016 financial year.
The contributions will increase annually to reach £4m in 2022.
Including a payment of £300,000 made to the scheme in 2014, the company will contribute a total of £24.4m over the life of the plan.
Electrocomponents said its ability to close the deficit over the past six months had been stymied by the discount rate falling by 0.5 per cent. It added this was offset in part by a slight fall in the expected rate of inflation.
Richard Murphy, partner at consultancy LCP, said macroeconomic conditions were making deficit reduction difficult for schemes.
“The real challenge for pension schemes has been investment returns and bond yields, which is why it’s so hard to make progress on deficits,” he said.
Murphy said schemes should still look to cut costs and improve efficiency where possible, for example by increasing contributions.
“The fact that the environment is going against you shouldn’t stop you saying ‘how else can we control costs?’” he said.
Rather than capping pensionable earnings, Murphy said many employers simply close their pension scheme to future accrual, stopping the build-up of benefits for active members.
“[Capping benefits and increasing contributions] is a compromise that is available that gives members continuing DB accrual, even though they’re capping benefit,” he said.
“The Pensions Regulator is encouraging companies and trustees to work together and this is what’s envisaged.”
However improvements to the deficit could be achieved by hedging against interest rates and inflation, said Paul Kitson, partner at consultancy PwC.
He said for many who had not adequately hedged, falls in interest rates had wiped out previous investment gains.
This was compounded, Kitson said, by increasing longevity assumptions, though he added this may be tailing off.
“What we’ve seen is a lot of quite rapid changes in how long people are living, [but] there’s a bit more stability now,” he said.
