Corporate travel company Hogg Robinson has extended its scheme’s deficit reduction plan after low interest rates stretched its shortfall to more than a quarter of a billion pounds.
In the Pensions Regulator’s annual defined benefit funding statement last month, it said the investment environment was having a negative impact on liabilities and suggested schemes may have to extend their funding plan in response.
The travel agency’s preliminary results, released last month, showed its pension deficit had reached £258.6m, an increase of £78.2m on last year.
In its report, the company said: “We have noted in the past that inflation and discount rates are volatile and that the current low interest rate environment increases the accounting valuation of pension liabilities.”
It added: “We have agreed a new 10-year recovery plan with the trustees, with annual deficit reduction payments decreasing by £1m to £7.2m in the current financial year and increasing in line with [the retail price index] thereafter.”
The scheme previously had a 10-year deficit reduction plan agreed in 2006, but opted to extend it after its most recent triennial valuation.
The regulator’s DB funding statement warned the current interest rate environment meant many schemes would need to take similar steps.
Committing to a longer contribution schedule means you can take less investment risk
Calum Cooper, Hymans Robertson
It said: “Our analysis suggests that many schemes with 2015 valuations will have larger funding deficits due to the impact of falling interest rates and schemes not being fully hedged against this risk.”
The regulator added some schemes may be able to address the increase by extending recovery plans, increasing deficit repair contributions or changing investment return assumptions.
Lynda Whitney, partner at consultancy Aon Hewitt, said: “Where people have the deficit go up, one of the things they will look at is extending the existing recovery plan,” adding its research showed many schemes were drawing out recovery plans.
Extending the recovery also allows schemes to take less investment risk, putting them in a stronger position should their investments or sponsor run into trouble.
Calum Cooper, partner at consultancy Hymans Robertson, said: “Committing to a longer contribution schedule means you can take less investment risk so should that perfect storm of poor performance and covenant failure [occur], you’ll be in a better position.”
Enhanced transfers
At the start of its previous recovery plan in 2006, Hogg Robinson set aside £16m for enhanced transfers.
This was followed by a second exercise in the year to March 2012, which “reduced the March 2012 assets and liabilities by approximately £33m”, according to its 2013 annual report.
Hugh Nolan, chief actuary at consultancy JLT Employee Benefits, said providing a transfer value is less than the technical provisions funding requirement and the cost of a buyout. This means schemes can offer members more than they otherwise would have received at less cost than keeping them in the scheme.
“It’s less than they have to fund for and members could get 5 per cent more,” he said.
