Invensys blitzes liabilities with cash, PIE and closure plans

Large private sector schemes are seeing dramatic moves from sponsors to reduce their liabilities, as government rules allow greater scope to cash in DB pensions and scheme funding hits its lowest point in 18 months.

Tesco, for example, last week announced it would launch a consultation on its final salary pension scheme. Invensys is in fact £121m in surplus following its sale last January to French multinational Schneider Electric, which also provided a £1.75bn guarantee to the scheme.

Scheme chair Kathleen O’Donovan explained the changes to members in the 2014/15 winter newsletter saying, “it is important for you to understand how these will impact you and other members”.

The employer, together with its £4.7bn DB fund, has embarked on the following changes:

• Members aged over 60 (or, from April 1, those over 55) with less than £10,000 in pension entitlement will be given the option to receive their pension pot as a one-off lump sum.

• Effective this month, those members coming to retirement will be able to receive an initially higher pension valued at 80 per cent of their future pension increases. The newsletter confirmed the company is also considering extending this to pensioner and dependants, and has made provision in the rules to do so.

• The sponsoring employer, Schneider Electric, has launched a consultation on shutting the scheme to future accrual.

Commentators said the lump-sum offer had the attraction of ease, given that under trivial commutation rules members do not need financial advice as they would with a transfer into a defined contribution scheme. 

“You don’t have to go through all that rigmarole of financial advice,” said Charles Cowling, director at JLT Employee Benefits. “Trivial commutation is a much more straightforward process.”

But workers representatives have criticised the value of such offers for members.

Ros Altmann, the government’s older workers champion, said: “From a member’s perspective, the deal is not financially or actuarially attractive. However, emotionally and in practical terms many members may be very attracted to it.”

The broad 20:1 multiple for such cash entitlements means a £500-a-year pension at age 65 is worth £10,000. Altmann calculated a near-equivalent joint-life annuity in the market could cost more than £16,000.

“So members are receiving less than two-thirds of the open market value of their pension rights,” she added. “They need to understand the true value of the pension income they are selling back to the company that offered it to them, and it is not clear they will.”

Ruth Bamforth, barrister at law firm Gordons, said the debate lay with the government policy that had created the flexibilities.

She added: “On the one hand you have got members thinking what they might want to do. On the other hand you have got issues of what schemes want to provide.

“There is a question about to what extent schemes should be paternalistic to members.”

Protecting members

The scheme has put protection in place in the one-off lump sum offer, requiring those aged over 80 at the time the option comes into force to formally request it.

This is one of the key tenets of the industry code of practice on incentive exercises, created in June 2012, to avoid vulnerable scheme members making harmful decisions.

The newsletter informed members that they only receive 80 per cent of future increases to reflect that it is simply “an option”, and to stop members selecting to the detriment of the scheme.

“If members with short life expectancy were to take the option they would receive a higher pension than would otherwise be the case under their standard pension,” it explained.

“Providing the option at less than full value provides protection against selection and therefore protects the funding of the scheme for the remaining members.” Schneider Electric declined to comment on the changes.