Many schemes worked hard this year to make a dent in their pension fund deficit as liabilities soared, employing methods ranging from simple payment increases to complex recovery plans.
Scheme funding is an anvil around the neck of UK plc. At the end of October, the aggregate deficit of the 6,057 schemes in the Pension Protection Fund’s 7800 Index was £221.1bn. At the end of November 2013 it was £59.7bn.
The average scheme in that group has assets amounting to 84.8 per cent of liabilities, with 4,781 schemes in deficit and 1,276 in surplus.
Given the length of time that deficits have now been running, it is unsurprising that employers have taken steps to reduce their liabilities, or take some of this risk off their books.
Here are five of our case studies from the year looking at how employers have worked to reduce their pensions exposure, and how scheme representatives have worked to limit the impact on their members.
Lafarge doubles contributions to cut deficit
April 7
One way to fill a hole is just to pour in a load of cement. Building materials manufacturer Lafarge agreed earlier this year to more than double its contributions to its pension scheme to help reduce its deficit.
Despite the gradual recovery in the economy, actuarial consultants reported that many sponsors of defined benefit schemes were maintaining rather than raising the level of their funding payments.
Under the 15-year agreement secured in March 2014, when the scheme finalised its June 2012 valuation, Lafarge UK Pension Plan was to receive payments from its sponsor of £25m by December 31 2014, £30m in 2015 and £32.5m from 2016 onwards, according to scheme documents.
This was an increase from annual employer contributions of £21.3m made to the scheme in 2013 and £12m made from 2010 until 2012, which were agreed at its last triennial review in 2009.
Annual payments may be increased to £36m from 2016 onwards, subject to Lafarge reattaining investment-grade status.
Channel 4 looks to shut off DB accrual to quell deficit increase
September 15
The pressure to close to future accrual grew this year. One of the bigger names to consult on switching off DB accrual was broadcaster Channel 4.
A valuation of the scheme at the end of 2012 showed a funding deficit of £101m on a technical provisions basis, a significant increase from the £30m calculated in January 2010.
Many DB schemes have struggled with increased funding deficits in recent years, further threatening their continuing accrual with the end of contracting out is set to increase costs further for some.
A spokesperson for the broadcaster said the increase was attributed to “similar issues to many other pension schemes”, pointing to lower gilt yields and lower expected returns on assets, as well as increased longevity.
The company proposed closing the scheme to future accrual at a member meeting on April 24 2014, before following up with individual emails to members about the proposal.
RSPB underpins scheme using contingent assets
November 3
Charity begins at home. Bird protection organisation RSPB set up a £56.4m contingent asset agreement as part of a 17-year recovery plan, in a suite of measures designed to address its pension deficit.
Contingent assets can increase a scheme’s security by guaranteeing ownership of that asset should the sponsor be unable to meet its obligations. They can also be used to boost the funding level without the risk of money being trapped once full funding is reached.
The recovery plan was part of a series of measures from RSPB to address its deficit (see graphic). These included increasing staff contribution rates and the normal retirement age, reducing spouse death-in-service benefits and the accrual rate, and closing the final salary section to new entrants.
According to RSPB’s most recent report and accounts, the agreement contains £56.4m worth of land and buildings, which will underpin the plan.
Lloyds scheme saves £710m with pensionable pay freeze
November 10
Banks have responded to capital constraints and a difficult regulatory environment by trying to reduce the impact of pension schemes on their financial situation.
Lloyds gained a £710m credit in the second quarter from its freeze on pensionable pay.
The partially state-owned bank reduced its cap on pensionable pay increases to 0 per cent from 2 per cent after a consultation with unions, in what market experts saw as an aggressive move to contain its liabilities.
The changes will be in place for all active members by April 1 2015.
Hugh Nolan, chief actuary at consultancy JLT Employee Benefits, said capping pensionable pay was commonly used to stop accrued liabilities growing further. “Most people just close the scheme,” he said. “Zero per cent is quite an aggressive way of doing it.”
Pennon saves £15m with pensionable pay cap
December 8
Utilities company Pennon also made some changes to pensionable salary this year, saving a more modest £15m by capping increases in pensionable earnings at 2.5 per cent.
To soften the blow it introduced a voluntary defined contribution top-up for scheme members wanting to contribute more.
Pennon staff can contribute 3, 4 or 5 per cent of any pay increase they receive above the cap and the company will make a corresponding 6, 8 or 10 per cent contribution.
Pensions manager Gavin Coulstock said: “The decision to allow members to join the DC scheme came in direct response to concerns raised in consultation. We put in place this modification to alleviate concern.”
