Leonardo Helicopters has decided to keep its scheme open to accrual but plans to extend a pension increase exchange while tweaking the inflation measure for future benefit build-up.
Many employers have decided to call quits on defined benefit accrual in the past decade: the percentage of schemes closed to existing members reached 39 per cent in 2017, up from 12 per cent in 2006, the Pension Protection Fund’s Purple Book shows.
We are one of the schemes that’s affected by the so-called drafting lottery
Mike Nixon, Leonardo
Some have also stepped up liability management exercises to get a grip on deficits. Engineering company IMI, for example, completed a Pie as well as a buy-in two years ago.
Leonardo Helicopters has proposed extending a Pie to around 2,000 employees when they retire, with a consultation closing earlier this month.
A Pie involves receiving a higher initial pension in exchange for agreeing to pension increases in line with the consumer price index.
The company, part of Italian defence giant Leonardo, has linked the Pie offer to a benefit change, proposing to stop further build-up of pensions based on the retail price index from April 6 2019 in an effort to control costs.
It said the cost of future accrual had doubled to 18.2 per cent, due to “low interest rates in particular”, adding that without the CPI switch, the future service rate would be 1.4 per cent higher.
Leonardo's head of pensions Mike Nixon explained that it would be “odd to be creating new RPI-linked benefits” when employees will have the option to swap these for CPI increases at retirement.
The proposed change only affects future accrual because “we are one of the schemes that’s affected by the so-called drafting lottery”, where RPI is written into the rules, said Nixon.
Considering the challenges of keeping a DB scheme going, a saving of 1.4 per cent might not seem like very much, but Nixon argued that “1.4 per cent is not a small number; in pounds it is £700,000-plus”.
The result of negotiations
The fact benefits are changed might be a small price to pay for keeping the scheme open. Nixon did not reveal whether closure had been discussed but he noted: “All parties welcome the continuation of accrual.”
The scheme’s latest valuation, as at April 2017, established a funding level of about 96 per cent taking into account the proposed changes.
The scheme’s deficit reduced to £67m from £123m three years earlier; this is in part because of the Pie that was offered to 1,850 pensioners, which had a take-up rate of 33 per cent for the first exercise and 38 per cent for the second.
According to the company, the nearly 5,000-member scheme, which closed to new joiners in 2007, is kept open to accrual “to provide stability and certainty to members of the scheme”.
The employer might well have suggested closure as an alternative to the trustees accepting the benefit changes, said partner at law firm Hogan Lovells, Duncan Buchanan.
“Sometimes the employer will say, ‘If you don’t agree to that change we will have to make a more radical change and close the scheme’,” he said.
In light of this, “the trustees will have concluded that it was in the members’ interest to move to CPI in the future”.
Trustees have to look at any benefit change from the perspective of scheme members, including deferreds and pensioners, said Buchanan; while they do not need members’ consent for accepting a rule amendment, they would have been advised to consult with them.
Given the significant number of DB scheme closures, “if I were a trustee of this scheme I would be pleased with the deal I’ve got”, he added.
The CPI change could easily have been part of a deal to keep the scheme open, agreed Hugh Nolan, director at consultancy Spence & Partners.
“[The employer] could well have said, ‘You know it’s got too expensive, we’d like to commit to DB but it’s got to be a bit of give and take here, can we go to CPI please’,” he said.
For Nolan, “it’s one of the least controversial changes you can make, because from a member’s point of view CPI and RPI both mean inflation”.
Will it make a difference?
Charles Cowling, director at JLT Employee Benefits, said that “any scheme that’s continuing to provide DB in the private sector is doing well”.
However, he also thought that a CPI switch for future accrual is not normally enough to make the costs work.
Leonardo Helicopters caps RPI increases at 2.5 per cent for pensions accrued after April 2005, and intends to cap the proposed CPI increases at the same level from April next year.
“I can’t see that’s going to make a massive difference,” said Cowling.
