The Mineworkers Pension Scheme has secured a 10-year extension to the repayment deadline of its government-backed investment reserve, as it works to manage increased longevity among scheme members.
Schemes are increasingly using cash buffers to deal with the strain of maturing scheme demographics on their benefit cash flows.
The £11.7bn pension scheme’s investment reserve acts as a buffer to ensure limited benefit increases can continue to be paid when the scheme is in deficit and to protect the government from having to pay additional money in. 
It was established with the government as its guarantor after British Coal was privatised in 1994. At that time the buffer amounted to £470m, and it grew to £1.6bn by 2013.
The scheme has now negotiated with the government to extend the life of its investment reserve to 2029, beyond the original deadline of 2019.
The reserve smooths pension increases for members, which could otherwise be more “volatile and bumpy,” according to Geoff Mellor, chief executive of Coal Pension Trustees Services.
Pensioners will receive a bonus of 4 per cent increase on the part of their guaranteed pension that does not already receive statutory increases from April this year, since the most recent valuation showed the scheme’s guaranteed fund, from which benefits are paid, is now in surplus.
The buffer also ensures the total pension is not reduced in cash terms each year, even when the retail price index – used to revalue pension increases – falls. In 1994 the scheme’s actuaries predicted it would be a lot closer to its end point by 2019, Mellor said.
“It’s the fact that people are living longer and therefore the scheme is going to have a longer lifetime than expected,” said Mellor.
The scheme requested its deadline for repayment be extended in recognition of its increased longevity, he added.
Cash management
The scheme made aggregate payments of £2.3bn from funding surpluses to the guarantor by March 31 2013, and £135m as part of its original requirement to repay from the investment reserve by 2019.
The trustees also paid £700m to the government from the investment reserve last month to bring it back in line with the scheme’s other assets and minimise the risk of borrowing too much from it in future.
There has been increasing interest from sponsors in setting up “ring-fenced” cash funds to be used as buffers, but which can be accessed by trustees under certain conditions, said Russell Agius, a partner at consultancy Aon Hewitt.
As funding levels have improved, sponsors have not wanted to risk their scheme becoming overfunded while money could be put to use growing the business at the same time, he said.
“It does require there to be the willingness to have the money available to put into a fund,” said Agius.
Despite the fact people are making lifestyle changes such as eating healthier and quitting smoking, mortality rates will not continue to improve exponentially, said Hugh Nolan, chief actuary at JLT Employee Benefits.
“Although we have seen these rates for a long time, the reasons for these rates can’t keep going,” said Nolan
