Phoenix Group opts for second helping of Pie

This is the second time the Phoenix Group has carried out a pension increase exchange exercise for one of its defined benefit schemes. In 2012, the company cut its liabilities by £19m by using the same method for the Pearl Group Staff Pension Scheme.

Pie exercises are usually employer-led and have proved popular for companies seeking ways to reduce their pension scheme liabilities. As part of the exercise, members are offered a higher pension payment upfront in return for giving up part of the future increases to their benefits.

In order to protect the members, and in order to ensure that they are really making a well informed and balanced decision, it is important that they get access to good, clear communication

Tom McPhail, Hargreaves Lansdown

During the first quarter of this year, “existing in-scope pensioners were offered the option to exchange future non-statutory pension increases for a one-off uplift to their current pension, thereby reducing longevity and inflation risk for the group,” the company’s latest half-year report states.

The exercise resulted in a reduction in fund liabilities of £3m, according to the report.

When asked whether the company was aiming for a greater reduction in liabilities for the circa £2bn scheme, a company spokesperson said that the exercise "met pre-implementation expectations".

“The exercise saw engagement levels of 65 per cent and take-up of 40 per cent,” said the spokesperson. This was from a population of around 1,100.

The Pearl Group exercise “was carried out with a group six times the size of this one,” the spokesperson added.

Careful planning and communication

Tom McPhail, head of retirement policy at consultancy Hargreaves Lansdown, said that the result of a Pie exercise can depend on a number of different circumstances, including how the Pie is priced.

Furthermore, he said, it rests on “how they’re communicated, and what level of support and advice and information is provided to the members”. Success can also be dependent on the "particular characteristics of the workforce”. Another critical factor is how attractive the offer is to members, McPhail noted.

McPhail said that Pie exercises “can work well for the members", but communication needs to be done well.

“In order to protect the members, and in order to ensure that they are really making a well informed and balanced decision, it is important that they get access to good, clear communication,” he stressed.

Garry Wake, managing director at administration specialists Trafalgar House, said that in general, a Pie exercise can be a good thing for both employers and members.

“It can provide an opportunity to further secure the liabilities and improve the funding position in a cost-effective way, and give members more flexibility and the option for more income at the outset,” he said.

However, he added: “It isn’t a ‘magic wand’ and any exercise needs a robust feasibility study, detailed analysis and careful planning. If all of this makes sense then the most critical part comes into play; the communication with the members.”

Wake said that communication should be “clear, concise, balanced and conveyed in terms that the member can understand, with appropriate financial support and advice provided.”

Gary Hatch, head of derisking at Capita Employee Benefits, said that when carrying out a Pie exercise, that when carrying out a Pie exercise, “communications should be phased so that members are not receiving information and being asked to make a decision based on one communication.

This can also be helped by setting up a member helpline, he added.

Hatch said that not all Pie exercises are intended to give a liability cut. "Some are designed to offer members wider choices, particularly following the wider range of options available to members with defined contribution schemes looking for freedom and choice," he said.

He added that another reason why a company may not be targeting liability cuts is to remove future inflationary increases and the risks thereof.

"Removing these reduces both inflation and longevity risk for the scheme. This can also lead to potentially reduced buy-in or buyout costs at some point in the future."

When planning a Pie exercise, Hatch said that “one important factor is for the company and trustees to do a feasibility study in advance to understand the impact of alternative take up rates and potentially alternative Pie designs.

"This can consider the impact on the profit and loss and balance sheet positions for the company as well as any other objectives that the company or trustees might have.”

He added that trustees should also plan on the detail in advance, and check “that there are sufficient non-statutory pension increases which can be exchanged".