RM deficit reduction highlights need to be proactive

Many defined benefit schemes have been increasing the length of their recovery plans in recent years, as low gilt yields have increased the cost of liabilities.

Those that aren’t taking a proactive approach are possibly missing a trick

Richard Smith, Spence

The scheme completed a triennial valuation in May last year showing a deficit of £41.8m, down from £53.5m three years earlier. A new recovery plan was then agreed in December.

In its preliminary results, the company said: “The deficit recovery plan comprises an initial cash contribution of £4m into the scheme and £4m into the escrow account previously established for the purposes of further risk-mitigation exercises, together with deficit recovery payments remaining at £3.6m per annum until 2024.”

In addition to the £3.6m contribution, the company pays £400,000 each year to cover administration costs.

The recovery plan was originally scheduled to run until 2027.

A spokesperson for RM said: “The main driver of the reduction [was] cash contributions and experience adjustments... Whilst asset returns were positive, they were mainly offset by interest on liabilities.”

The experience adjustments “relate to updated member information in the 2015 actuarial valuation against the 2012 actuarial valuation data projections used in 2014”, the spokesperson said.

Proactive approach

Joanne Livingstone, technical director at actuarial consultancy Punter Southall, said the change in “experience” could be due to a higher-than-expected number of deaths in the scheme.

“You could end up projecting a higher mortality rate,” she said, which would lower the projected liability on the scheme.

Richard Smith, head of corporate advisory services at consultancy Spence & Partners, said that in general, scheme deficits were going up, but that well-prepared companies could cut their deficit by ensuring they take action, for example conducting liability-management exercises to take risk out of the scheme.

He said: “Those that aren’t taking a proactive approach are possibly missing a trick by being exposed to the vagaries of the market.”

Pensioner buy-in

RM’s escrow account was set up in October 2014 with £8m. That same month, £4.7m was paid towards a pensioner buy-in. The £4m addition agreed as part of the new recovery plan brings the account balance up to £7m.

The buy-in was carried out with Pension Insurance Corporation. It covered all 165 of the scheme’s pensioners, which represented 9 per cent of the scheme’s membership, removing 13 per cent of the scheme’s liability.

The insurance premium cost the scheme £30.7m, paid from the amount in the escrow account and with £26m in fixed income assets.

Some have argued that growth in the buy-in and buyout market in recent years through the addition of market participants may not lower prices as might be expected, but James Mullins, partner at consultancy Hymans Robertson, said there were good opportunities for schemes of all sizes.

He said: “Pricing has been very attractive, there’s been lots of competition in the market for buy-ins. At the start of 2013 [there were] only really five insurers competing for business, whereas now there are nine. That’s led to good pricing.”

Mullins said he expected competitive risk transfer pricing to continue this year.

“It’s really open at the moment,” he said. “Some insurers are particularly keen on the bigger-sized schemes, and then you’ve got others that are much more focused on the smaller end.”