Adhesive tape manufacturer Scapa has set up a joint working group with the trustees of its pension scheme as it looks to derisk its defined benefit scheme further.
Scapa has taken several steps to reduce the liabilities of its pension fund over the past few years. In 2014, it offered a flexible retirement option to some deferred members, saving about £600,000.
Scapa will continue to execute projects that provide a good balance of member and company benefits whilst looking to derisk the scheme further
Graham Hardcastle, Scapa
Around a year later, Scapa lowered its DB liability by £4m by undertaking a mortality study across its pensioner population.
More recently, in 2017, it carried out a pension increase exchange exercise.
The company is now in a joint working group with the trustee, as it looks “to move the UK schemes off the balance sheet in the medium term”, Scapa’s latest annual report shows.
The group has been set up "to select joint advisers as we have reached a stage where the group’s goal to move the UK scheme to a full buyout position is becoming more achievable", the report adds.
It states that Scapa continues to manage the cost and volatility of the legacy pension deficits and also continues "to see good take-up of the flexible retirement options that are now embedded into the UK scheme".
Scapa “will continue to execute projects that provide a good balance of member and company benefits whilst looking to derisk the scheme further as we move forward with our joint working group”, wrote group finance director Graham Hardcastle.
Setting clear goals
Scapa's pension position has improved in recent years. The overall deficit for all the company's pension schemes dropped to £21m as at March 2018, from £31.4m in 2017. The deficit of the £139.2m UK scheme is £14m.
Vassos Vassou, senior trustee representative at Dalriada Trustees, said joint working groups can be used in different ways.
“The gist of it all is to introduce dynamism and… sharpness of movement so that you can react to situations much quicker as a little committee,” he said.
Throughout the lifetime of a scheme, the best interests of the scheme and the corporate are well aligned most of the time, except for “certain points of stress”, Vassou said.
When a scheme is coming up to buyout or similar transaction, “that alignment of goal and objective is heightened”, Vassou noted.
He added: “Having that kind of steering committee in place makes a lot of sense because both parties are trying to achieve the same objective, and they’re having to do it in an environment when things are moving relatively quickly.”
Ruth Ward, senior consultant at JLT Employee Benefits, said schemes need a clear goal and consensus among stakeholders: “It’s helpful if... they’re all clear on what their roles and responsibilities are going to be in the process that leads to that goal.”
A busy buyout market
Depending on how close the scheme is to transacting, Ward said there is often still a lot of preparation the scheme can do to avoid problems further down the line. This could include data cleansing, getting a legal review on their benefit specification, or doing a benefit audit to ensure a thorough understanding of the scheme benefits.
While some small points can be addressed after a transaction without a problem, larger issues can be more problematic – having a material impact on pricing, she noted.
Recent research by consultancy LCP has shown that nearly £4bn buy-in and buyout transactions have been announced during the first half of 2018, and this figure could grow substantially when insurers report half year results in August.
“It’s a really, really busy market at the moment – the busiest we’ve seen in a decade,” Ward said, adding that pricing has been very attractive.
Martin Hunter, principal at XPS Pensions, said a joint working group could involve a couple of trustees and a few employer representatives “talking about some of the exercises and the issues that they’d want to consider to get to that end point”.
The government’s DB white paper encouraged the creation of commercial consolidators for DB schemes, with a couple of new players already having come to that market.
Hunter said that trustees and employers may now consider transferring to a consolidator as an option, or whether the long-term goal of buyout or self-sufficiency is better for them, based on their circumstances.
This market “will evolve and grow”, and may affect schemes in terms of setting their long-term goals and how they are going to achieve them, Hunter noted.
