The Selex Pension Scheme has moved to a career average revalued earnings structure following the results of its latest triennial valuation, in an attempt to cut costs and reduce risk.
More employers have been taking action to tackle the rising cost of providing defined benefit pension funds, particularly due to low real interest rates.
However, switching a scheme from final salary to career average has been less common over recent years, as a larger number of DB schemes have been redesigned by closing to future accrual.
The only risk that is removed by moving from a final salary to a Care structure is around an individual’s salary increases during their career, and most notably in the run-up to retirement
Nick Griggs, Barnett Waddingham
Mike Nixon, head of pensions at the scheme’s sponsoring employer, defence group Finmeccanica UK, said that the £436m scheme is now transitioning to the new structure and career salary accrual has started.
The move is about “simplicity, risk control and certainty of cost”, he said.
Nixon added that the decision was “effectively a shared view”.
The fund’s latest newsletter to its members explains that the company, active members of the scheme and the pensions consultative committee carried out a formal consultation process last year, and agreed the scheme would move to Care from April 2016.
The DB pension will now be based on a member’s earnings over the course of their career, rather than at the point of retirement.
Roadshows
The newsletter shows that the fund's latest actuarial valuation, carried out in 2014, revealed a funding surplus of £79.2m, and a funding level of 118 per cent.
However, the cost of future benefit provision increased by 5.9 per cent of earnings a year between 2011 and 2014.
During 2015 the scheme provided a series of meetings to explain the new structure to members.
Documents from these roadshows stated that the company “believes it is now right to address some of the challenges of the [fund] design and put the scheme on a more sustainable footing for the future”.
The previous structure “was well intentioned, but has not worked well in the economic climate of the past 10 years”, the documents added.
Furthermore, the fund said it sees Care as a “fairer” option because people under final salary schemes who are promoted towards the end of their career benefit more than those who receive steady salary increases.
Contracting-out
The documents also stated that the new structure will “resolve regulatory issues” for the main section of the scheme, in relation to the end of contracting-out from April 2016.
Nick Griggs, head of corporate consulting at consultancy Barnett Waddingham, said that the ceasing of contracting-out “has prompted companies to review pensions costs given the increased national insurance contributions”.
In terms of risk reduction, Griggs said: “The only risk that is removed by moving from a final salary to a Care structure is around an individual’s salary increases during their career, and most notably in the run-up to retirement.”
Griggs noted that switching from final salary to career average was popular about 10 or more years ago as companies looked “to make minor tweaks to their DB schemes”.
However, more recently, more schemes have been closing to accrual, generally after closing to new entrants a few years previously, and “the number of employees impacted is a smaller proportion of the total workforce”.
Wage growth vs inflation
Similarly, Andrew Cheeseman, chair of independent trustee company Pan Group, said that this type of transitioning has become more popular mainly among central and local government pension schemes rather than corporate pension funds.
“Very few private sector employers have introduced Care, and have controlled cost by use of DC,” he said.
With regard to the Selex scheme, the pension that members have accrued as at April 2016 will be protected “and many members will receive an uplift”, the roadshow documents stated.
Cheeseman said that “there are very few disadvantages” for members of a scheme that is changing to Care.
Over the long term, salary increases should outperform inflation, although he noted that “in recent years this has not been the case in many sectors”.
