The £530m Selex Pension Scheme has further grown its funding surplus, but its pensions head is unfazed about overfunding as the interest rate environment has pushed up future service costs.
The surplus grew to £72m on an ongoing basis at April 5 2014, up from £48.2m on the same day the previous year. However, the estimated cost of future service benefits also increased by around 4 per cent due to low interest rates since the scheme’s last actuarial valuation in 2011.
A growing surplus has been seen as a concern for employers, who seek ways to mitigate ‘trapped' surpluses, where they have overfunded the scheme and then are unable to claw back the contributions.
Mike Nixon, head of pensions at the scheme’s sponsoring employer, defence group Finmeccanica, said the scheme was currently undergoing a valuation and may find that increased future service costs would put the scheme’s surplus to work.
We can’t take [the money] out again but we have means to make sense of it
Mike Nixon, Finmeccanica
“We can’t take [the money] out again but we have means to make sense of it,” he said, adding: “The company costs might have gone up.”
Alan Collins, director at actuarial consultancy Spence, said such a scheme surplus could give employer and scheme more freedom to operate.
"It’s not a massive surplus, it’s a reasonable buffer against keeping costs down," he said. “It might be allowing them to take an aggressive investment strategy, which might fit with the company outlook.”
Surpluses have moved up the agenda for some of those employers and schemes whose funding levels have improved.
Earlier this year the Shell Contributory Pension Fund set up a reserve account, allowing the employer to continue to make contributions to the overfunded scheme without the risk of trapping money not needed to pay benefits.
Hugh Nolan, chief actuary at consultancy JLT Employee Benefits, said falling gilt yields have likely driven surpluses down towards the end of the year. He said: “Gilt yields have fallen over the year… it may well be that their funding level now is worse than it was."
Nolan added some schemes have rules allowing the employer to reduce or hold contributions in the event of a surplus, letting it reduce over time. “What’s happening at the moment is, as people see this surplus sitting there, it empowers them to try new things.”
