SES Water, formerly known as Sutton and East Surrey Water, has opened a consultation with members on the closure of its defined benefit section to future accrual, citing efficiencies demanded by water regulator Ofwat.
In a letter sent to the plan’s 53 active members seen by Pensions Expert, the company put the proposed closure down to pressure to cut costs driven in part by PR19, the latest of Ofwat’s annual price reviews that are aimed at helping the regulator to safeguard consumer interests.
“As the company prepares its business plan submission for PR19 [a 2019 price review], Ofwat are looking for companies to demonstrate that they are efficient,” the letter read.
“The company has a transformation programme... looking to deliver efficiencies across all areas of the business,” it added. “Pension provision is no different to any other aspect of our costs.”
We have had to make a series of assumptions about a number of future uncertainties and these will be explained to Ofwat
SES Water spokesperson
Water companies have until September 3 2018 to submit their business plans under the PR19 framework.
SES Water, a member of the Water Companies Pension Scheme, would become the latest in the list of water companies that have closed their DB schemes or sections.
In March, United Utilities employees went on strike over the closure of its final salary scheme. The company closed its DB schemeto accrual in April.
In the same month, Anglian Water executives refused to meet unions GMB, Unite and Unison for talks over the closure of its own DB scheme.
The SES Water consultation “will run until at least Monday September 3 2018”, the letter said – the same day that SES Water is due to submit its business plan with Ofwat.
Watering down the pension promise
If the closure goes ahead, from October 31 SES Water DB members will be moved into its defined contribution plan, provided by Aviva, which currently holds 228 employees.
In its letter it also stressed the need to control the company’s exposure to pension scheme volatility, and the company’s desire to harmonise pension benefits across all of its employees.
The company said historically low interest rates have meant that more assets are required to pay pensions in the future.
In 2013, SES Water changed the basis upon which DB benefits accrued from a final salary method to a career average.
The scheme’s last valuation in 2017 indicated that “the company’s share of the cost of providing these benefits has increased substantially to 33.6 per cent of members’ salaries, which is higher than the cost prior to the move to [career average revalued earnings]”, according to the letter.
The company’s 2018 annual report shows that same actuarial valuation yielded a £9.5m surplus.
Younger members need additional support
The company has proposed a two-year transitional period for death-in-service pension benefits, and early retirement benefits, for ill health and redundancy.
Hugh Nolan, director of consultancy Spence & Partners was surprised by the “dry” nature of the communication sent by the company to its members.
Other companies have made efforts to ensure similar communications are “a bit more friendly, a bit more addressed to the emotional side of things”, he said.
The company scheduled three presentation sessions to members in July, along with a question and answer session with a pension consultant, according to the letter.
Members would benefit from financial projections that would help them better understand the impact of being switched to DC, particularly those who are some way from retirement, Nolan said.
“If they’ve got 20 good years in already, five years at the lower scale is not necessarily going to break the bank,” he said.
“Somebody who’s only been in the scheme for five or seven years, and who’s got 20 years to go, then the bulk of their pension’s going to be diminished to the lower level and it’ll look a lot worse for them.”
Source: SES Water
Not the pensions regulator
Following the closure proposals made by Anglian Water and United Utilities, Frank Field, chair of the Work and Pensions Committee, wrote to Rachel Fletcher, Ofwat chief executive on March 28.
In his letter, Field observed that in 2014, “Ofwat granted companies leeway to recover some of the costs of deficit repair contributions through customers’ water bills until the early 2020s, but noted that ‘there are strong arguments for shareholders to bear these costs in future’”.
As part of its 2014 price review, Ofwat wrote that it was seeking to “significantly strengthen incentives on companies in relation to pension deficit repair costs and ensure that customers do not pay for these costs any longer than is necessary”.
In response to Field, Fletcher clarified that “Ofwat does not have powers to regulate what pension arrangements companies should have in place”.
She added that “while we believe it is appropriate that companies should take account of pension obligations when making dividend decisions, we make no judgement about the appropriateness of companies closing their defined benefit schemes to future accruals, and it is not Ofwat’s role to regulate how much companies should pay in to their pensions”.
Total dividends paid out in 2018 amounted to £5.6m, according to SES Water’s annual report. Its contributions into the scheme came to £845,000, down from £1.5m in 2017.
Customers should not plug deficits
Ofwat will receive SES Water’s business plan on September 3. A company spokesperson said: “In the preparation of our business plan for PR19 we have had to make a series of assumptions about a number of future uncertainties and these will be explained to Ofwat in the plan.”
The company confirmed that its business planning process “continues well past initial submission on September 3 with Ofwat not making their final determination until December 2019”.
“No decision has been made and those affected have until September to ensure they understand the proposed changes and provide their feedback.”
Northumbrian Water makes moves to manage liabilities
Northumbrian Water has embarked on a multi-pronged liability management exercise in a bid to control its defined benefit obligations, including a pension increase exchange and employer-funded financial advice.
An Ofwat spokesperson said: “As part of our next price review, we expect water companies to deliver a step change in efficiency to provide more for customers and the environment, while reducing bills. We also expect companies to meet their obligations to customers and take fair account of employee interests before making dividend payments.”
“However, it is for companies to make decisions on how they manage their pension schemes, and we have no views on the nature of pension schemes that should be offered to employees.”
