Engineering and electronics company Siemens has set up a Scottish limited partnership for its UK defined benefit scheme to provide additional security for members, shutting a large part of its deficit and stabilising the company’s cash flow.
The £3.2bn Siemens Benefits Scheme has acquired an interest in SBS Pension Funding (Scotland) Limited Partnership, funded by a £322.7m contribution from the company.
The pension funding agreement between the company and the trustees was part of a longer-term plan to appropriately address the deficit
John Smith, Siemens
An asset-backed funding structure involves a sponsor placing some assets of the business into a separate entity to generate cash for the pension scheme. The scheme retains ownership of that asset and uses the income to pay pensions.
John Smith, head of pensions at the company, said: “The pension funding agreement between the company and the trustees was part of a longer-term plan to appropriately address the deficit which met the company’s objectives of stabilising cash and avoiding overfunding the scheme, and the trustees’ objective of obtaining additional security for members’ benefits.”
He added that in assessing the appropriateness of the overall funding agreement the trustees looked at the underlying cash flow from the SLP rather the initial contribution and investment.
The company’s contribution to the SLP has boosted the scheme’s funding position to 88 per cent at September 2013 from 73 per cent at the same time in 2011.
The SLP’s principal asset is a loan to Siemens Finance BV, a Dutch subsidiary of the group, which made an initial £12.9m interest payment to the scheme in December 2013 and will continue to make twice yearly payments of £15.3m until 2032. A final payment of £2.5m will be made on July 29 2033.
Payments from the SLP to the scheme will be suspended if an actuarial report shows its funding level has reached 110 per cent of its technical provisions, while the trustees’ rights to payments will cease if a formal valuation shows the same.
As part of a recovery plan following its 2011 valuation the scheme agreed a series of contributions from 2013 and 2031, from which payments from the SLP will be deducted.
DB schemes are increasingly using such strategies to enhance their security, where additional employer contributions may not be forthcoming.
Asset-backed contribution arrangements can help reduce schemes’ deficits, enable trustees to be more flexible in their funding approach and can help reduce their Pension Protection Fund levy, but are still secondary to cash.
“The trustee would prefer the actual cash or material contributions but where that’s not forthcoming the asset-backed contributions are a good alternative,” said Alan Collins, director at consultancy Spence & Partners.
These types of arrangements are becoming more common among medium and smaller-sized schemes, he added.
Considerations for trustees
The Pensions Regulator issued guidance in November relating to the use of ABCs, which it said may be used to improve a scheme’s security in certain circumstances.
However, it added: “It is important that trustees consider the risks involved in ABC arrangements as part of their assessment of any proposal, obtaining advice and considering available alternatives as appropriate.”
Catherine McKenna, partner at law firm Squire Sanders, said trustees firstly have to consider the security of the assets themselves and the security arrangements as to whether these assets will be there when they need it.
“Sometimes the SLPs have been set up, which look to be secure, but they aren’t because they have certain terms and conditions... because the company wants to retain an interest,” said McKenna.
Collins said trustees should also consider how the value of the asset and their exposure to it might change over time.
“Agree a mechanism in advance when you’re entering into an agreement – how you’re going to monitor it,” said Collins.
