The latest scheme to pull up the drawbridge on defined benefit accrual, Swallowfield has enhanced its defined contribution offering for members, but consultants have urged caution against “sleepwalking” into bigger deficits.
DB closures will rain down thick and fast over the next few months as the April cessation of contracting out looms ever larger on schemes’ horizon.
Stilted yields and looming deficits have already led to sweeping closures across the industry as corporate sponsors seek to clamp down on rising risks and costs.
DB closure, DC enhancement
Swallowfield, the personal care and beauty products business, closed its DB scheme to future accrual on December 31 after conducting a formal consultation with employees.
If you switch off accrual without being thoughtful about it you can inadvertently amplify the amount of risk you’re running in your scheme
Calum Cooper, Hymans Robertson
One-fifth of the company’s 500-strong workforce had been active members of the scheme, which closed to new entrants in 2009.
The scheme underwent its latest triennial valuation as at April 5 2014, and in July 2015 the company agreed a revised deficit recovery plan and schedule of contributions with trustees, setting payments of £108,000 a year, from £111,500 a year previously, over the next 10 years.
A spokesperson from Swallowfield said the company had entered into formal consultation with the members in July 2015 and confirmed the scheme’s closure in October.
“A number of points raised during the consultation period were incorporated in the final arrangements,” said the spokesperson.
The company had existing DC provision, which was enhanced following the consultation.
“Former DB active [members] can transfer with effect from January 1 2016 to a DC scheme with 4 per cent employee and 6 per cent employer contributions,” the spokesperson said.
“In addition, we introduced a new band of 6 per cent employee and 7 per cent employer contribution, available to both transferring and also all pre-existing DC members.”
Liability journey
Molins is another name on the list of schemes that have closed to accrual. Chair of the technology specialist’s pension scheme Nigel Cobby, speaking at an event in London organised by consultancy Hymans Robertson, said the decision to close to future accrual brought the scheme to a new juncture.
He said it laid down the challenge of managing out liabilities under a very different set of conditions and contributions.
“It gave us the opportunity to think about something we should have thought about all along; where we are going… and what liability journey we were on.”
The £2bn Merchant Navy Officers’ Pension Fund will be the next one to close to accrual, from March 31 this year, after an extended period of consultation with members. The DB scheme will be replaced by a defined contribution arrangement with a 30 per cent contribution rate.
Short-term cash flow
When closing to accrual, schemes should consider the impact this can have on their cash flow, said Calum Cooper, partner and head of trustee consulting at Hymans Robertson.
During the process of closure to accrual, long-term cash flow requirements are reduced but less money is coming in. “If you switch off accrual without being thoughtful about it you can inadvertently amplify the amount of risk you’re running in your scheme,” he said.
“It requires a fresh look at investment interventions to make sure you don’t sleepwalk into bigger deficits in the future because of capital loss risk.”
Managing cash flow
Cooper said trustees can take a multi-pronged approach to managing cash flow and funding requirements on an ongoing basis, including:
• Regular rebalancing of assets that have performed well
• Drawing income from assets
• Investing in lower volatility assets
• Holding a larger cash buffer
• Restructuring the income portfolio
• Exploring options for buy-in or longevity swaps
Charles Cowling, managing director at consultancy JLT, also said trustees should consider how their investment strategy will meet shorter-term cash obligations, particularly the demand of funding transfer values.
“At a very immediate level... it’s important to think how you might want to invest with a short-term perspective, as well as a longer-term perspective, in mind,” he said.
