The introduction of a bridging pension option in the Rolls-Royce UK Pension Fund has helped smooth the transition for its members following a scheme restructure announced in May last year.
The most recent valuation for the scheme, which closed to future accrual in December last year, showed a net deficit (before deferred taxation) of £686m, up from £208m in 2019.
The coronavirus crisis prompted a review of the pension scheme, which, after resulting in the decision to close it to future accrual, saw all employees being transferred to a defined contribution scheme as of January 1 2021, with a maximum employer contribution of 12 per cent of salary.
As part of the broader restructure a voluntary severance programme was offered to select employees, and pension liabilities were remeasured to reflect the number of members expected to leave the scheme.
Bridging pension options have been around in many pension schemes for some years, but we have seen a significant renewed focus on them since the pandemic
Kelly Hurren, Aon
A bridging pension option was introduced and made available both to active members and to those leaving on severance.
Bridging pensions allow members to take a larger portion of their pension before reaching state retirement age, and a lower amount thereafter.
According to the company’s 2020 annual report, published on March 31, “this change will support the group’s future financial position and ensure a more equal level of total reward for our people, regardless of when they commenced employment”.
The change also saw the executive directors’ contribution rate brought down to 12 per cent to align with the rest of the workforce. The original plan had been to reduce it from 25 per cent to 17 per cent by 2022.
The severance programme and changes to the pension scheme led to a £213m past service gain, recognised as a non-underlying profit.
Bridging pension lowers expected transfers out
Richard Wray, director of external communications and brand at Rolls-Royce, told Pensions Expert: “We offered a bridging pension as a new retirement option to help our employees — who were at risk as a result of the restructuring we announced in May last year — be able to afford to retire early if they so wished.
“It helps to bridge the gap between early retirement and the date when a state pension becomes payable. We allowed people to divert some of their severance lump sum into the pension arrangement to help finance this option.”
He said it has allowed “some members to apply for voluntary severance who might not have been able to afford to retire early, and to receive a higher level of regular retirement income from our plan before their state pension becomes payable”.
While the group has set no target for adoption, Wray confirmed that there has been “significant” interest from its members.
The introduction of the bridging pension option has already had a material impact on actuarial assumptions, according to the annual report.
Before this option, it was estimated that 45 per cent of members would transfer out of the fund on retirement. That figure now stands at 40 per cent.
The report noted that a 5 per cent increase in that assumption would translate to a £45m increase in defined benefit obligations.
Wray said that having a bridging pension did not present any significant administrative challenges “as we already give people access to retirement advice — which we pay for — from a reputable firm”.
“All we needed to ensure was that the adviser understood the new option and was able to support individuals in considering it as part of the range of options available to them,” he noted.
Covid spurs interest in bridging pensions
Pensions Expert reported in June last year on increased interest in bridging pensions, apparently spurred by the pandemic.
A webinar poll conducted by Aon found that 50 per cent of the 124 pension professionals confirmed their interest in bridging pensions, and 12 per cent said they already had such an option in their schemes.
Kelly Hurren, head of member options at Aon, told Pensions Expert that the demand for bridging pensions has not died down since last year’s report.
“Bridging pension options have been around in many pension schemes for some years, but we have seen a significant renewed focus on them since the pandemic. Since last summer, broadly one new pension scheme has come to us each week with the aim of looking at introducing this option,” she said.
Covid-19 leads to unexpected interest in bridging pensions
The coronavirus pandemic has led to an increase in the number of defined benefit scheme members looking to bridging pensions, according to a report by Aon.
“The main benefit for scheme members is that a bridging pension enables them to receive a higher pension and lump sum at the start of their retirement, which, for many, has made an earlier-than-planned retirement more affordable.”
Trustees need to ensure the option is set up appropriately and communicated clearly, Hurren continued. But once they have been established, they generally do not require much extra effort to maintain.
“Trustees usually take detailed advice on this area. However, once set up there is not any special ongoing management above usual reviews of all scheme factors and options that trustees will do from time to time,” she said.
