The trustees of construction company Kier Group’s defined benefit pension plans have agreed a new payment schedule, to reduce sponsor contributions as the schemes approach full funding.
The agreement cuts Kier’s payments over the next four years to £54.5m from £138m, according to the company’s annual reports.
It follows the schemes’ triennial valuation and negotiations between chief financial officer Simon Kesterton and the pension scheme trustees.
The reduction will help the sponsor’s planned restructuring and cost saving push under new chairman Matthew Lester and CEO Andrew Davies.
In the financial year to 30 June 2020, Kier paid £24.9m into the pension plans. At that date, the schemes had £1.9bn in total assets, resulting in a £38.8m surplus.
Sponsors need to be as open as they can be with trustees and provide regular and accurate updates on financial and covenant information. Trustees, meanwhile, need to have empathy towards the employers, now more than ever
Gary Crockford, Buck
Agreements with the trustees and lenders meant that Kier “would be expected to continue to have available liquidity headroom under its existing finance facilities” if there was a second wave of Covid-19, the annual report stated.
Kier Group’s adjusted operating profit halved in the 2019-20 financial year compared with 2018-19 due to the impact of Covid-19. The company recorded a loss from operations of £195.6m, on top of the previous year’s loss of £203.5m.
Chair Mr Lester — who took up his post on January 1 2020 — said in his introduction to the annual report that Kier Group was “in need of a turnaround” even before the pandemic hit.
“Important steps have been taken and progress has been seen,” Lester said. “Management has taken decisive action to turn the business around, including accelerating the cost savings programme and introducing performance excellence, while maintaining a dedicated and clear focus on operational safety.”
Navigating pandemic challenges
Kier’s annual report highlighted engagements between the company and trustees that allowed the corporate board to “assess an appropriate level of funding for both the group and the schemes”.
“Trustees should be sympathetic to renegotiating contribution schedules if the viability of sponsors is compromised, because an ongoing sponsor is clearly valuable for the scheme,” says Alistair Russell-Smith, head of corporate DB at Hymans Robertson.
Kier schemes on the derisking path
Kier operates four defined benefit schemes, the largest of which is the £1.3bn Kier Group DB scheme. This had a surplus of almost £90m as of 30 June 2020, the company’s annual report stated.
Alongside this are three smaller schemes the company has brought on through the acquisitions of Mouchel, May Gurney, and McNicholas, all of which were in deficit at the end of June.
The trustees ran a pension increase exchange exercise in the previous financial year for members of the Kier and Mouchel schemes, which account for the majority of the company’s pension liabilities. This resulted in a one-off improvement of £16.1m.
In addition, the schemes’ aggregate asset allocation indicates a programme of derisking over the course of the 2019-20 financial year. Equity allocation dropped from 33 per cent of the portfolio to 27 per cent, while corporate bonds increased from 23 per cent to 48 per cent.
The trustees also cut cash to 6 per cent from 10 per cent, and significantly reduced exposure to absolute return strategies from 19 per cent of the portfolio to just 4 per cent.
“However, trustees’ need to ensure the negative impact of agreeing to lower contributions is mitigated effectively. Two examples could be obtaining security or a share of future upside in exchange for lower contributions.”
For Kier Group, the £27.1m due to the schemes this year includes £13.4m that is guaranteed by a third-party surety bond.
Gary Crockford, head of the knowledge resource centre at pension consultancy Buck, explains that the relationship between the sponsor and trustees is crucial for successfully navigating difficult periods.
“Sponsors need to be as open as they can be with trustees and provide regular and accurate updates on financial and covenant information,” he says. “Trustees, meanwhile, need to have empathy towards the employers, now more than ever.
“Structure and planning can go a long way towards encouraging and allowing for this easy flow of communication. Scheduling regular updates or even just marking out a specific slot in the quarterly trustee meeting can make this process easier.”
Mr Russell-Smith says trustees should consider establishing a “joint working party” of scheme and employee representatives to facilitate better communication.
“This is a great way to set, share and work towards shared objectives, and tends to be far more efficient and effective than, for example, batting letters to and from each party,” he says.
The Covid-19 pandemic has hit the global economy hard, but unlike previous crises the impact has varied significantly by sector, according to Mr Crockford.
“Overall, better hedged and better funded schemes have seen less impact, as they tend to be less reliant on cash to meet their long-term targets,” he says. Schemes reliant on cash contributions are more likely to have had to reassess their journey plans.
Should ‘too-big-to-fail’ schemes be nationalised?
Analysis: The current pandemic-led economic crisis, coupled with the fact that some of the biggest defined benefit schemes are sponsored by quasi-governmental institutions, has led to suggestions that the government should nationalise these pension funds.
Just 16 per cent of UK schemes have seen their sponsor covenant weakened by the pandemic, according to new research by Willis Towers Watson. While this is “less gloomy” than many feared, says head of funding Graham McLean, many schemes still feel the crisis has done “lasting damage” to the financial health of their sponsors.
The survey also found significant disparity between trustees’ and corporates’ views on achieving long-term objectives. Nearly two thirds (64 per cent) of trustees said they would reach their current objective in no more than nine years, but only 28 per cent of corporates said this was likely.
Mr McLean says this could mean both sides enter the next round of negotiations “with starting positions that are further apart than they have been for many years”.
“Creative solutions will have to be explored if they are to find common ground,” he adds.
