The British Coal Staff Superannuation Scheme has announced pension increases for its members, as it ends the surplus-sharing arrangement established after the privatisation of the scheme's employer in 1994.
Once-public schemes often have arrangements in place to guarantee levels of benefit for their members, but the current funding environment is making pension increases more difficult to justify.
Pension pots in the BCSSS were previously made up of the 'formula' pension, which rose in line with retail price index, and the 'bonus' pension, which rose or fell based on the scheme's assets, in a surplus-sharing arrangement between scheme and company. This second part could also be negative, potentially negating the increase.
British Coal members’ pensions will now rise by a guaranteed 2 per cent each year from 2017 until 2019, following similar increases for 2014 to 2016 awarded after the last actuarial valuation. After 2019 the bonus part will remain flat, while the 'formula' will continue to rise with inflation.
Geoff Mellor, chief executive at BCSSS, said: “The guaranteed part of the pension – which is estimated to be three-quarters of the pension – will go up with inflation from 2020 and the rest will stay level."
Investment reserve
The scheme began a sustainability review in mid-2013 following discussions with the government, which concluded late last year.
As a result of these the fund will give members a 2 per cent increase and repay £500m of the scheme's investment reserve – set up when British Coal was privatised in 1994 – to the government.
The reserve is intended to prevent the government needing to put further money into the scheme and was due to be repaid in full by 2019. However, under the new arrangement the reserve will remain with a balance of £1.5bn until 2033.
The guaranteed part of the pension – which is estimated to be three-quarters of the pension – will go up with inflation from 2020 and the rest will stay level
Geoff Mellor, BCSSS
Mellor said the reserve was invested in the scheme and had generated £100m that was paid to the government in 2006.
Richard Butcher, managing director at professional trustee PTL, said the growing cost of running defined benefit funds has led to schemes and employers being less willing to give members pension increases.
“I’ve not come across a scheme that has given more than it absolutely has to for a long time,” he said.
Butcher added the nature of the BCSSS as an industry-wide scheme gave it more control over contribution rates. “The scheme is completely independent from the group of employers,” he said.
Hugh Nolan, chief actuary at consultancy JLT Employee Benefits, said the culture of benefit increases and contribution holidays in the 1980s has changed completely in today’s challenging investment environment.
“Schemes that go into surplus aren’t going to be giving members uplifts, they’ll be looking to reduce their risk. Schemes and employers are much more cautious now… there’s no element of sharing the good times.”
Nolan added schemes with money to spare were more likely to use it to reduce risk than increase benefits.
