Water Companies scheme trustee stands firm over surplus transfer

In April, work and pensions select committee chair Stephen Timms asked the scheme to explain the transfer of an estimated £12.1mn surplus to Bristol Water.

The section of the scheme is being wound up, with an annuity having been bought in June 2018 with Aviva to insure members’ benefits. 

The committee was contacted by scheme members with concerns about the transfer.

It is appropriate for the surplus to be returned to Bristol Water

David Sankey, Water Companies Pension Scheme

Members have said a provision in the section’s rules allow for the surplus to be used to boost members’ benefits. There were no discretionary increases to members’ benefits last year.

In response to Sankey's letter, Timms has told Pensions Expert that members remain unhappy with the consultation process undertaken by the trustee and are entering into dispute over the matter.

The trustee has ‘followed the correct process’

In a letter to Timms dated May 9, Sankey wrote: “In exercising its power to distribute surplus (and in particular in determining not to exercise its discretion to augment members’ benefits) the Trustee has followed the correct process, taken account of all relevant factors and has considered the matter very carefully.” 

“It remains of the view that it is appropriate for the surplus to be returned to Bristol Water,” Sankey added.

Sankey said that the trustee’s ultimate objective in running the scheme had been to secure members’ benefits with an insurer, something that it has been specifically pursuing since the mid-2000s.

He emphasised the trustee’s commitment to minimising risk, referencing investment risk reduction in particular. 

He also pointed to the Pensions Act 2004, which he observed demands the prudent administration of the section — something, Sankey wrote, that “only impacts Bristol Water plc’s contributions (not members)”.

“Bristol Water plc has been supportive of this approach and has paid significant additional contributions to support this risk reduction and low risk investment strategy,” he added. 

Between 2005 and 2016 Bristol Water plc paid additional contributions in 2005 and 2016 of more than £16mn into the section, with the aim of derisking the section’s investment strategy and ensuring the funding strategy protected members “against adverse future events”.

“With hindsight it is the Trustee’s strong view that it is the prudent funding and low-risk investment strategies, coupled with the additional contributions paid into the Section by Bristol Water plc between 2005 to 2016, that is the reason the Section is in the healthy position it is,” he argued, “and without which there would most likely be no surplus”.

Trustee opted not to increase benefits

Bristol Water’s pensions were the centre of dispute in 2021, with workers announcing strike action in response to a pay freeze and no rise in pension contributions from the company.

Sankey admitted that the trustee did consider whether to increase members’ benefits, which the section’s rules allow for in a winding-up scenario.

The rules also require the trustee to consult with the employer — in this case, Bristol Water — and if the benefits are not increased, any surplus is transferred to the employer.

Sankey cited several reasons for the trustee’s decision not to increase members’ benefits.

He wrote that “for the duration of the operation of the Section, all of the 'downside' risk lay with Bristol Water”, emphasising that the employer had been “very supportive” of the trustee’s funding and derisking strategy, along with the additional contributions it has paid.

“With all such risks having (fortunately) not materialised, it does not seem fair or appropriate for Bristol Water plc to be, in effect, penalised for having been willing to facilitate and fund the Trustee’s prudent approach to reserving for these adverse, unrealised contingencies,” he added.

He also observed that members will receive their benefits in full, while most members’ benefits are fully inflation-linked. Those that are not are inflation-linked up to 5 per cent.

Members who were still in-service when the section closed in 2016 received an increase of an additional year’s benefits, he wrote.

Impractical to have member-nominated trustee directors for each section

In his April letter, Timms asked how members had been consulted, along with a request for detail on the nominations and selections process for member-nominated trustees and directors.

Sankey set out the consultation steps that the trustee took in the process, which he argued demonstrated its compliance with the relevant regulations. It has liaised with the Pensions Regulator, he said.

With regards to the make-up of the trustee board, Sankey observed that as a “relevant centralised scheme”, it was not obliged to comply with rules set out in the Pensions Act 2004 over the board’s constitution in the same way that most schemes do.

“Modified provisions apply to it by virtue of its unusual structure (it being a segregated scheme in which non-associated employers participate),” Sankey wrote.

“Very broadly this means that it must maintain at least a third of directors who are ‘independent’ or ‘independently selected’ by members (the latter of which are commonly referred to as member nominated trustee directors) but it is otherwise exempt from the detailed requirements under Section 242 of the Pensions Act 2004 as they do not work practically for a scheme of its nature.”

Sankey added that it would not be practical to have member-nominated trustee directors for each section of the scheme. The nominations process depends on whether the sections included have active members or not.

In response to Sankey's letter, Timms told Pensions Expert: "The Committee has also heard from scheme members, who argue that they have also made significant contributions and that the pension scheme is an important part of their remuneration.

"They think they should be also be entitled to a share of the surplus. They do not feel their views were taken properly into account in the consultation. We understand they are raising their concerns through the disputes process.

"They have asked the Committee to look at the approach taken in other countries, and also in other schemes, such as the Mineworkers’ Pension Scheme, where there is a surplus sharing arrangement. 

"The Committee is interested in this and may well look further at this in the course of this Parliament."

On May 19, Canadian asset manager Brookfield said that it will retain repair business HomeServe’s current DB arrangements — which also sit in the Water Companies Pension Scheme — following the announced agreement of a £4bn takeover of the company.