Year in review: 2016 was the year the dam finally broke and defined benefit funding issues jumped into the mainstream news, with stories such as Tata Steel and BHS’s funding woes striking a chord.
While the wider public tried to get its head around the gargantuan deficits being estimated for these schemes (though the British Steel Pension Scheme’s has fallen significantly), debate raged within the pensions industry about how funding is measured and reported. This issue is sure to continue into 2017.
Here we have a round-up of our five most popular articles on DB and derisking, ranging from the M&S scheme finding itself in very good health, to the risks posed by asset derisking.
Halcrow plots rescue of DB scheme
May 9
Pensions Expert was the first pensions title to report on the efforts to manage liabilities at engineering company Halcrow, which had increased following the company’s acquisition by engineering giant CH2M.
When the company was acquired in 2011, the scheme’s liabilities were estimated at £100m. However, Willis Towers Watson (then Towers Watson) calculated the solvency deficit at approximately £500m on December 31 2015.
The trustee and employer proposed a mirror scheme, providing identical benefits and with the same trustees, the only difference being that benefits would increase at the statutory level rather than the 5 per cent previously offered.
Ultimately, the Pensions Regulator worked with Halcrow Group Limited to agree a regulated apportionment arrangement and ensure the scheme was kept out of the Pension Protection Fund.
GKN continues derisking with £53m buy-in
April 4
The global engineering group signed off on a second buy-in last year, insuring £47m of pensioner liabilities as a result.
The company added the £53m buy-in, carried out with insurer Rothesay Life, to a £123m deal with the same company back in 2014.
In the year to the end of 2015, the scheme’s deficit dropped by £153m to £1.6bn, due to additional contributions and changes to the discount rate.
As the schemes mature, the group plans to derisk away from growth assets such as bonds and other matching assets.
But until then, the company’s annual report from 2015 said: “The group considers that equities and similar assets are an appropriate means of managing pension funding requirements, given the long-term nature of the liabilities and the strength of the group to withstand volatility.”
M&S scheme in ample surplus as hedge pays off
February 15
Hedging interest rate risk paid off for the Marks & Spencer Pension Scheme, as it announced at the start of the year that it had swung into surplus.
The company agreed its triennial valuation with trustees at the start of the year, calculating a £204m scheme surplus as of March 31 2015, up from a £290m deficit on the same date in 2012.
An announcement from the company said: “This is due to an outperformance of return-seeking assets over the period. The scheme has also been fully hedged for interest rate purposes and thus insulated from the effect of falling gilt rates.”
A spokesperson for the scheme said the hedging strategy had been implemented gradually, increasing the hedge over 10 years until it completely covered the scheme against interest rates.
NI government offers early retirement to teachers aged 55+
January 6
The Department of Education in Northern Ireland approved a £33.1m scheme to offer early retirement to members over the age of 55, in an effort to make space for recently qualified teachers.
There are more than 2,300 teachers aged over 55 working in Northern Ireland; up to 500 are expected to retire under the scheme.
The Department of Education described the scheme as "part of a dual approach to a strategic cost reduction for schools".
Outside the public sector, the introduction of freedom and choice last year has prompted debate over how best to ensure people leave the workforce at the end of their working lives, enabling newer recruits to join.
Richard Butcher, managing director at professional trustee company PTL, said: “The employer can no longer control their workforce in the way they used to. The consequence is you can have over-55s saying, ‘No thanks, I don’t want to retire.’”
Asset derisking could leave a funding gap
January 8
Research released at the start of this year questioned whether asset derisking by pension schemes had gone too far, potentially curtailing their ability to generate returns and meet long-term funding targets.
UK DB schemes have removed nearly half of their funding-level risk over the past decade, but this has been achieved mostly through reducing asset-side risk, rather than hedging liabilities, according to a report from consultancy Redington.
The report used data from the PPF’s Purple Book and consultancy KPMG’s liability-driven investment survey to conclude the cash plus 1.7 per cent return expected from schemes’ current allocations falls 0.7 per cent short of the return needed to reach full funding by 2030.
It added that schemes would need returns of between cash plus 2.4 per cent and cash plus 2.9 per cent to reach full funding by 2030, depending on ongoing levels of sponsor contributions.
