Automotive and aerospace company GKN has made a £7m saving on its pension scheme following completion of a pension increase exchange exercise.
Research released by consultancy Aon Hewitt this week found 19 per cent of schemes larger than £100m are planning to offer a pension increase exchange to members. Pies are often used as one of a range of methods for reducing liabilities.
The company ran the exercise for its legacy defined benefit scheme, GKN1, offering members the opportunity to exchange future inflationary increases for a one-off payment.
If you award someone a higher pension it is possible there are tax considerations that should be borne in mind
Bob Scott, LCP
The option was taken up by 54 per cent of members.
In its most recent annual results, the company said: “Due to differences in the inflation assumption used to determine the pension increases and those used for accounting purposes, the PIE exercise has led to a £7m income statement credit which has been recognised in trading profit.”
In addition, the scheme received £42m in additional contributions during the year. £30m from an asset-backed cash-funding arrangement, £10m in deficit recovery payments and £2m to cover a funding requirement arising from a £123m bulk annuity purchase.
The deficit across all schemes operated by the group was £1.5bn at June 30 2015, down from £1.7bn at December 31 2014. The group attributed the improvement to “favourable changes in the discount rates used, further deficit contributions and beneficial currency movements.”
The funding arrangement was formed on March 31 2010, when the group transferred certain UK freehold properties and a non-exclusive licence over GKN trademarks, along with rental and royalty rights, to a limited partnership. The group then made a special contribution of £331m to the scheme, which was used to acquire a nominal limited interest in the partnership worth the same amount.
A spokesperson for the company said: “The UK pension scheme’s nominal partnership interest entitles it to a distribution from the income of the partnership of £30m per annum for 20 years subject to a discretion exercisable by the group in certain circumstances.”
Liability reduction
Bob Scott, partner at consultancy LCP, said Pies were a useful way to simplify pension increases and reduce the cost of a buy-in or buyout.
However, he added schemes should also consider the effect on a member’s potential tax bill.
“With all the changes in pension taxation, if you award someone a higher pension it is possible there are tax considerations that should be borne in mind.”
Lynda Whitney, a partner at Aon Hewitt, said companies considering a Pie should consult the code of practice for incentive exercises.
She said: “It’s something companies should look at, especially if they want to get trustees on side.”
Whitney added that even where schemes were not looking to offer a Pie to members, the introduction of increased pension flexibility was leading schemes to widen the options offered to members.
“Even if people aren’t going to offer a Pie, they’re looking at the freedom and choice language and seeing if they can offer them more options,” she said.
She added that schemes could also look at doing more liability-driven investment as another way to create savings.
The group agreed an additional £10m a year in deficit funding recovery payments following the 2013 funding valuation. The spokesperson said further additional payments may commence in 2015, depending on asset performance.
