Imperial Tobacco has increased contributions to its UK defined benefit scheme to boost its winding-up funding level, which has dropped by 12 percentage points, according to its latest valuation.
The majority of DB schemes are still working to reach full funding on a technical provisions basis through a combination of employer contributions and investment returns.
The £2.7bn scheme has agreed a higher level of contributions with the tobacco company, which started at £47.5m in the year until March 31 2014 and will steadily increase to £57.5m until the same time in 2016.
Annual contributions will then increase to £62.5m for the next 12 years.
Our contributions are being driven by the winding-up position of the fund
Paul Hughes, pensions manager and scheme secretary
Pension manager and scheme secretary Phil Hughes said: “Our contributions are being driven by the winding-up position of the fund.”
Under the terms of the scheme’s trust deeds and rules, trustees have to fund the scheme – not only on a technical provisions level but also considering the winding-up position of the scheme, he said.
The scheme is 100 per cent funded on a technical provisions basis and 69 per cent funded from a winding-up position, he said.
This is down from 81 per cent on a winding-up basis at the time of its previous valuation in 2010.
The level of contributions will be reviewed once the next valuation is completed in 2016.
Annual contributions were increased from nil to £31m at the time of the scheme’s 2010 valuation, according to the company’s 2013 annual report.
It ceased to admit new members on a defined benefit basis from June 30 2010.
Paul McGlone, partner at consultancy Aon Hewitt, said only one or two of the DB schemes that he looks after have reached full funding on a technical provisions basis.
“Those that do get there tend to be of two minds,” said McGlone. “Some of them say, ‘We’re fully funded now, we don’t need to pay any more’ and others say, ‘We’re aiming for something else, we’re aiming for buyout, lets keep going until we get there’.”
Martin Hooper, associate at consultancy Barnett Waddingham, said some schemes may be starting to plan to reach full funding on a winding-up basis but are still working towards their technical provisions.
“But what these schemes are doing is paying some contributions but hoping to make up the difference by a combination of investment returns and contributions,” he said.
Once schemes have reached this position they would typically pursue an investment strategy that hedges out interest and inflation risk but still delivers strong investment returns, Hooper said.
This is typically being achieved through investment in some equities, corporate bonds and increasingly diversified growth funds, he said.
“The idea is to produce broadly similar returns but with much less volatility,” Hooper said.
McGlone said employers are usually reluctant to pay more contributions to its scheme once it is 100 per cent or more funded on a technical provisions level.
“The issue is that 100 per cent funding on your technical provisions means you do have enough money provided you get the investment returns you need to do it,” he said.
However, McGlone said employers with a scheme that has reached this level would be better off putting contributions into an escrow account or reservoir trust.
“There’s no way I’d recommend paying money to get in to buyout earlier,” he said.
Schemes with a large number of deferred members that are looking for buyout may want to wait until more are pensioners to get a better price, McGlone said.
