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British Steel backs defensive strategy to close deficit – 12th March

“Jackal Advisory’s Director of Pensions, Simon Kew, looks at the recently publicised British Steel scheme and what trustees should be mindful of.”

British Steel Pension Scheme has told members that its defensive investment strategy will help close its £1.5bn funding gap, after an annual update revealed its funding level had dropped by six percentage points in a year.

A formal valuation in March 2011 put its funding level at 95 per cent, with a deficit of around £500m. By March 2012, this level had dropped to 89 per cent and its deficit had hit £1.5bn.

The £12bn scheme’s trustee board has decided against bringing forward its next valuation date from March 2014, or changing its recovery plan, to take account of the increased deficit.

British Steel Pension Scheme: key stats

  • Contributing members: 18,062
  • Deferred pensioners: 38,194
  • Current pensioners: 94,828
  • Scheme assets: £12bn
  • Deficit: £1.5bn
  • Source: British Steel Pension Scheme, figures at March 31 2012.

Allan Johnston, the scheme’s chair, told members in a newsbrief that the defensive nature of its asset allocation, coupled with diligent management of the scheme, should put it in the best possible position to tackle the issue.

“All UK pension schemes are facing the same challenge, but the relative strength of the BSPS funding position has been protected to some extent by the defensive nature of its asset allocation, which has proved to be very resilient over time,” he said. In February, the value of its assets reached an all-time high of £12.6bn.

The scheme announced last year that it was going to close its defined benefit section and launch a defined contribution arrangement, to make the scheme more sustainable and manage costs associated with auto-enrolment.

The major factor behind the significant rise in its liabilities was record low gilt yields that are affecting all schemes, said the update.

Johnston also explained that the trustees had found “no compelling reason” to adjust its recovery plan – agreed as part of the 2011 valuation to get the scheme back to a fully funded level by 2026 – and bring forward the valuation date.

 

How to close your funding gap

Some schemes have moved their valuation date in order to take advantage of the impact of favourable marketing pricing on the price of paying future benefits.

Lawyers have reported that some companies have been forced to put forward unorthodox proposals like this to try to tackle the adverse effect of plunging gilt yields.

Jane Kola, pensions partner at Wragge & Co, said there were other options available to trustees dealing with big deficits:

  • Schemes should look at their investment strategy to assess whether they can afford risk, particularly if they have a weak covenant.
  • Discretionary benefits could also be closely scrutinised if they fall under the trustees’ remit, including whether it is appropriate to continue paying them.
  • Trustees should try to find out as much as possible about what abilities they have, such as whether they have unilateral powers to wind up.

“These are definitely things within [schemes'] control and they are things they should look at first,” Kola said.

It is important for schemes not to make knee-jerk reactions to funding movements, according to Simon Kew, director of pensions at covenant specialist Jackal Advisory.

He said: “The key thing is monitoring. Is there going to be a major transaction at the company, for example? With something like that, the trustees may need to revisit [previous decisions].”

For schemes, looking at whether they are being “overprudent” is another option that could be explored, Kew added. British Steel declined to comment further to the newsletter.

Category : Savants in the News — admin @ 12:00 am March 12, 2013

2013 Pension Schemes of Europe Conference

Simon Kew, Director of Pensions at Jackal Advisory, has been asked to join a prestigious line-up of speakers at the PlanSponsor Pension Schemes of Europe Conference, in Amsterdam, on 18 June. He will be sharing his thoughts on the future of Defined Benefit pensions, both in the UK and across Europe. To find out more, please follow the link to the PlanSponsor website:

http://www.plansponsor.com/europe/event/speakers.aspx?id=6442490887

Category : Savants in the News — admin @ 12:15 pm March 3, 2013