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Kodak deal could ‘set precedent’ for benefit change

The recent Kodak Pension Plan (KPP) deal, prompted Pensions Week to speak with our Director of Pensions, Simon Kew, to ask his views on what this may mean for other schemes and employers.

News analysis: The technique used to save the Kodak Pension Plan’s sponsor from insolvency could set a precedent for schemes and employers wanting to change members’ benefits to reduce risk.

A settlement finalised last month between Eastman Kodak Company and the defined benefit scheme to save the company from insolvency in the US left individual scheme members with the choice to enter a new pension arrangement or go into the Pension Protection Fund.

In the deal, approved by the Pensions Regulator, the scheme bought two of Eastman Kodak’s businesses for $650m (£421m) and withdrew its £1.9bn of legal claims against the company.

A spokesperson for the Kodak scheme said the settlement also includes a new Kodak UK pension plan, whose sponsor is a special purpose vehicle held in a separate corporate group. This group will not trade, hold any of the assets transferred from the company or pay contributions. Income is expected from the acquired businesses’ cash flows.

“The existing scheme was unsustainable, so therefore there was no opportunity for that to continue, or for members to stay within that scheme,” said a spokesperson. The original scheme had assets of approximately £1bn.

“Members are being given the opportunity to join KPP2, the new scheme that will be launched, or they can vote no to that proposal, in which case [they] will go into the PPF. But importantly if they don’t vote, that will be counted as a no vote and they will go into the PPF,” the spokesperson added.

Voting on your pension

The members’ choices are on an individual, not consensus, basis. If any members do choose the PPF, the old scheme will start the assessment period for possible entry into the organisation.

Clive Pugh, partner at law firm Burges Salmon, said usually it is quite hard to change benefits, even if members’ permission is asked beforehand.

“Even if you get those consents, you have the problem that sometimes you can’t give up the benefit, you have to exchange the benefit under the law, depending on the law,” he said.

“But here, because the original scheme is dropping into the PPF, they don’t have that problem if this is what is being used, because the new scheme is given those different benefits.”

Pugh added: “If that’s a new technique I could see it being a precendent.”

Schemes can ask for support during successful periods to prepare for possible bankruptcies, said Simon Kew, head of pensions at Jackal Advisory.

If schemes thought sponsor insolvency was likely, they should try and get involved in the discussions as early as possible, Kew said, adding that trustees generally should have a standing item on their agendas for employers to give financial health updates.

He suggested schemes watch out for the inevitable positive spin from the company during discussions. “Bottom line, get as much information as possible. Do not put heads in sand and think it will be okay – it might not be. Look at all the possible outcomes,” he said.

A spokesperson for the PPF said the scheme was not yet in the assessment period as it had yet to receive an s120 insolvency notice, triggering entry.

“Anything that provides better benefits for members and does not increase our liabilities is to be welcomed,” the PPF spokesperson said.

Category : Savants in the News — admin @ 12:00 am June 28, 2013

Reading between the lines of TPR’s ‘Annual Funding Statement ‘

Earlier this month, the Pensions Regulator (TPR) released their second ‘Annual Funding Statement’, which created a great deal of buzz around their ‘new-found flexibility’.

Right off the bat, let me say that there is NO NEW FLEXIBILITY. What we have seen from a large section of the Industry is the usual ‘king’s new clothes’ reaction, to any missive from Brighton, from those that don’t know how TPR works. There has ALWAYS been flexibility in the system. I know, because my colleagues and I have been there, seen it and employed it ourselves

Triggers
Whilst I’m talking about Industry misunderstanding, I have to mention the 10 year trigger, as I have done many times before. It is and always has been a trigger. Not a target. It was a way that TPR could quickly split the data they received into two, broad piles. How many of you, in the early days of Scheme Funding, received a very quick response when a 9 year 6 month recovery plan was submitted? Quite a few, I’d wager. It was never a bar that had to be kept under, like a financial limbo competition. So, when TPR says they are “moving away from setting triggers focused on individual items”, it is not a huge step for them. They’re probably just sick to the back teeth of trotting out the ‘trigger not a target’ line!

Covenant
Now, let me address the remainder of the statement. In short, it follows a similar brief to last April’s release, in that it collates previously available information/guidance and brings it together in one place, to encapsulate current regulatory thinking. Not ground-breaking, but certainly a useful summary, for us to gauge where TPR’s thinking is at.

Covenant and affordability remain at the heart of the funding process, with an increased focus on investments. TPR have named this “Integrated Risk Management”. This is what Trustees and Employers should have been doing since the start of the Scheme Funding regime. So, whilst there is little we have not heard before, there is a new abbreviation to add into the mix – IRM.

Employer Strength
We have always said that the strength of the employer, along with their ability to make good the scheme deficit, is the key factor to be considered. Pre and post retirement discount rates are part of that, as is the investment strategy for the scheme. Let me use a rather extreme investment strategy, to underline that point – if the Trustees were to place all (or part) of the scheme funds on the Epsom Derby, how able is the Employer to replenish the funds if the horse doesn’t win? If the answer is ‘very’, then Trustees may wish to look at a more adventurous investment policy. If the answer is ‘highly unlikely’ or ‘not at all’, the Trustees need to exercise greater prudence.

Future Changes
An autumn consultation is in the offing which, we are told, will include TPR’s regulatory approach and how they assess risk. I can’t encourage you enough to take part in this, if you have the time to do so – I know I certainly will. It is far too easy to hit the regulator with brickbats, without providing constructive feedback when the opportunity arises. We may not all get what we want from the consultation, in fact I’d pretty much guarantee it (TPR has to take an objective approach based on the overall good, rather than any vested interests) but that should not be a barrier to participation.

I mention ‘objective’ in the previous paragraph, so it would be wrong of me not to address the spectre at the feast being TPR’s new objective. The Chancellor said in his budget statement that “The Government will provide The Pensions Regulator with a new objective to support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer and fully consistent with the 2004 funding legislation”.

The draft 2013 Pensions Bill provides further clarification stating that, when carrying out its scheme funding duties, TPR should “minimise any adverse impact on the sustainable growth of an employer”.

I will cover this in full, in a separate newsletter, when the regulator indicates how it intends to interpret the new objective. In the meantime, I shall say this. The Chancellor provided a significant caveat in his speech, when he says growth should be supported where “…fully consistent with the 2004 funding legislation…”. In other words, TPR can carry on regardless…unless BIS or No. 10 decide to get involved. ‘Twas ever thus!

Category : Employer Covenant — admin @ 9:20 am June 12, 2013

Breaking up is hard to do…

Simon Kew, Jackal Advisory’s Director of Pensions, was asked to look back on his time at the Pensions Regulator (TPR) and the issues facing schemes that are looking to change their administrator.

Laura MacPhee outlines how schemes can make the process of switching administration providers as painless as possible

The relationship between a scheme and its administrators is vital: both parties should work hard to understand and accommodate each other’s needs as far as possible. But it is equally important to know when to call it a day.

There are a number of reasons why a trustee board might choose to change administrator – they may not be happy with the service they are receiving, it may be proving too expensive, or some corporate activity such as a merger forces the decision on them.

But breaking up isn’t always easy to do, and trustees expose themselves to a variety of risks when they take the plunge.

Common problems include delays in providing data and information, high fees to provide this data, disputes over data ownership and working files, and the withholding of historical data and information.

“Even with good intentions, the absence of agreed good practice or thought-out exit plans in contracts can increase the risks for trustees, employers, and the new administrator,” says Margaret Snowdon, chair of the Pension Administration Standards Association (PASA).

So what can trustees do to make the transition period as smooth as possible?

“You make sure that you’ve got a copy of all your contracts, and you know what happens if you need to leave, but then you try to make the relationship work.”

It’s a case of hoping for the best, but planning for the worst, says Kim Gubler, director of Kim Gubler Consulting. “You make sure that you’ve got a copy of all your contracts, and you know what happens if you need to leave, but then you try to make the relationship work.”

Contractual issues

Contracts are likely to be more of an issue where a scheme has had a lengthy relationship with its administrator. Gubler says: “If they’ve been with their provider for 20 years there might have been an appointment letter, so the sort of things that are in a contract now weren’t in the contract then or they’d refer to terms and conditions that weren’t included.”

Trustees should periodically review their contracts to make sure they know what will happen if anything goes wrong. Brian Spence, Dalriada Trustees’ chief executive officer, suggests trustees could think of the contract with a third party administrator as a “pre-nuptial agreement”.

This would remove the problem of uncertainty around issues such as who owns what documentation. Correspondence with members is a particularly grey area – both the trustees and administrators could argue they should be responsible for it, which can delay or frustrate the continuing administration process.

If an ex-administrator retains documentation their successor will be left in the dark with incomplete records.

Trustees face a number of hazards when changing administrator. Simon Kew, director of pensions at Jackal Advisory, recalls how one scheme encountered a particularly difficult and unusual situation. Its trustees made a frantic call to the Pensions Regulator after realising their records had been lost.

They had been handed to a courier to transfer from one administrator to the other and “during transit disappeared into the ether without any explanation of how or where they could have gone”, he remembers.

Breaking up is hard to do...

“The trustees were doing absolutely the right thing,” says Kew. They paid for credit checks for members to ensure that nothing untoward had happened as a result of someone finding their personal details, and many of their files were backed up electronically. However, there were gaps that needed to be filled, which was both time consuming and costly.

The moral of the story is that trustees must make sure they have backed up their data – whether in electronic or paper form. Kew suggests they could even scan in paper records if they don’t have the time or resources to have someone enter the information manually.

This is particularly important when switching providers, as the new administrator needs access to complete information, so it must be moved from one place to another, with all the risks that may entail.

Another factor, which can complicate changeovers, is the notice period. Again, trustees can generally find this information in the contract, but they should ask if they are uncertain – and before it becomes an issue.

Gubler says it will generally be three, six or 12 months, depending on the size of the scheme. Trustees should also check whether they will be charged an implementation fee for leaving an administrator’s service before a specified term.

5 pitfalls to look out for when changing your administrator

1 Contracts  Make sure you have a copy of your contract, and that it contains any relevant terms and conditions, particularly when you have used the same administrator for a long time

2 Notice period  Find out either from your contract or administrator how much notice you need to give when you decide to change

3 Ownership of documentation  Work out whether the administrator or the trustees own the documentation, such as correspondence with members

4 Fees  Check whether you will be liable to pay the old administrator for ending the relationship before an agreed period

5 Backing up  Make sure all paper and electronic data is backed up and that you know how to access it

Code of conduct

Trustees are not alone in trying to tackle the pitfalls of switching providers. PASA is developing its Code of Conduct on Administration Provider Transfers (see box) to provide some guidelines for the transition phase. Phillip Bretnall, a PASA board member, is taking the lead, spurred on by his experiences as chief operating officer at the HSBC Bank Pension Trust.

The scheme were not happy with their administrators and embarked on the time-consuming task of cleaning up swathes of poor-quality data with a new provider. Good data is crucial, not least because if it is incorrect it will not be possible to calculate actuarial cashflows accurately, or invest in them properly.

The HSBC trustees are not the only ones. Regrettably, the service provided by the ceding administrator is often “considerably less than professional”, Spence laments, pointing out that third-party administrators are often responsible for maintaining the scheme data that “underpins everything in the operation of the scheme”.

PASA’s initiative is designed to help trustees avoid the difficulties too many have experienced. Whether the new code really improves the situation for schemes, and ultimately members, remains to be seen, but this is a positive step in a perilously unregulated area.

Category : Savants in the News — admin @ 12:00 am June 5, 2013