Will DB Pension Schemes Ever Recover?
Based on the current figures coming out the deficits are just going to get bigger and bigger. With most schemes invested in Government Bonds, mortality rates increasing and less people joining pension schemes it seems almost impossible for company schemes to survive. Here’s some notes from Reece Fallaize deVere Group in house pension specialist.
First lets look at some examples of large DB schemes:
Universities Superannuation Scheme
This is the second largest scheme in the UK with almost 300,000 members. It is also one of the worst. As at March 2011 the scheme had a deficit of £2.9 billion which represented a funding level of 92%. During the 12 months to March 2012 the deficit had increased to a whooping £9.8 billion which only represents a funding level of 77%. The funding level is reduced to 50% on a full wind up basis which is very significant indeed
The scheme has only managed to achieve an annual return of 1.1% on its investments over the last 5 years
As a result of the deficit the scheme have increased retirement age to 65 and have said that this will be increased further in line with state retirement age
A point that is overlooked is that the pension scheme is run and controlled by separate legal entity to the main company. This often results in slight disagreements over the figures between the scheme actuary and the company although under legislation the scheme Trustees (who the actuary works for) pulls rank.
In the December 2011 accounts it is noted that the last actuarial funding report was done on 31 March 2010 (these reports are only required every 3 years). At that time the Deficit was £3.5billion which represented a funding ration of only 84%. As mentioned above the company can produce different figures of what they view the deficit as and these have been as follows (all at end December):-
2007 – £232m surplus
2008 – £1,442m Deficit
2009 – £2,594m Deficit
2010 – £2,190m Deficit
2011 – £2,164m Deficit
As a result of the deficit the group has a recovery plan in place until 2018 that will pay additional annual contributions of £375m per year and from 2013 £400m per year. These figures sound good but below is the cumulative net actuarial losses on an annual basis:-
2009 – Actuarial loss of £3,856m
2010 – Actuarial loss of £3,680m
2011 – Actuarial loss of £4,031m
So the additional contributions make up about 10% of the annual losses!
Scheme is now closed and further changes will need to be made to reduce this deficit such as change of RPI to CPI or even closed to future accruals altogether. I think this scheme will probably follow Tesco’s lead and increase retirement age to 67.
Last year BT disclosed a pension deficit of £1.8 billion and in March 2012 made the largest additional pension contribution of any UK company totalling £1.912 billion. We would therefore expect the scheme to be fully funded however, the latest report and accounts of BT show that their current pension liability is £2.4 billion which is a large increase on last year despite the huge one off contribution.
BT will be making another additional contribution of £325m in March 2013 followed by annual contribution of £295m until March 2021. Will these planned contributions do anything to help the funding status of the scheme? Highly unlikely considering the position got worse after a contribution of nearly £2billion!
The liabilities within the scheme are now at 20% of the market capital of the company (bearing in mind how large the company it this shows the level of obligations it has taken on) and as a result the scheme is considered to represent a financial risk to the company.
In June 2010 the company froze the final salary scheme and moved members to a DC scheme although their accrued final salary pensions were not moved to DC arrangement just future benefits. This change saved the company $800m and caused a bit of negative media attention at that time.
The company haven’t committed to a long term funding strategy and have thus far committed to June 2013 and aim to contribute £715m by then. This may sound a lot but its less than half the current deficit and in addition they are assuming that their investments will generate a 5.9% annual return which is quite unlikely bearing in mind they have a 60% weighting towards bonds. SO it is likely that the investments will under perform and again this will drive the total deficit higher still.
There are lots more examples we can give. What do you think? Can DB Pension Schemes ever recover?
Nigel Green deVere Group
Blog written on 12th of November