Scheme funding ratio remains static

Despite schemes having made three extra years of deficit repair contributions, the Pensions Regulator has reported that the average funding ratio of “tranche 9” schemes has remained relatively unchanged since the previous valuation, with both deficits and deficit repair contributions higher in nominal terms.

The Regulator’s latest analysis and related statistics is based on over 1,800 tranche 9 schemes – those with triennial valuation dates between 22 September 2013 and 21 September 2014 – which by 31 January 2016 had either submitted a recovery plan to the Regulator because they had a funding deficit, or reported a surplus.  86% of the schemes submitting recovery plans had also submitted recovery plans in tranche 6 and tranche 3. 

The Regulator has also reported:

• The average increase in assets between the tranche 6 and tranche 9 valuations is 22%, while the average increase in technical provisions is 20%. On average, the funding ratio has increased from 88.2% to 88.9%.  By 31 January 2016, 399 tranche 9 schemes have reported surplus positions out of a total of 1,838 submissions; this compares with 445 surplus schemes out of 2,097 in tranche 6
• Over one-sixth of schemes have one or more contingent assets, which typically take the form of guarantees from a sponsor’s parent or associated entity. Only 11% of schemes have PPF-recognised contingent assets.  Schemes with contingent assets tend to be larger in terms of memberships and liabilities, with weaker covenant support, or with no active members
• On recovery plans the average recovery period is eight years, with half of the schemes having recovery periods of seven years or less. The average recovery period end dates have increased by two years since the previous valuation, with just over one-third of the schemes extending their recovery period end dates by more than three years.  Schemes with longer recovery periods tend to be those with weaker covenant support, lower funding levels, assets which are less robust to downside investment risks, and greater proportions of return-seeking assets
• On assumptions the average real discount rate (single effective discount rate) assumption has decreased from 1.76% in tranche 6 to 1.06% in tranche 9. The mortality assumptions have remained similar to those used for the previous valuation, with average assumed life expectancy for a future pensioner currently aged 45 of 90.1 years (male) and 92.1 years (female).  Many schemes have also switched from the use of Retail Price Index to Consumer Price Index for pension increases

Comment

The headline funding figures are very similar to those shown last year based on tranche 8 schemes (see Pensions Bulletin 2015/21).  This is unsurprising as the UK economy has seen similar movements over each of the three-year periods.  Looking further ahead, the Regulator’s predictions for both tranche 10 (those with valuation dates between September 2014 and September 2015) and tranche 11 schemes (those with valuation dates between September 2015 and September 2016) are not as optimistic, with a general expectation that both deficits and deficit repair contributions will increase by a substantial amount for many schemes (see Pensions Bulletins 2015/23 and 2016/20 respectively).

High court rules out version one of Halcrow Pension Scheme rescue

Last year, the trustees of Halcrow Pension Scheme (HPS) sought the blessing of the High Court to a proposed transaction that would have seen the 3,200 scheme members transferred (without their consent) to a new scheme.  This scheme would have provided the same benefits as HPS, but with future increases in payment and in deferment at statutory minimum levels.   There would have been no change in sponsoring employer but CH2M, the US parent company of Halcrow, was to provide a substantial guarantee.

The rationale for the transaction, as stated in the judgment, was that the sponsoring employer was heavily balance sheet insolvent and was only able to continue as a going concern because of substantial support by the US parent.  The US parent was unwilling for this state of affairs to continue.  It was suggested that unless the transaction took place, the sponsoring employer would become insolvent and scheme members would end up in the PPF, in many cases with compensation less than under the new scheme.

The judge ruled that the mechanism by which the transaction was to be achieved – in particular the provision of an actuarial bulk transfer certificate under Regulation 12 of the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 – was not valid.  In particular, when comparing the benefits in each scheme it was not permissible to take into account the ability of the schemes to pay them – whether or not the transferring scheme was to continue or to wind up.

The judge was also asked to rule on whether the trustees’ decision-making process had been conducted with due propriety.  She found that it had.

Although the ruling was made on 18 December 2015, the judgment has only recently become available.  It is understood that a new transaction is now being considered.

Comment

There is much discussion in this judgment on how the legislation surrounding the actuarial certification of bulk transfers operates, but in the end there is no change to the current understanding.

What gives this case some poignancy is that the Government is now proposing to facilitate such a transaction, subject to safeguards, as one of two possible means by which the British Steel Pension Scheme can avoid ending up in the PPF (see Pensions Bulletin 2016/22).  Right now it intends that only the very largest of schemes with stressed employers could restructure their benefits in such a way, but as a result of Halcrow it could well come under pressure to open it up to smaller schemes.

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.