Case Studies
Pension Increase Exchange
Case Study
A FTSE 350 Company had ceased
accrual and was operating a £50 million defined benefit scheme with
a moderate deficit (c. £15 million) on balance sheet (assessed in
accordance with IAS19). The Company Pension
Scheme contained £30 million of deferred pensioner liability and
£20 million of pensioner liability.
JLTPCS designed and implemented a
Pension Increase Exchange exercise for the pensioner members which
allowed all pensioner members the option of exchanging future
pension increases (awarded in respect of pre 6 April 1997 service)
for a higher, but flat pension. The exchange took place with 60% of
increases being used to fund higher pensions, the remained being
used to reduce the pension scheme deficit.
Over 40% of members consented to the
option and liabilities in respect of pensioners were reduced by
almost £1 million. The saving here was treated as a P&L gain in
the year of the exercise.
At the same time retirement options
within the scheme were amended to allow retiring deferred pensioner
members the option to exchange pension on retirement, and to access
a higher tax-free cash lump sum. Unsurprisingly this option proved
very popular amongst members as they retired. The company has made
allowance for some of the expected savings in its balance sheet
liability.
The Trustees at the request of the
company are to make an allowance for the Pension Increase Exchange
for deferred members in their next valuation which could provide
savings in the region of £2
million.
Company Accounting
Case
Study
A FTSE 350 Company with
substantial pension liabilities (in excess of £60 million) reports
pension liabilities in accordance with IAS19. The Company's
accounts are audited by a large accountancy firm which produces
benchmark ranges for pension scheme assumptions for its audit
clients.
The Company desired to publish
pension liabilities at the most aggressive end of permissible
assumptions.
JLTPCS provided suggested
assumptions to the directors and advocated on their behalf to the
company's auditors.
The result was that JLTPCS
successfully negotiated an IAS19 deficit over £12 million lower
than the central benchmark assumption and £2 million outside of the
benchmarked range. The results were acceptable because a robust
justification had been provided for the assumptions
adopted.
De-risking / Buyout
Case
study
Background
-
Closed Defined Benefit Scheme of substantial size with
active, deferred and pensioner members.
-
Over £1bn worth of liabilities, calculated on the Scheme's
funding basis; also a significant deficit on the same
basis.
-
Small Private Equity sponsor, with no DB expertise on main
Board (or desire to engage in the management of a DB
liability)
The
problem
-
Extremely conservative funding basis
-
Annual actuarial valuations, leading to volatile (and
ever increasing) ongoing and recovery contributions
-
Substantial running costs
-
High opportunity cost for parent, as demands on cash were
curtailing market activity
Proposed
solution
-
Transfer actives to another scheme run by the same
employer
-
Carry out Early Retirement & Enhanced Transfer Value
exercises for deferred members, funding with current year's
contributions
-
Buy out pensioner members - immediate payment to insurer
equal to share of fund; residual payments to be made over a period
of up to 5 years
Final
result
-
A substantially smaller scheme with deferred members
only
-
Reduced contribution volatility, plus much reduced
contributions after 5 years
-
Running costs reduced to a minimum