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2011 PENSIONS CONSULTATIVE
CONFERENCE
The 2011 Pensions Consultative Committee
Meeting was held at
1. Annual Report & Accounts + Other Matters – Allan Johnston
Allan Johnston opened the meeting by
reviewing the annual report and accounts of the BSPS, membership trends and age
profile, it being pointed out that the scheme currently has 80 recipients over
100 years old and that pensions payable account for some 60% of the scheme’s
liabilities. The market value of the fund, which is one of the few remaining
final salary schemes in the
An independent assessment of the scheme (by State Street) confirms the fund to be well ahead of its scheme specific benchmark and is the best performing fund of its size over 5 and 10 year assessment periods. Attention was drawn to the importance of the 2011 triennial evaluation, the results of which are expected later this year. It is anticipated that this evaluation will show the fund to be in deficit for the first time, by an amount depending on factors such as mortality improvements and longevity statistics. This will dictate the need for preparation of a recovery plan (not needed before) and talks between TATA and the Trustee are already under way in this connection, the latter recognising that it cannot afford to “break” the company. The aim would be for a recovery plan timescale of less than 10 years so as not to invite scrutiny by the pension’s regulator. Elevating the pension scheme within the company’s organisation/structure would be of assistance in this respect (but TATA unwilling to do this) as would strengthening of the company covenant.
Reference was made to the work of a joint TU/company working party (Trustee not represented) set up to examine the health and prospects of the scheme in preparation for the 2011 triennial valuation, the expectation being that any proposals from this working party will be taken into consideration in the valuation outcome.
Details of CPI/RPI indexation of pensions were considered, it being stressed that RPI will remain the basis for indexation of the BSPS for the foreseeable future. Results of the audit of pension payments by the National Fraud Initiative were outlined. Confirmation of the effectiveness of internal controls on the BSPS were provided by reference to the results of an independent audit report by KPMG showing that the scheme is the only scheme in the country to have scored 10/10 against every benchmark. Equally, record keeping and communication arrangements all meet required standards.
Finally, Allan Johnston outlined the existing trustee membership and organisation arrangements together with the business plan for 2012/2013.
2. Pensions Administration Update – Mike
Donahue
Mike Donahue introduced his presentation by referring to the significant impact on pension’s administration by Government changes to the tax regime. Further details were provided of the impact of the two main limits on tax effective savings viz. the lifetime allowance and the annual allowance (pensions in payment and deferred pensions benefits are exempt from the annual allowance). Of particular concern to the BSPS is the impact of the annual allowance on particular individuals at retirement, treatment of the “High/Low” pension option and other issues, all of which add considerably to the administrative burden on scheme management.
Early retirement terms were explained, with illustrated examples relating to both the 55-59 and 60+ age groups respectively, at the request of the company and with the consent of the company.
Factors involved in the calculation of pensionable earnings were explained, with particular emphasis on the effect of Rule 5(3) which is applied where there is an increase in earnings due to abnormally wide fluctuations in non – basic elements of pay such as bonus and overtime. Likewise, Rule 11(8), relating to the “High/Low” pension option was reviewed with attendees being referred to the explanatory article by Geoff Deeley in a recent edition of the Pensions Update magazine. It was pointed out that operation of this option is likely to be reviewed in the light of continued changes to state pension age/amounts and limits imposed on tax relievable pension savings by the annual allowance. Rules for the commutation of small pensions were reviewed and illustrated by specific examples.
Attendees were reminded of the company’s current consideration of the actions necessary following the Government’s abolition of the default retirement age of 65.
Finally, Trustee rules concerning the transfer of pensions to another registered pension scheme were highlighted together with criteria applicable to lump sum death benefits. As regards the latter, scheme members’ wishes to nominate preferred recipients, by completion of a Scheme Nomination form, were explained and general advice given to members on the preparation of a valid will to cover benefits accruing on death was emphasised.
3. Investment Update – Hugh Smart
Hugh Smart reviewed the performance of the pension fund over recent years, highlighting how well the fund had done against both its peers and its benchmark, a performance which has seen it unbeaten over 5 and 10 year periods. Financial statistics and illustrations presented were used to confirm how internally managed funds outperformed most other funds, which failed to add value relative to their respective benchmarks, and at considerably lower costs. Specific details were provided on the performance of individual investments within the overall investment portfolio, most of these being positive with only a few being negative.
The performance of all asset allocations
within the “maturity” and “growth” portfolios was also illustrated. The
increase in the diversity of the fund since 2006 was also emphasised, with
particular reference to the “maturity” property portfolio where some £400M has
been invested to date, principally in supermarkets, a hotel and the BBC Roath
Lock studios in
4. Pension Issues and Developments – Derek Mulholland
Derek Mulholland reviewed current pension issues and developments with particular reference to indexation, auto-enrolment, state pension changes, the pension protection fund (PPF) and increasing life expectancy (longevity). Attendees were reminded of current BSPS indexation arrangements, based on RPI, and the fact that these arrangements have consistently resulted in pension increases in excess of the Government’s minimum requirements. It was also confirmed that the Government is not minded to pass legislation aimed at overriding BSPS provisions and indexation arrangements.
From October 2012 (February 2013 for TATA) all eligible workers will have to be auto-enrolled into a qualifying pension scheme. Those opting out will be auto-enrolled every 3 years (currently some 96% of TATA employees are scheme members) implying a significant administration burden for both TATA and the pension scheme
Proposed Government changes to the state pension (age and amount) and the impact of these on both men and women were outlined. The results of a DWP consultation, published in April 2011, showed that > 75% of those organisations that responded favoured the creation of a single tier flat rate pension above the Pension Credit standard minimum guarantee (£140 at today’s prices) for future retirees. One disadvantage of proposals under consideration could be the end of “contracting out” of the state second pension which currently provides rebates worth £5billion per year for defined benefit pension funds. It is anticipated that many employers would look to cut back on benefits to mitigate the impact of lost rebates and that this could spell the death of final salary pension schemes.
Derek Mulholland next referred to the increasing cost of the PPF levies on the BSPS (up from £1.6M in 2006/07 to a projected £4M to £10M in 2012/13), implying those schemes with the deepest pockets having to shoulder a greater share of the burden of failing schemes. Additionally, figures provided illustrate that benefits provided by the PPF could not match those provided by the BSPS.
Finally, Derek Mulholland dealt with the thorny subject of increasing life expectancy which is a major problem for all DB pension schemes. This was illustrated by reference to the fact that over the 20 year period up to the 2008 triennial valuation, longevity improvements had added some £2 billion to BSPS liabilities. Possible longevity mitigating factors were highlighted, these currently being subject to market development and testing. Mention was made of a “longevity adjustment factor” currently favoured by some of the major pension providers such as BAE and John Lewis.
5. TATA Results and Trading Update – Colin Harvey
Colin Harvey reported on the current financial/trading situation for the TATA Steel Group and TATA Steel Europe and on the future outlook. TATA Steel Group results for 2011 show an improvement on 2010 with respect to turnover and profit after tax for similar yearly deliveries. Within the group TATA Steel India showed the best profit margin on about 25% of total deliveries. TATA Steel Europe also showed better performance in 2011 (£240M profit versus £484M loss in 2010), due mainly to better volumes, higher selling prices and profit from the sale of TCP to SSI (£351M). Steelmaking is due to restart at Teesside in December 2011.
Group results for the first quarter of 2011/2012 show an improvement over the same quarter for 2010/2011 with respect to turnover and profit after tax. Likewise TATA Steel Europe showed a marginal improvement for the same period (profit up from £108M to £159M) largely due to increased selling price and a £96M profit from settlement of the TCP consultation arbitration.
The outlook period looks uncertain with the global economy set for a marked slowdown for the remainder of 2011/2012. Although a slight recovery is expected during the first half of 2012, risks are skewed to the downside due to Eurozone sovereign debt crisis and increased commodity prices. Moderate growth in the engineering and automotive industries will be offset by the downturn in the construction sector. Iron ore contract price remains at a record high level and while coking coal contract price is expected to ease this also remains at a very high level. Selling price (HRC), which weakened in September 2011, is expected to stabilise although margins for European producers will remain under pressure. TATA Steel Europe is receiving considerable financial support from TATA Steel parent who are pursuing raw material developments for TATA Steel Europe’s longer term benefit.
6. Question & Answer Session
A variety of questions were raised at the end-of-meeting question and answer session. The more significant of these are summarised as follows.
6.1 Will the implications of future CO2 tax
proposals cause TATA to withdraw its operations from the
Answer- No – this suggestion is the result of misplaced commentary on TATA’s position.
6.2 Will surplus CO and BF gas be offered by SSI to others for reheating operations?
Answer- Not known but to be followed up.
6.3 Why can TATA Steel India achieve higher
operating margins when selling prices in
Answer- TATA Steel India is self-sufficient in raw materials and has significantly lower labour costs.
6.4 Do large scale redundancies put a strain on the BSPS?
Answer-Yes.
6.5 Should BSPS have a seat on the TU/company joint working party?
Answer-No, it’s not BSPS’s job to dictate to the company and the trade unions on aspects of the pension scheme but will determine the outcome of working party agreements on the scheme’s future.
6.6 Are there any firm proposals yet on how the question of longevity will be resolved?
Answer-No but it will be important to err on the side of caution at this stage.
6.7 Has BSPS considered the validity of relationships between pension recipients and their “partners” as regards pension benefits following the recipients death?
Answer-Only marriage and “civil partnerships” are recognised as providing legal certainty with respect to receipt of death benefits.
6.8 Have the trustees had any meetings with TATA as regards changes to the current pension scheme?
Answer-No, trustees cannot support the trade unions in defending changes to the scheme. While closing the scheme to new members could be seen as being of benefit to existing pensioners, and may be viewed as such by trustees, it would not be appropriate for the trustees to be involved in negotiations relating to such matters.
6.9 Further clarification of Rule (5.3) sought?
Answer-Rule (5.3) is designed to protect the scheme by ironing out peaks and troughs in contributions.
6.10 Question re the 70/30 investment policy and whether or not the scheme’s peer groups and the benchmark against which the scheme’s performance is gauged operate to the same investment policy?
Answer-Maintenance of the 70/30 split requires skill in timing when to sell equities and buy bonds and vice –versa. Irrespective of the precise investment policy followed by the scheme’s peer groups the BSPS consistently outperforms them.
6.11 Further clarification of company covenant sought?
Answer-This represents BSPS’s belief in the company’s ability to meet the scheme’s liabilities. Currently the security package in place with the company will cover the period to 2017.
6.12 Question re the recent “rogue broker” incident at UBS and whether such a situation could arise with the British Steel pension fund?
Answer-Those risks under BSPS control are regularly assessed and are covered. The major risk is the demise of TATA which is outwith BSPS control. Only one person within the system is potentially in a position to defraud the scheme but cannot invest or withdraw from the funds without reference to others and whose activities are constantly monitored.
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