What's happening to the Nortel Networks UK Pension Plan?

acc

Does anyone know what is happening to the Nortel Networks UK Pension Plan, now that the company has filed for bankrupcy protection? (hxxp://www.guardian.co.uk/business/feedarticle/8262950)

The UK pensions plan (hxxp://www.nortelpensions.com/documentlibrary/FAQ_Update.htm) is already in deficit, and now the £85m per annum contribution from the company is at risk.

If the company does go bust, the UK plan members may need to resort to the Pension Protection Fund (hxxp://www.pensionprotectionfund.org.uk/index/protecting_peoples_pensions.htm), where the level of compensation for people who have not reached pensionable age is only up to 90%, and is subject to an overall cap which is recalculated each year. Between April 2008 and March 2009, the cap at the age of 65 equates to £27,770.72.

This figure of £27.7702.72 is presumably the annual pension, as implied by the fact that it is recalculated annually, but I would be grateful for confirmation from someone who knows.

Debt_Free_Chick

acc wrote: »

Does anyone know what is happening to the Nortel Networks UK Pension Plan, now that the company has filed for bankrupcy protection? (hxxp://www.guardian.co.uk/business/feedarticle/8262950)

The UK pensions plan (hxxp://www.nortelpensions.com/documentlibrary/FAQ_Update.htm) is already in deficit, and now the £85m per annum contribution from the company is at risk.

At the moment, Nortel has filed for bankruptcy protection in the US and Canada. This allows the company to continue to operate whilst preventing it being forced into liquidation by its creditors. Press reports suggest that Nortel will be restructured - probably broken up and sold.

If the company does go bust, the UK plan members may need to resort to the Pension Protection Fund (hxxp://www.pensionprotectionfund.org.uk/index/protecting_peoples_pensions.htm), where the level of compensation for people who have not reached pensionable age is only up to 90%, and is subject to an overall cap which is recalculated each year. Between April 2008 and March 2009, the cap at the age of 65 equates to £27,770.72.

This figure of £27.7702.72 is presumably the annual pension, as implied by the fact that it is recalculated annually, but I would be grateful for confirmation from someone who knows.

It's possible that the UK company is sold, with the buyer taking on the pension debt ..... not likely, but possible.

The PPF pays "compensation" a term I find particularly annoying, as the PPF effectively becomes the scheme's manager and pays pension entitlements! However, they describe what they pay you as compensation.

This compensation is 100% of what you would have got anyway, if you are already retired and over the scheme's pension age. If you are under the scheme pension age, the compensation is 90% of your entitlement and the compensation paid is capped at £27,770.72.

So .... the cap is the amount of pension entitlement - or "compensation" in PPF speak. The PPF has a leaflet explaining how compensation is calculated.

EdInvestor

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5536942.ece

Sunday times report.

tuggy12

It's also worth mentioning that not all 'compensation' is indexed linked.
That part of the 'compensation' which has accrued from contributions made prior to 6th April 1997 is frozen, i.e. no annual increase.
That part of the 'compensation' which has accrued from contributions made after 6th April 1997 will be increased annually at RPI or 2.5%, whichever is less.
These rules apply regardless of whether the 'compensation' is 100%, 90%, or capped.

MikeJones_2

Hi tuggy12,

tuggy12 wrote: »

It's also worth mentioning that not all 'compensation' is indexed linked.
That part of the 'compensation' which has accrued from contributions made prior to 6th April 1997 is frozen, i.e. no annual increase.
That part of the 'compensation' which has accrued from contributions made after 6th April 1997 will be increased annually at RPI or 2.5%, whichever is less.
These rules apply regardless of whether the 'compensation' is 100%, 90%, or capped.

Just to make clear to readers who are unfamiliar with the different types of pension increases (before and after Normal Retirement Date):

Increases to preserved pensions before Normal Retirement Date are called revaluation.

Increases to pensions in payment are referred to as escalation.

The PPF provides revaluation for preserved pensions matching RPI up to 5% p.a. based upon the pension at the date the sponsoring employer 'went bust' (in the circumstances described below).

The PPF provides escalation matching RPI up to 2.5% p.a. for post 5th April 1997 service (in the circumstances described below).

See: Compensation (Pension Protection Fund) whose page clarifies this point under item 2:

For the majority of people below their scheme’s normal pension age the Pension Protection Fund will pay 90% level of compensation.

In broad terms and in normal circumstances, this means 90% of the pension an individual had accrued immediately before the assessment date (subject to a review of the rules of the scheme by the Pension Protection Fund) plus revaluation in line with the increase in the Retail Prices Index between the assessment date and the commencement of compensation payments (subject to a maximum increase for the whole period calculated by assuming RPI rose by 5% each year). This compensation is subject to an overall cap, which, as at April 2008, equates to £27,770.72 at age 65 (the cap will be adjusted according to the age at which compensation comes into payment. Please refer to the current compensation cap factors).

Once compensation is in payment, the part that derives from pensionable service on or after 6 April 1997 will be increased each year in line with the Retail Prices Index capped at 2.5%. Again, this could result in a lower rate of increase than the scheme would have provided.

In addition there will also be compensation for certain survivors.

There are some subtleties in respect of how preserved benefits are treated (as opposed to active members' benefits at the time that the sponsoring employer went bust). This is to do with how they are calculated for revaluation purposes. It's quite technical and not something I feel is well explained on the PPF's website, but it makes a heck of a difference to what the PPF would pay out at NRD compared with what would have been payable had the sponsoring employer survived.

Hope that helps clarify an often overlooked point.


Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

Schnorbitz_2

Mike Jones provided a very good list of the differences between your normal pension entitlement and what the PPF provides, if a company goes bust and its pension scheme doesn't have enough in it to "buy out" the equivalent of the PPF benefits with an insurance company (like Legal & General or Prudential).

This reduction in "revaluation" increase can be quite a lot if you were a member of a contracted-out scheme and left before 1997 (or worse before 1988). The revaluation was often at a high-ish fixed rate each year. Replace that with an increase in line with inflation, and that can be a big hit on what you were expecting.

Whenabouts was your service in the Nortel scheme? Was it recent?

Steve_GJ

Having read today's article in the Times Online, it appears this is going to be a major story in the coming months. One issue not raised so far is the continuing payments to existing Nortel pensioners. I rang Nortel Pensions Admin (Watson Wyatt) on Friday to enquire and asked whether pensions would continue to be paid and they would not confirm that they would, although the FAQ's on the website and on the PPF website indicate that payments would usually continue during the assessment period. There will, I understand, be a statement and letter from the Trustees of the Fund shortly. However, this uncertainty must be very worrying for all my fellow Nortel pensioners added to the knowledge that for most our pensions will be frozen at their present levels and so will lose value from now on. I imagine that the increase this April would have reflected the RPI in September.

acc

Thanks for all your advice and comments.

I have a Nortel pension deferred from 1990, and have been getting increasingly concerned about the safety of the scheme, which was in deficit even before the big stock market drops of the last year or so.

I am a number of years before the age at which I can take the pension, which I believe, but am not sure, is 62. I had been considering whether to transfer my pension to another company, but the chance to transfer out has gone.

Do you pensions experts know whether had I decided to before last week, I could indeed have transferred out, and whether that would have meant losing the advantage of a defined pension plan?

When I first heard about the company filing for bankrupcy protection, I hoped as Debt_Free_Chick said that the pension plans would not be too badly affected if the company could be restructured, but the Sunday Times article is much more pessimistic, particularly for people who have not reached pensionable age.

I was not aware that even existing Nortel pensioners may lose out, because of the pensions being frozen at the current levels.

julesjpg

Acc,
Agreed, I am more pessimistic now having read the Sunday Times article. I am a way away from retiring so have never really fussed over pensions other than to make a contribution, but now this has got me worried. If the PPF pays up to 90% I guess this is relatively positive, but I can't imagine this will continue if the number of companies folding increases.

Debt_Free_Chick

Have to admit that I posted before I'd seen the Sunday Times article - I'm sorry if I raised false hopes

The PPF is by no means perfect, but better than what we had previously (which was .... er.... nothing, effectively). A pity, though, that the Government thought it necessary to fund an executive for the PPF in addition to an executive for the Pensions Regulator - couldn't one have served both? Anyway ... I digress .... good luck to those affected. Post back if we can help with information etc

Nail_Lad

For folks reading this who maybe some of the more recent Nortel employee's remember Nortel had/has 3 types of pension:

1) Defined Contribution
2) GPP (Group Personal Plan) - with the Pru
3) Stakeholder pension

Now, correct me if I'm wrong but I believe Nortel moved away from 1 and 3 in favour of 2 as it is less of an ongoing liability to them as is being proved out now as the company is in Administration.

So, just to alleviate some concern to those on the GPP, remember the agreement is between you and the provider (Pru in most cases) ergo the company has no hold over your pension. This is how I read it anyway. Someone please correct me if I'm wrong.