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Company pension funding comparison
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ReportInvestor
Posts: 3,646 Forumite
10 million letters have just gone out to people in company final salary pension schemes, telling them how well, or rather not so well, their pension scheme is funded.
Many MSE members must have received them, so:
I thought it would be useful to compare notes in the following format:
Company ; Funding Level ; at date
I'll make a start.
Lloyds Bank (Scheme no.1 ) ; 87% ; at 30 June 2005
MPs ; 100% ; Now and for ever ; backed by the British taxpayer
Civil Servants; 100% ; Now and for ever ; backed by the British taxpayer
Teachers; 100% Now and for ever ; backed by the British taxpayer
Doctors & key NHS workers ; 100% ; Now and for ever ; backed by the British taxpayer
Average UK company scheme; 70%- ?
Reuters background news about this 10 million letter mass mailing designed to bring amxiety to most UK breakfast tables
Mercers say that 20% will be 70%+ funded and 20% will be 50%-60% funded. So there's quite a lot of work to do for these companies. They don't say it, but I guess the average is unlikely to be more than 70% funded.
Let's talk, because our companies are unlikely to want to. And it might help those MSErs who are genuinely worried and may have to talk to their pension fund trustees sooner rather than later.
Many MSE members must have received them, so:
I thought it would be useful to compare notes in the following format:
Company ; Funding Level ; at date
I'll make a start.
Lloyds Bank (Scheme no.1 ) ; 87% ; at 30 June 2005
MPs ; 100% ; Now and for ever ; backed by the British taxpayer
Civil Servants; 100% ; Now and for ever ; backed by the British taxpayer
Teachers; 100% Now and for ever ; backed by the British taxpayer
Doctors & key NHS workers ; 100% ; Now and for ever ; backed by the British taxpayer
Average UK company scheme; 70%- ?
Reuters background news about this 10 million letter mass mailing designed to bring amxiety to most UK breakfast tables
Mercers say that 20% will be 70%+ funded and 20% will be 50%-60% funded. So there's quite a lot of work to do for these companies. They don't say it, but I guess the average is unlikely to be more than 70% funded.
Let's talk, because our companies are unlikely to want to. And it might help those MSErs who are genuinely worried and may have to talk to their pension fund trustees sooner rather than later.
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Comments
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Happy to do this, but bear in mind that different schemes will value their liabilities differently - so we won't necessarily be comparing like with like.
Of course, the public sector schemes are not funded in the same sense as private sector schemes. There is no pot of money set aside so the funding level is 0%. Which only goes to prove that the funding level is irrelevant, provided someone is prepared to pay your pension.
What is the basis for the LTSB funding level?
Rio Tinto at 31 March 2003
MFR value of liabilities = £585m
Fund's assets = £735m
Surplus = £150m
MFR funding level = 126%
Scheme value of liabilities = £797m
Scheme value of assets = £761m
Shortfall = £36m
Funding level = 95%
At 31 December 2005 it was estimated that the scheme had a surplus of £2m on the scheme basis for valuing assets and liabilities.
BUT ... if the company wound up the scheme, it would have to buy annuities. At 31.12.2005
Cost of buying annuities = £1,252m
Market value of assets = £1,019m
Shortfall = £233m
Buy-out funding level = 81%
It should be borne in mind that if the company decided to wind up the scheme and buy annuities, they must pay the shortfall.
If the company went bust, then the scheme would more than likely go into the PPF - unless the Australian company were still in existence. Then the Regulator might try to pursue them for payment of any shortfall, although it's not clear whether the Regulator has any powers over foreign companies in relation to UK pension debts.
Trustees now have to assess the financial strength of the employer and can request that the employer pledge contingent assets to back up what it owes. It will be very interesting to see how those discussions pan out ... expect more press coverage on this.Warning ..... I'm a peri-menopausal axe-wielding maniac0 -
Wow. What a strong position RTZ pensioners were in at the bottom of the stock market crash!
If it was wound up the Lloyds scheme would need £13.05bn v assets of £7.594bn i.e. a 59.2% buy-out funding level.
Lloyds has undertaken to provide £138m pa deficit contributions for ten years and has not ruled out further deficit contributions.0 -
10 million letters have just gone out to people in company final salary pension schemes, telling them how well, or rather not so well, their pension scheme is funded.Lloyds Bank (Scheme no.1 ) ; 87% ; at 30 June 2005
MPs ; 100% ; Now and for ever ; backed by the British taxpayer
Civil Servants; 100% ; Now and for ever ; backed by the British taxpayer
Teachers; 100% Now and for ever ; backed by the British taxpayer
Doctors & key NHS workers ; 100% ; Now and for ever ; backed by the British taxpayer
Average UK company scheme; 70%- ?It should be borne in mind that if the company decided to wind up the scheme and buy annuities, they must pay the shortfall.If the company went bust, then the scheme would more than likely go into the PPF - unless the Australian company were still in existence. Then the Regulator might try to pursue them for payment of any shortfall, although it's not clear whether the Regulator has any powers over foreign companies in relation to UK pension debts.Trustees now have to assess the financial strength of the employer and can request that the employer pledge contingent assets to back up what it owes. It will be very interesting to see how those discussions pan out ... expect more press coverage on this
could employer lay off people to reduce costs and put money into pension funds etc - if no other way of funding it?MPs ; 100% ; Now and for ever ; backed by the British taxpayer
Civil Servants; 100% ; Now and for ever ; backed by the British taxpayer
Teachers; 100% Now and for ever ; backed by the British taxpayer
Doctors & key NHS workers ; 100% ; Now and for ever ; backed by the British taxpayer0 -
To Homer,
Here's some background on the 10 million mailing which was required by new disclosure rules - IA link
Just because Lloyds Bank's scheme is 87% funded doesn't mean that it won't pay out in full to scheme members. Lloyds is an established company that will no doubt fulfil its obligations.
From April 2006 UK pension schemes members are covered by the Government's Pension Protection Fund (PPF) which is funded by contributions from companies offering final salary schemes. If a company goes bust then an individual is eligible for 90% of their pension entitlement up to £25K pa.
Yes different criteria are used. Tried & trusted ways of manipulating the true position of pension funds, among others are a) underestimate life expectancy b) overestimate the future investment returns on equities in the fund (US companies are almost laughable in their high hopes).
Re MPs, teachers, doctors etc. - there is no fund, as DFC points out, just the bottomless pit that is the present and future UK taxpayer.
When it all becomes too much for companies they generally still fulfil their obligations to date, but they might close the scheme to new entrants (or even existing employees - but for the remainder of their careers, not on their entitlements to date) or require additional contributions from employees in the future.0 -
homersimpson wrote:why have these letters been sent out? (what's the background etc)? have they been told to send them out by Pensions Ombusdman etc?
A new law which says members should get a Summary Funding Statement. The content is pretty much prescribed by regulationsshould you receive one automatically - if you haven't received one who should you contact and what should you say?
In most cases, yes. But there are some exceptions. They are not applicable to money purchase schemes and some smaller final salary schemes are exempt. You should contact the pension scheme administrator, in the first place. But they may refer you on to the Secretary to the trustees (if there is one)what are your legal rights etc?
To receive a Summary Funding Statement, automatically, every year - the first one should have been issued by 22 September 2006.Are you saying people who working in Lloyds bank have a final salary scheme but their pension scheme only has 87% of what it should have/needs to pay people their full pensions and that employees will receive less.
Yes - at the moment it only has 87% of what it should have but no - there is no suggestion that anyone is getting less. All those who have retired will be receiving their full pension. Those who have not yet retired should not worry immediately as LTSB is still paying into the scheme and probably paying extra to try and make up the shortfall.how are assets etc valued?
Complex, but some allowance will be made for future investment returns.do all firms use same criteria - if so what is the most important?
No they don't all use the same assumptions. The assumptions and funding basis should be prudent, however and not a wild reckless guess at the future.do they have any form of redress - if so against whom and what is procedure?
Redress for what? If you're getting the pension you're entitled to, what's the problem?if pension manager knew why haven't they done anything? or have they?
The Trustees almost certainly will have done something - like agree a plan with the employer for paying contributions to the scheme. But this is no different to a loan or a mortgage - providing the employer can continue to pay into the scheme, does it matter if it's not 100% funded? If it were 100% funded and then investments grew, so it were 110% funded, would you be happy for the company to have the surplus back?
A pension scheme can never be 100% funded 100% of the time. The value of investments changes. The value of the pension promise changes - every time there is evidence that we're living longer, the value of the pension increases as it will be probably be paid for a longer period. So the scheme funding level will fluctuate and the contributions that need to be paid in will change to reflect this.can they do this? what is annuity and its effect? why must they pay shortfall etc?
Yes, an employer can wind-up the scheme. The members will get the pension that has been promised up to the date of closure. An annuity is an individual policy that pays out a specific amount of income (pension). If your pension is £5,000 pa then an annuity policy will pay you £5,000 pa for so long as you live. It will also include a spouse's pension and annual increases, if you're entitled to them.
The employer must pay any shortfall between the scheme's assets and the cost of buying annuity policies for every member - without any reduction in the members' pension entitlements. They must do this now as the law requires it. If the employer wants to avoid this, it's only option is to let the scheme continue and to keep on paying the contributions to make up any shortfall. This new law means that members no longer lose out when a pension scheme is wound up by the employer - provided the employer is remaining in business and not bust.what is ppf?
The Pensions Protection Fund. A new government scheme to rescue underfunded pension schemes when the employer goes bust. It aims to protect members' pension entitlements - but it will only pay out 90% of each member's entitlement, unless there is enough money to pay it all. There's also a monetary maximum entitlement of £25kwhat is connection to Austrailian co?
Rio Tinto is quoted on the London & Australian stock exchange. If the UK company went bust, with a shortfall in its pension scheme, then there is a possibility that the Pensions Regulator might try to get the Australian Rio company to pay the shortfall. But it's not clear if the Regulator has this power and how it would be enforced.who is regulator and what powers do they have?
The new Pensions Regulatorcould employer lay off people to reduce costs and put money into pension funds etc - if no other way of funding it?
Yeswhere is evidence for this?
Evidence for what? Public sector employees get pensions. No money is put aside for this as the pensions paid today for those who have retired are simply paid by that nice Gordon Brown, from all the taxes he raises. What evidence do you want for this?Warning ..... I'm a peri-menopausal axe-wielding maniac0 -
ReportInvestor wrote:Yes different criteria are used. Tried & trusted ways of manipulating the true position of pension funds, among others are a) underestimate life expectancy b) overestimate the future investment returns on equities in the fund (US companies are almost laughable in their high hopes).
But what is the "true" cost? Serious question ... how should pension liabilities be valued?
Perhaps a different thread?Warning ..... I'm a peri-menopausal axe-wielding maniac0 -
Here's an explanation of the new requirement to provide Summary Funding Statements from a legal firm that advises employers and trustees on compliance with pensions law.
Sorry Report Investor, but all too often journalists either don't understand; don't bother to study the actual legal requirements; and simply spin stories to win headlinesWarning ..... I'm a peri-menopausal axe-wielding maniac0 -
Here's a question for you all.
You are a trustee in a pension scheme that's just issued these statements.
Like LTSB, your pension scheme is only 90% funded, using the funding basis and the assumptions that you agreed with the Scheme Actuary and the employer.
What would you do about it?Warning ..... I'm a peri-menopausal axe-wielding maniac0 -
What they've already done, by the looks of things. Get Lloyds or ANother Plc to commit to an extra £x funding over the next few years.
The problem arises when a scheme is, say, 55% funded and the company is struggling to compete in its core market.
Re the "true cost" question - no-one knows. But pensioners, and investors, should ask questions of companies where too much of the fund is in equities or the rates of return are unrealistic as both these situations create further risk.0 -
ReportInvestor wrote:What they've already done, by the looks of things. Get Lloyds or ANother Plc to commit to an extra £x funding over the next few years.
But the press - including the broadsheets - continues to scare people with details of the deficit and little about the extra contributions being paid.
I geniunely see the funding of some company pension schemes as no more scary than one's personal mortgage! If you can always meet the repayments, then there's no problem. As you say, it's when things go wrong ....The problem arises when a scheme is, say, 55% funded and the company is struggling to compete in its core market.
The new Pensions Regulator should help, as they are going to monitor the funding of pension schemes and identify those "at risk". Again, the press doesn't seem to have published much about this. It's true - good news is "no news"!Re the "true cost" question - no-one knows.
More people need to understand this. When the last pensioner dies - including all the dependents of current members - then one can look back and add up all the amounts that were paid out over the life of the scheme and say "That's the cost". Until time travel becomes possible, no-one will ever accurately predict what a pension scheme will cost in the future. The funding is merely a prudent savings scheme. And it should only ever be needed if the employer is not around to pay - that, really, is the only reason we have pension funds. If employers were around "forever" they could simply pay pensions in the same way as the public sector and not have to put millions out of reach in an untouchable fund.But pensioners, and investors, should ask questions of companies where too much of the fund is in equities or the rates of return are unrealistic as both these situations create further risk.
Too much in equities is not necessarily a bad thing. Rio Tinto pension scheme has about 70% in equities!
Future rates of return generally are "realistic". These days they tend to reflect the extra return one could expect for the risk of investing in equities, over bonds. And they look forwards - yes, historic performance is considered, but future equity returns are based on what it would be reasonable to assume the future return would be, as an addition to the current bond yield. An equity risk premium of 1.5-2.0% would be common i.e. current bond yield +1.5-2.0%.
Again, the Regulator's code of practice on funding requires that the trustees link their assessment of the equity risk premium to the financial strength of the employer. The rationale being that the employer is effectively underwriting any future failure in equity performance. Again - with a strong employer, there should be less concern over a high equity risk premium.
The problem with members asking questions is that they don't know what to ask and invariably won't understand the answers. And now of course, they really need to be able to assess the strength of the employer - instead of, or as well as that of the pension scheme.
The real challenge we face is in restoring public confidence in pensions, generally - but especially occupational final salary schemes. The vast majority of employers are genuinely trying to seek a workable compromise between funding schemes adequately and manage/run a profitable company. Despite what many think, they are not blatantly trying to squeeze the pension scheme dry and/or renege on their pension promises. We need to understand that a promise made in the 1970s has turned out to be vastly more expensive than ever was originally envisaged.
Boards like this help ... provided you get the right people contributing the answersWarning ..... I'm a peri-menopausal axe-wielding maniac0
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