ASDA closes final salary scheme

StevieJ

All too common these days, but what I don't understand is how their deficit has doubled i.e. from £200m to £400m bearing in mind the both the stock market and bond markets are in positive territory?They mention longevity, have they changed that again? are we going to live another couple of years (in theory)?

Asda is the latest in a string of British companies to close a final salary pension scheme as rising longevity and turbulent financial markets drive schemes into deep deficits.
The grocer said its scheme's deficit had doubled in size to 400 million pounds over the past nine months.

http://money.uk.msn.com/news/articles.aspx?cp-documentid=154918185

sunil1234

proably a few reasons,

the stock markets are still turbulent

the actuarial assumptions of longetivity have changed

people want to work longer

bad investment decisions by the trustees?

sparkymark_3

I have a frozen ASDA Final salary scheme pot from when I was made redundant a few years ago - assume they will transfer monies into defined contrib. scheme, is this a good time to transfer out ? (I have a Standard Life plan and also a final salary scheme with current employer)
Many Thanks in advance.

Loughton_Monkey

Mortality will almost certainly be the reason for the doubling of the defecit. Other factors mentioned above also explain the original deficit.

The press love this sort of sensationalist comment. "Deficit has doubled". Almost as if they want you to believe (as maybe they do themsleves) that all ASDA pensioners are going to get half their pension or something.

The truth is rather more boring.

When Actuaries value any pension fund, one of their key assumptions is "Mortality" - the rate at which we are all expected to die. As everyone knows (including Actuaries), mortality is improving. We are living longer. But actuaries are sentimental and cautious animals. They club together and use "Standard Mortality Tables". From time to time, they review these, and there comes a time when they all start using a "new" table, showing a 'step change' in mortality.

This can have a dramatic effect on a pension fund. Just imagine that revised mortality assumption alone accounted for the need (overnight) for a pension scheme's liabilities to increase by 5%, then a fully funded scheme with total assets of £4 bn would suddenly be £200 million in defecit. If it was already £200 million underfunded (5%) then we can truthfully argue it has "doubled".

The 'nice-but-dim' boys in the sensationalist press-room will, under these circumstances, try to find a similar scheme that was even in better shape - e.g. only 1% underfunded (£40 million) and then create the headline of "Pension fund deficit sextupled". [Probably the only reason they haven't is that they think the word 'sextupled' is something to do with a mother having six children at a time].

Of course they could, alternatively, find an extremely dire and newsworthy company with £4 billion of liabilities, and a massive 40% deficit (£1.6 billion). But the effect of mortality here, would put it up from £1.6 to £1.8 billion. Nowhere near as 'startling' in the headline, but rather more worrying than the first examples!

Time, I think, for another Panorama Special. Evidence that ASDA are now recruiting only massively obese staff, and giving free cream cakes to existing staff, in order to reduce their pension deficit.....

Bring it on!

jamesd

StevieJ wrote: »

bond markets are in positive territory

Bond yields aren't in positive territory.

Pension funds buy bonds to use the yield income to pay their benefits. As the capital prices goes up the yield falls and the amount that they have to spend to match their benefit commitments increases. For this reason quantitative easing and other things that decrease yields increase the reported liabilities of pension funds. Halve the yield and you double the cost of buying the income.

The current situation is transient but it makes for good-looking letters and press releases by schemes that want to claim a big deficit as a reason for closing their scheme. A doubling of deficit from £200 million to £400 million in a scheme with 175,000 members isn't particularly large as changes go (only £1,100 increase per member) and suggests that the scheme is quite well funded.

If bond prices were to collapse, and yields increase, we'd soon start seeing stories of reduced pension fund deficits.

blueboy43

StevieJ wrote: »

All too common these days, but what I don't understand is how their deficit has doubled i.e. from £200m to £400m bearing in mind the both the stock market and bond markets are in positive territory?They mention longevity, have they changed that again? are we going to live another couple of years (in theory)?

http://money.uk.msn.com/news/articles.aspx?cp-documentid=154918185

Walmart in shock move to reduce employee costs.

Who'd have thought it.

I notice Tesco still have a defined benefit scheme (career average).

conic76

I work for Asda and am quite dispondant about this. Been paying in for 12 years and as someone has stated, all our competitors are on average salary which is a DB. Yet in our q&a pack it states non of our competitors are offering DB!!!!

There is only 3800 members in this scheme. 175000 colleagues work for asda but this was a management only scheme and was closed to new entrants 5 years ago.

We obviously don't have an option about them closing the scheme but they are offering us 25% of base salary ( in my case 10K) as a bribe if we agree to our frozen pot being linked to CPI. They say if we don't accept this is will mean no pay rises for anyone in company and no bonuses!!! Why are they so keen for us to link it to CPI and can anything be done.

The new scheme is stakeholder, me 7% them 7% but i am paying £50 exta in NI contributions (for Sp2) so unbelievable my take home pay will go down, and i was paying 9% into my Final salary before!!

Any advice appreciated as unsure what if anything i can do. Do i vote against linking to cpi as my expected earings will be high (mid 30's and progressing) with the company and will it make a difference as everyone will take the bribe anyway??

jamesd

3800 members in the scheme makes that 200 million a lot more significant, £52,600 per member. Though it's still mostly going to be the short term effect of the gilt and corporate bond pricing.

RPI increases faster than CPI in general. So changing to CPI will reduce the cost to the company. Assuming a one percent difference, about right, it'll reduce the last year's payment to a 40 year old who dies at age 78 by 32%. At age 65 the reduction would be 22%. Pretty big reductions in cost for the company and 25% of current salary doesn't come remotely close to undoing the lost pension value, though if you invest it, it would help a little.

As someone whose earnings are expected to increase rapidly you'll probably suffer very greatly from this closure. Your pension would become based on your income today, not reflecting any future pay increases, just CPI or RPI. This loss is far, far more significant to you and others with increasing salaries than the CPI/RPI issue.

Various things can be done. One of the most appropriate is to refuse to accept the change from RPI to CPI and change job to avoid the threatened penalties. Before doing that you'd need to check whether frozen pots of departed employees can be changed to CPI without agreement, which is possible.

It's interesting that Walmart is applying its well-known employee relations approach from the US in the UK as well. The best thing for consumers in general to do is avoid shopping at Asda, to try to limit how big Walmart's influence here can become. Market rewards and penalties for employers based on how socially responsible they are can be useful tools.

As stakeholder contributions go, a 7% employer contribution is quite good, though not remotely close to what it was before, which would have been more like 20-25%.

To me it looks as though Asda/Walmart is exploiting a temporary issue with bond rates to get a change that will save it lots of money over the long term.

conic76

Hi, they have not said what the option is if the frozen pot is not linked to cpi. Just that no one gets their 25% bung and if we don't choose linking it to cpi it will threaten future pay increases/ bonuses for everyone!!

Can i opt out of the increasing ni contributions for s2p?

Shimrod

conic76 wrote: »

Can i opt out of the increasing ni contributions for s2p?

No, unfortunately you have to pay the 1.5% increase. You got the decreased NI because the pension fund guaranteed a minimum pension value. You can opt out of s2p, but that is only likely to last until 2012 unless the new government changes the rules again. If you opt out, you get some NI rebated into your defined contribution pension (as a separate pot called protected rights). There are a number of factors you have to consider when doing this including your age. In my case, I have chosen to opt out even though it goes against general advice because it gives me control over the money (the s2p rules have changed several times) and if I want to retire early I can access the money early). If you stay with s2p you will only receive the enhanced pension at normal retirement age.

conic76

So the decrease in my take home salary ( despite currently paying 9% and going to 7%) i'm seeing in my projected quotes is due to the 1,5% increase in ni due to longer being in a DB??

Does that mean sp2 equates to an extra .5% ?