Pension news (Summer 2011)
News From the Chairman
Welcome to the Summer 2011 edition of the IPS Newsletter
We are sending the newsletter later than usual because the Trustee, the Executive Office and the Administration Office have been working on:
- Assessing the potential consequences of the Company’s statements related to a possible pension scheme buy-out made during their year-end results presentation;
- Reaching a provisional agreement with the Company on the Scheme’s 31 March 2011 triennial actuarial valuation; and
- Finalising the Scheme’s March 2011 financial accounts.
An important topic I am addressing in this newsletter is the Company’s statements made in relation to a potential buy-out of the Scheme. The statements were made during the Company’s results presentation on 19 May. Some of you have called us requesting further information on the matter and we posted the following note on the Scheme’s website on 14 June:
“We have received enquiries from members in relation to comments made by Invensys plc concerning its pension scheme and a subsequent article from the Sunday Times dated 12 June 2011. In order to clarify for members what has been said, we summarise below the key points. As part of the presentation of the 2011 results of Invensys plc (the “Company”) on 19 May, an update on the position of the Company’s pension schemes was presented. The following was stated with regard to the Invensys Pension Scheme (IPS): The Company’s strategy in relation to the IPS is to: • “Continue to manage the pension schemes to reduce volatility and risk”; and • “Exploring other options with the ultimate goal of buy-out with a reputable insurer”. As a listed company with substantial pension liabilities, it is inevitable that Invensys plc would be exploring strategic options regarding the Scheme. The term “buy-out” is used to describe the process by which the responsibility for paying benefits to a scheme beneficiary is transferred from the Scheme (which is ultimately backed by the Company) to an insurance company (which is required by law to hold more than enough assets to pay all of its liabilities). A scheme “buy-out” transfers part or all of its assets to an insurer who takes on some or all of the scheme’s liability to pay benefits. As insurance companies value typical pension liabilities on a conservative basis, the assets held by pension schemes (including IPS) are often not sufficient to cover these liabilities. There is consequently an extra payment (contribution) required by the corporate sponsor before such a buy-out can take place. The Trustee will give due consideration to any proposal that the Company may put forward while continuing to act in the best interests of the members.”
A pension scheme buy-out would be a major event for the Trustee of the Scheme and its members; I therefore strongly recommend that you spend some time reading the section in this newsletter that covers the following points:
- Why do companies consider pension scheme buy-outs?
- What is a pension scheme buy-out / buy-in?
- What happens to members’ pension benefits in a scheme buy-out?
- How much do pension scheme buy-outs / buy-ins cost?
- IPS-specific: the powers of the Trustee and the Company.
Whilst I realise how concerned members may be regarding this development, we cannot answer specific enquiries regarding this potential transaction. Invensys plc is a listed company and as such is governed by the disclosure rules of the Stock Exchange and therefore neither the Trustee nor its employees can publicly speculate about such a price sensitive event.
Insofar as the triennial actuarial valuation is concerned, we have been working since January with the Scheme’s Actuary and the Company in formalising the Scheme’s triennial actuarial valuation (as at 31 March 2011), which requires us to value the Scheme’s assets and its liabilities (the future benefits to be paid to our members). This process usually takes a minimum of 6 months from the March date. The value of the benefits we have to pay in the future (the Scheme’s liabilities) is dependent on three main factors:
- The interest rate used by the Actuary to value your future benefits;
- The inflation rate: even though your benefit amount is set on the day you retire, certain movements in inflation will increase the amount payable; and
- Life expectancy: as people are, on the whole, living longer, then the liability will increase.
The discussions we have with the Company during a triennial valuation are necessary as we are required to agree the valuation assumptions with the Company. These assumptions will determine the deficit of the Scheme and the deficit funding plan the Company will need to follow to make good any deficit.
The March 2011 triennial valuation has not yet been formally completed, however current indications are that we will be able to reinforce the valuation’s main assumptions. We should also be able to maintain the deficit funding contribution schedule agreed in 2008, whereby the Company will pay the Scheme circa £40m a year (linked to inflation) until 2017 in order to make good the deficit currently calculated as £235m.
Based on the provisional March 2011 valuation assumptions, the Scheme’s funding position is 94%. This funding position should be compared to March 2008: 93%, March 2009: 86% and March 2010: 93%. This is a very good result given the headwinds the Scheme has been experiencing since 2008 and I would like to thank the Executive Office and the Scheme’s advisers for their continued focus on not only safeguarding the Scheme’s assets but improving its funding position. We provide you with more details on the Scheme’s performance in section 3 of the newsletter.
Moving on to the Scheme’s accounts, we have been working with our auditor, Ernst & Young, since early April in order to finalise IPS’s accounts. Once the accounts are finalised, they will be available on IPS’s website. We will also be sending a summarised version of the accounts to your home.
Please also make sure you note the information and messages in sections 5 and 6 of the newsletter. These sections deal with external tax-related advice that could be useful to you, important communication processes for deferred members and various important administrative requirements from the Administration Office.
Following comments we received from some of you, I have decided that, going forward, we will endeavour to send the newsletter at the following times:
- Summer newsletter, to be sent end of July / beginning of August
– this will allow us to include the Scheme’s March year-end performance results and potentially a summary of its accounts;
- Winter newsletter, to be sent end of January / beginning of February
– this will allow for the notification of your pension increases.
Kathleen O’Donovan
Chairman of the Trustee of
the Invensys Pension Scheme
Click here to download the the Summer 2011 IPS Pensions News
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