Year in Summary
1. The year in summary
This section summarises the year to 31 March 2019.
During the year, the Trustee completed a full valuation of the Scheme as at 31 March 2018. The liabilities of the Scheme (the Technical Provisions) were calculated by the Scheme Actuary using assumptions agreed with Invensys Limited (the Company). Total assets of £5,097m exceeded the estimated liabilities of £4,954m by £143m. This represents a funding level of 103%. The surplus at March 2015, the last full valuation of the Scheme, was £67m.
The main change in the assumptions from the 2015 valuation was a reduction in the assumed future improvement in members’ life expectancy. This reflects recent trends. The methodology used to set the inflation and interest rates assumptions was not changed.
As the Scheme continues to be fully funded on a Technical Provisions basis no contributions are required from the Scheme’s Sponsor, Invensys Limited or from the other participating employers in the Scheme.
Estimated funding position
Each year, the Scheme Actuary provides the Trustee with an estimated funding position, based on the assumptions agreed at the previous triennial valuation. As at 31 March 2019, the assets of the Scheme were £5,045m and the liabilities were estimated to be £4,950m. This indicated that the Scheme had a surplus of £95m and a funding ratio of 102%.
Schneider Electric results for 2018
Schneider Electric, which provides a £1,750m guarantee to the Scheme, reported its 2018 results on 15 February 2019. Adjusted earnings before interest, taxes and amortisation (EBITA) were €3.9bn (2017: €3.7bn). Free cash flow was €2.1bn (2017: €2.3bn). Total market capitalisation of Schneider Electric at 31 March 2019 was €41bn (circa £35bn).
Pensioners are now able to access information using the on-line functionality provided by the Scheme administrator.
The Scheme closed to future accrual on 31 March 2015. All the active members became deferred members at that time.
The Scheme has 60,713 members, 4.5% fewer than last year. 41,518 are receiving a pension and 19,195 are deferred members.
Guaranteed Minimum Pension Reconciliation AND RECTIFICATION
The Scheme continued to reconcile all its Guaranteed Minimum Pensions (GMPs) with the UK Government’s records. All other pension schemes which have previously contracted out of the State Second Pension have been doing the same thing. The project involved the comparison of many thousands of records dating back to 1978 and is particularly complex because of the number of schemes that were merged into what became the Invensys Pension Scheme. We have made good progress and we expect to complete the reconciliation phase in 2019. Our Scheme administrator has already started to correct our records and the amount of GMP paid where necessary.
Guaranteed Minimum Pension EQUALISATION
We have started to plan for the equalisation of GMPs, following the High Court decision in the Lloyds Bank pension scheme case in late 2018.
This ruling may affect the pension of members who accrued benefits between
17 May 1990 and 5 April 1997.
Further court ruling(s) and guidance for schemes affected by equalisation are expected in the coming year. We intend to start correcting benefits once the further guidance is published. This topic was discussed in the 2019 edition 1 of Pension News which is available on our website. We will continue to provide updates on this subject in future editions of Pension News.
Pension Increase Exchange (PIE)
The final part of the Pension Increase Exchange project for Pensioner Members that the Company ran was completed in the year.
The Trustee continues to offer a PIE option to members as they reach retirement. Members selecting this option receive a higher initial pension but will receive lower increases to their pension in future years.
2. Our investment summary
Our investment strategy
Our investment strategy is:
to secure members’ future benefits by reducing risk and delivering consistent, reliable investment performance.
to meet the requirements of the Company to achieve 1 percentage point above the return on gilts (The Strategic Target). This requires the Trustee to invest in assets that have an element of additional risk associated with them.
The Scheme’s assets GREW BY 5%, BUT UNDERperformed AGAINST OUR STRATEGIC TARGET RESULTING IN A SLIGHTLY SMALLER SURPLUS
The year to 31 March 2019 saw a broadly supportive macro-economic environment. The US, Eurozone and UK economies grew in 2018 by 2.9%, 1.9% and 1.4% respectively. The performance of financial markets was generally positive.
The Scheme’s assets achieved a return of 5.0% over the year, however this was 0.7 percentage points below the Strategic Target. The 5.7% Strategic Target reflected lower gilt yields which increased the present value of liabilities to be paid in the future.
During the year, the Investment Committee and the Executive Office focused on the following investment initiatives:
· Enhancement of risk return profile – implementing a number of asset re-allocations when the pricing of investment grade bonds was attractive relative to gilts.
· Ongoing focus on cash flow generation – ensuring that there is projected to be sufficient cash available to pay pensions.
· Management of Brexit – The Trustee has monitored the evolution of negotiations through the year. We have reviewed the legal documentation with the Scheme’s service providers and counterparties, and considered the impact that potential Brexit scenarios may have on markets.
You can find further details in the Investment report on page 14.
dc and avc developments
Following a review conducted with its Investment Adviser, the Trustee decided to change both the range of funds available to members with DC and AVC investments and the default lifestyle arrangement. Based on an understanding of how most members use their DC savings, the default lifestyle fund now targets cash at retirement, rather than an annuity. These changes were implemented during 2018.
3. The outlook
The Scheme is well positioned for the future
The funding level, along with the security provided by the Company, the other participating employers and the Schneider Electric SE Guarantee of £1,750m, gives the Trustee confidence that the Scheme is well positioned to pay the pensions promised to its members.
The Trustee will continue to assess the financial security of the Scheme
Looking to the future, the Trustee will continue to monitor both the funding level and the security provided by the Company. Where there are opportunities to improve the security of our members’ benefits, we will seek to work with the Company to achieve them.
The Trustee will continue to monitor the Scheme’s investments closely, looking for ways to deliver the current investment target while managing investment risk.
Thank you to the Board
I am grateful to the Board for their involvement, effort and enthusiasm. They continue to tackle demanding technical issues and oversee significant projects, in order to meet the responsibility of providing a safe and secure Scheme for all members, now and in the future. I would particularly like to thank Eleanor Ager, Tony Ferris and Andy Smith who left the Trustee during the year for their significant contributions. Both Eleanor and Tony served as directors of the Trustee for more than 11 years. Andy, who served as our CEO for six years, left in December 2018.
Chair of the Board
10 July 2019