I hear that the very well-informed MP, Stephen Timms, who chairs the Work and Pensions Select Committee, is on to Bristol Water’s claim on the £12.1m surplus that is estimated to be left over after the scheme is bought out with an annuity. It is good that we are arguing over excess money, it is bad that we are still having these arguments. It shows that after so many years of pain, the lawyers still have first charge on a pension scheme!
Bristol Water is a small to medium scheme which had around £171m in assets in March 2020. It glories in having a CFO named Laura Flowerdew and a Pension Manager called Kelly Damsell.
Until 2020,Bristol Water was one of very few water companies in the UK that had remained in private ownership since its inception. It’s now owned by the publicly listed Pennon Group who had sufficient cash when it bought out Capstone private equity to pay a special dividend and buy back shares at the same time. Bristol Water is a financially strong entity that could easily run off its DB scheme if it chose to.
It is financed by customer payments, in theory the (small) injection of the surplus might be enjoyed in lower bills, but you somehow doubt it!
This is a dispute between a strong and healthy company and scheme members who are going through a cost of living crisis. This is a timely intervention by Stephen Timms. I hope he is being informed by the Pensions Regulator.
The dispute is one of the first, others will doubtless follow
As the First Actuarial Best Estimate Index (FABI) has been saying for a number of years, the actual funding of defined benefit pension schemes has been excessive to the needs of the schemes to pay pensions over time. The funding has been aimed at other things, self sufficiency or buy-out. Where the pension scheme goes away, the shareholders play.
Last year Bristol Water had a one day strike because workers got no pay-rise and there was no increase in pension contributions. The FT’s Pension Expert reports that
According to a letter sent on April 19 from Timms to David Sankey, trustee of the Water Companies Pension Scheme, members have said that a provision in the section’s rules allow for the surplus to be used to boost members’ benefits. There were no discretionary increases to members’ benefits last year.
But the member’s representatives (the GMB union) claim there is a provision in the section’s rules stating that the trustee ‘may, in consultation with Bristol Water PLC, use any surplus to augment members’ benefits if and to the extent that it considers it just and equitable to do so’”.
The £12.1m surplus is a drop in the ocean compared with the potential surplus available to all DB members. FABI shows just how well funded DB pension schemes are. The current aggregate surplus (31st March) is £350m
The schemes well in surplus are most likely talking to anyone who will buy them out , that means superfunds, insurance companies and DB master trusts – grooming schemes for execution.
But , as lawyers know only too well, the trust deeds of all these schemes all read differently and each scheme gives a different wording for the distribution of residual surplus.
In my opinion, though the surplus has been funded by the sponsor, it forms part of the assets of the scheme and is “naturally” the property of the member, after all costs for wind-up have been met. But this is a contentious matter (see comments), by “natural”, I imply “common sense”, which suggests that money put into pensions should stay in pensions.
In Bristol Water’s case, the surplus goes some way to addressing the fact that there is to be no further pension scheme at Bristol Water, only a savings scheme to help members buy a pension. If the buy-out is secured, the value of the private equity rockets, because the ongoing impact on the P/L and balance sheet is so positive.
For the shareholder to pocket the surplus is a double indignity. For those workers not in the DB scheme (likely to be the majority as the scheme closed for future accrual in March 2016), the gap in the funding of their DC scheme , relative to the DB scheme will have been substantial.
In my opinion, not only are DB scheme members due a one off bonus distribution but the unfortunate staff with zero pay rise have good reason to ask for a share of the ongoing profits generated by there being no DB scheme, the DC scheme could no doubt do with a “top up”. DC top-ups have the corporate advantage of being targeted at current employees (whether in the DB or not).
It is right and proper for Stephen Timms to get involved. Timms , in his letter to the Chair of Trustees writes
“My committee rarely considers individual cases except where these illuminate more general policy and operational matters,”
“In this instance, I am considering asking my committee to discuss whether the legislative protections available to members of pension schemes regarding rights over surpluses and their ability to elect trustees are effective and sufficient.”
He is asking that question , not just about the Bristol plc. Water Companies Pension Scheme but about a number of others. Only 60 miles West is Port Talbot.