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.
To my mind, the surplus clearly belongs to the sponsor. All members have received their full pensions – the sponsor has performed with respect to its obligations. To say that the surplus is the property of scheme members when they had no part of deficits is a case of wanting their cake while also eating it. In deficit, the sponsor had to find additional contributions. Unless the scheme rules expressly provide for surpluses to be distributed to members, they have no claim in equity.
Agree entirely with Con (for once! 🙂 ) This “only upside” attitude to pension provision could be considered to have contributed to the very demise of DB pensions that leads to the limited DC offering you’re seeking to enhance!
But in this case, the trust deed states that members are entitled to some of the surplus, the issue is what discretion the trustees have to distribute it. I should have made it clear that this scheme is part of a multi-employer scheme, the trustee is effectively administering a master trust. This makes for an added subtlety, according to the FT, tPR is now involved.
An equitable settlement might be that the employer agrees to share the return of capital with all active members in the DC workplace pension.
Henry, I also agree with Con. It is up to the Principal Employer/Sponsor to decide wht it does with the surplus on wind up of the scheme having fulfilled its obligations. If the Trust deed explicitly states the surplus must be used for the benefit of members then the sponsor has no rights, however it is usual for Trustees to have a discretionary power to use surplus for one off increases, but in exercising the power Employer consent is required. Any deal by the Trustees to provide benefits for non members would be ultra vires.
With regards to Steelworkers and any British Steel Pension Scheme (BSPS2) surplus at the time of a potential buyout, the October 2017 BSPS ‘Time To Choose Options Pack’ provided the following information which explains when the new scheme (BSPS2) might give extra money to members.
1. When the shares that the Trustee of the new scheme will hold in TATA Steel UK Ltd are sold, or dividends are received from those shares and this is enough to pay the extra benefits. The Trustee of the new scheme would decide which members would get a payment. Only members who built up some benefits before 6th April 1997 could be considered. The Trustee could pay a lump sum or promise a future lump sum or pay extra pension.
2. If the funding level on a buyout basis reaches at least 103%. This is a measure of the cost of purchasing annuity policies for all members with an insurer which would replace member’s pensions. The Trustee would decide which members would get an extra payment. All members could be considered.
3. If the outcome of the 31st March 2021 actuarial valuation is better than expected and no payment has been made under point 2 above. Pensioners who built up some of their benefits before 6th April 1997 could get this payment. The payment could be a lump sum or extra pension.
More recently, the BSPS2 News Brief Spring 2022 https://www.bspspensions.com/library/2/member-newsletters/ states…..
“Message from your Trustee Chairman.”
“If part of your Scheme pension currently in payment was earned from service before April 1997, you will have a special interest in the outcome of the 2021 valuation. The agreement to set up the new Scheme included provisions for a potential additional payment for this category of members if the 2021 valuation resulted in an ‘unexpected surplus’. I am pleased to say that this condition has been met. Details about the one-off payment are on pages 4 and 5.”
“Over time (as the Scheme matures), the BSPS funding level is expected to improve further and ultimately reach 103% on the ‘buy-out’ basis. If and when that happens, benefits are expected to be secured with one or more insurance companies, and the 3% surplus will be used to increase members’ benefits in accordance with the provisions agreed when the new BSPS was established. Achieving the funding level to trigger this additional payment to members and secure their benefits
remains the key priority for the Trustee.”
Also, taken from a reliable source in your blog dated 29/03/2022 https://henrytapper.com/2022/03/29/why-pensions-need-a-shift-from-a-deficit-to-a-surplus-mindset/#comment-139527…..
“I cannot be sure if our letters and submission to consultative committee members had any influence on the Trustees decision to promise a restoration payment after the triennial audit. I am just pleased that they honoured their commitment. The Pensions Regulator and Trustee also stated that any surplus at the time of buyout should be used only for the benefit of members. So several years in the future, if the assets are above 103% at buyout level, we should expect another payment or higher pension benefits from the surplus available at buyout.”
“I still hold onto a hope that the Trustee/tPR/PPF would allow a strong low risk BSPS2 to continue without a sponsor as a Zombie scheme with a potential increase in benefits.”