Alternative Uses For Honda’s £0.5 Billion Pension Contribution
The Honda Motor Europe pension scheme is being handed over to L&G, its LDI manager, for around £800m.
Back in 2019 the Group decided to shut its Swindon plant and gave its £930 million pension scheme over £0.5 billion.
Fiduciary manager Mercer spent £0.7 billion on LDI over 3 years. Gilt yields were then around 1%.
In 2022 interest rates rose and £1.5 billion become £0.9 billion by March 2024.
The Aga Rangemaster pension scheme provides a rather helpful counterfactual case study.
It was in a comparable funding position to the Honda scheme in 2018 and still is – it just did not need £0.5 billion in cash contributions to get there. It continued steadily on.
Now if you had been given £0.5 billion in Swindon in 2019, what would you have done with it?
- Given it back?
- Left it in the car boot?
- Put it in the Post Office?
- Made Swindon Town a premier league team?
- Refurbished a car plant to make electric vehicles?
All better bets than Mercer’s on LDI.
Disappearance of the Honda £0.5 Billion Pension Contribution : The LDI Smoking Gun
Aga Rangemaster : Honda Motor Europe Pension Schemes Comparison
Comparing the two schemes:
In 2018 Aga Rangemaster (Aga) and Honda Motor Europe (Honda) had DB pension schemes with asset of £930 million and accounts deficits of around £200 million.
Honda donated £500 million to the scheme in 2019. Honda’s fiduciary manager Mercer spent the money on LDI at the bottom of the interest rate cycle. Aga kept to a run on plan.
By 2024 Honda, after the £0.5 billion cash injection and having paid out £120m less that Aga to pensioners, had just £60 million more in assets.
The Aga investment gain from 2018 to 2024 is £167 million; the Honda loss is £357 million.
Now Honda is giving the scheme to the LDI manager L&G in a buy-in for circa £800 million.
The conclusion should be actuarial work and the Pension Risk Transfer market needs scrutiny and disclosures now.
The author
William McGrath was formerly CEO of Aga Rangemaster and is the author of this piece
William McGrath
His business is C-Suite and he can be contacted through these details
w.mcgrath@c-suiteps.com
07768 607204
I do think “risk transfer” / LDI is the greatest financial scandal of the last century.
Simply the Honda pension scheme had assets of £1.5BN in March 2022 to pay benefits of say £40M per year (I assume the slightly higher 2021/22 figure was a result of the closure of the Swindon plant in lump sum and transfer values). Even with a zero investment return and no mortality the assets would have covered 37.5 years benefit payments.
Honda is not alone, it appears that the following high profile company pension schemes have lost similar or greater amounts:
WH Smith > £500M
Baker Hughes > £500M
The Royal Bank of Scotland > £2,000M
There must be countless (well perhaps 5,000) others.
If you consider the consequential effects on the cost of Government borrowing and the discouragement of investment by the sponsoring companies, that is a cost we are all sharing.
Who pays the LDI compensation?
If only VFM were ezpressed in a return over inflation. it seems only the scheme member wants to see that.
That is a really interesting comment John. Would you say that the benchmark for pensions should be based on offering inflation matching increaseAs each year and that anything above inflation was VFM and everything below VFM was poor value?
There is something very satisfying about the idea that all pots were turned to pensions at a given rate – say 5% and what was given over the basic amount was either guaranteed- an annuity – or was driven by the markets (conditional or Collective DC).
Do you think there should be a conversion rate for all defaults?
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