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