Bryan Elliston, a trustee director for the Vesuvius pension plan, explains why the scheme embarked on a de-risking journey, and the factors it took into consideration when choosing its strategy
The Vesuvius pension plan (formerly known as the Cookson Group pension plan) began its de-risking journey in 2004 which, over the ensuing 10 years, took the plan from 6,800 members and a deficit of £100m to one of 5,600 members and a small surplus.
Cookson Group plc entered the 21st century with an adequately funded defined benefit plan. Following a change in UK accounting rules in 2004, the sponsor needed to recognise its DB net liabilities on its corporate balance sheet. This led management to embark, in close cooperation with the plan trustee, on a course of de-risking, with the aim of removing such net liability from the balance sheet.
From the plan trustee viewpoint, while it had been content to rely on the sponsor’s covenant, it was also content to engage in de-risking activities provided that member benefits were safeguarded; it saw an ultimate goal of buyout as an acceptable way of fully securing those benefits.
For most, this type of long-term buyout goal is likely best achieved through a number of short-term de-risking actions.
The de-risking steps along the way
The first step was the decision in 2004 to close the plan to new entrants. Attention was then turned to legacy risks – investment, inflation, interest rate, administration, longevity, regulatory. Each was considered for possible de-risking opportunities.
The next major de-risking action taken was the introduction of an LDI approach to the plan’s investment strategy in 2006. Good timing, as it turned out. Through a combination of interest rate and inflation rate swaps, the plan’s exposure to these risks was all but eliminated, and the introduction of a ‘cap and collar’ arrangement traded some potential upside growth in the plan’s equity investments for protection on the downside.
Significant time and effort over the next two or three years was spent to make sure that the member data was accurate, so as not to provide an obstacle to any undertaking of large-scale member transfers.
In 2010, the government changed the basis of benefit revaluation from the Retail Prices Index to the Consumer Prices Index. While this change resulted in a sizeable improvement in the plan’s funding position, the sponsor and trustee saw the opportunity of sharing this with the members by offering an enhanced transfer value based on RPI rather than CPI. The offer resulted in an improvement of some £30m in the solvency position of the plan.
By 2012, the actions taken had resulted in a significant de-risking of the liabilities related to the plan’s deferred members. This meant that buy-in was now a feasible solution.
A policy was negotiated by the trustee to buy in 3,300 pensioners. This one transaction removed risks attached to some 60% of the plan’s total liabilities, while leaving the funding position of the plan marginally improved. A few months later, a second policy was arranged to buy in new pensioner members retiring during the next three years.
There was a significant change for the plan sponsor in 2012, with a demerger of the business into two companies. The legacy DB plan was to stay in one of them, Vesuvius, leaving the other, Alent, free from pension liabilities.
Months of negotiation followed to agree the level of compensation due to the plan in order to account for the reduction in the strength of the sponsor’s covenant, but years of successful de-risking meant that the compensation was low enough to be affordable by the sponsor.
The end goal
The ultimate aim remains a full buyout. At the present time this is too big a final step to make, so further smaller steps will be necessary.