the vesuvius story - 10 years of pension plan derisking
DESCRIPTION
case study of 10 years pension plan derisking at Vesuvius (formerly Cookson)TRANSCRIPT
A global leader in metal flow engineering
A global leader in metal flow engineering
A global leader in metal flow engineering
A Decade of De-Risking: The Vesuvius Story Bryan Elliston & John Reeve
John Reeve BSc FIA
• Premier• Consultant• Advisor to Vesuvius Trustee Board• Project Manager of these exercises• Works with Companies and Trustees on
all aspects of Pension provisionBryan Elliston FCA
• Vesuvius (formerly Cookson)• Financial Controller• Also a Trustee• Company Sponsor for the Projects
Vesuvius – a little background
• Formed as a result of the demerger, in 2012, of Cookson Group plc
• Cookson had created its UK defined benefit plan in 1946 and the company had grown through acquisition to have a global presence in electronics, precious metals fabrication and advanced refractories
• The advanced refractories business, Vesuvius, provides metal-flow control products to the steel and foundry industries globally, with sales of £1.5 billion and 11,000 employees in 30 countries
• On demerger, the entire UK DB plan remained with Vesuvius
• Cookson (Vesuvius) and the Trustees have always worked together in the interests of the members and the Company
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Cookson’s UK Pension Arrangements
• 6800 members: 1,200 active; 2,800 deferred; 2,800 pensioners
• £180m assets. £94m deficit
• Outsourced administration
• Grew by acquisitions hence quite complicated
• Prudently funded
3
Final Salary Scheme in 2004
Cookson’s UK Pension Arrangements
4
Defined Contribution Scheme (2012 – when wound up)
• 680 members: 570 active; 110 deferred
• £16m assets
• Trust based
• Outsourced administration
2004 2005 2006 2007 2008 2009 2010 2011 2012
Eight steps to a stronger business– The Actions
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Close Final Salary Scheme
Implement LDI
ETV Exercise
Pensioner Buy-in
Buy-in for Future Retirees
Close both Schemes to
accrual
Wind-up DC Scheme
Fiduciary Management
Data Cleanse
2004 2005 2006 2007 2008 2009 2010 2011 2012
Eight steps to a stronger business– The Result
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MembersActive 1,208Deferred 2,748Pensioner 2,832
Total 6,788
Assets £180mLiabilities £(274)m
Deficit £(94)m
MembersActive 234Deferred 2,022Pensioner 3,348
Total 5,604
Assets £470mLiabilities £(460)m
Surplus £10m
Increased liabilities:• Discount rates down c. 2-3%• Longevity improvements
Company funding contributions c. £130m
Know Your Enemy - Key Risks Identified by Trustee/Company
• Longevity Risk
• Investment / Liability Risk• Equity Falls• Interest Rate• Inflation
• Operational Risk• Administration• Governance
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Identified Risks
• Regulatory Risks
• Increased Levy costs• Governance• Solvency II
• Covenant Risk
• Escalating Costs
• Administration• Governance• Levy
The First Step – Stem the flow of new benefit liability
• Final Salary was becoming increasingly expensive
• Close to new entrants in 2004
• Followed the trend in industry at the time
But
• Doesn’t reduce risk of accrued liability
• Doesn’t stop the quantum of risks continuing to grow
8
Then…Address the Investment risk• Introduced Liability Driven Investment in 2006
• Addressed Interest Rate and Inflation risk
• Clear company wish not to be exposed to these risks
• Used liability-matching derivatives• Inflation swaps paid out a fixed rate and received a variable rate linked to
actual inflation. Beneficial when inflation runs higher than expected.
• Interest rate swaps paid a (LIBOR-linked) variable rate of interest and received a fixed rate. Beneficial when long-term interest rates fall.
• Complex solutions need training for Trustee and complex governance in place
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Then…Address the Cost of Governance
• Appoint a Fiduciary Manager of the asset portfolio in 2010
• Reduces the governance budget that has to be dedicated to Investment implementation
• Trustee focus on strategy and leaves tactics to the experts
• Performance related fees
• Detailed discussion and documentation of the risk appetite
• Trustee and Company worked together to assess the appetite for risk and the risk/return decision
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Then…Move to a Common Benefit Platform for All Employees
• Close to future accrual in 2010
• Next step in capping the liability
• High quality GPP to provide a good savings vehicle with excellent support
• Strong Governance structure retained
• One scheme for all UK employees
• Fits with the industry changes
• Controls on-going costs
But
• Doesn’t reduce risk of accrued liability
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2004 2005 2006 2007 2008 2009 2010 2011 2012
Eight steps became.… the Flight Path
Mitigation / Management Risk Reduction
© Premier pensions management 2011
Agreed “Flight Path” to:
• Reduce Risk
• Reduce Operational Costs
• Secure Benefits
• Inform and educate members
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Data review and cleansing – an Ongoing Process
• Carried out over a period
• Against different benchmarks
• Sufficient for Administration• Adequate for a buy-in• Adequate for an ETV
• Existence of Data v Access to data
• Benefit peculiarities and promises
• Identify the “known unknowns” and mitigate against the “unknown unknowns”
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Risk Reduction – Giving Members Options
• Opportunism - Sharing the CPI windfall
• Targeting the same Critical Yield for all
• Detailed evaluation of the offer• Cost• Benefit to members
Enhanced Transfer Offer in 2011
14
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Enhanced Transfer Value Offer
• Full IFA advice
• No Cash!
• Paid for by the Company
• M& S Vouchers for positive engagement with the process irrespective of the decision
• Targeting “Educated decisions” not cost saving
• Retrospective review against the “Code of Practice”
Key Aspects of Offer
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Enhanced Transfer Value Offer
• Data, data, data
• Despite a lot of work on data in the past“We have all the data needed, we just don’t have it on the systems in a way we can
access it easily”
• Processing bulk TVs
• Benefit History
• Communication process• Phased communication• Flexibility to allow time for decisions
Lessons Learned
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Enhanced Transfer Value Offer
• Offered to 2,732 deferred members with benefits of £240m
• 50% formally advised
• 20% (554) members transferred (24% by value)
• 66 members retired
• 6 members took trivial payments
• £58.3m paid out
• Broadly cost neutral against Technical Provisions
• Reduced the ‘Solvency’ deficit by c£30m
Results
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Risk Reduction – Giving Members Options
• Reduced administration costs
• Reduced Governance strain on the Trustee
• Gives members control
• Consolidate in the GPP, a Low-cost default or their own option
Winding-up the Trust-based DC Plan
19
Risk Reduction – Pensioner Buy-in
• Also reduced Investment and Regulatory risks
• Remaining risks• Insurer covenant
• Company covenant
• Good pricing v Technical Provisions (Prudent funding basis)
• Used the high valued gilt investments
• Payback from use of LDI
• Administration of the payroll!
Removed Longevity, Inflation and Interest Rate Risks
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Risk Reduction – Pensioner Buy-in
• Clean data for more accurate quotes and reduced ‘true-up’
• Clear and regular communication between Trustee and Company and efficient decision-making structure
• Expert, experienced advisors
• Credible insurer (strong covenant) with flexibility to tailor a solution
• Sufficient liquidity in the market
• Positive cost/benefit analysis – i.e. acceptable pricing
Precursors to a smooth transaction
21
Risk Reduction – Pensioner Buy-in
• Benefit of risks eliminated – inflation / interest rate / longevity / political (Solvency II) / administration management / operating costs
• But Insurer (and Company) covenant remains; and possibly data risk
• Which liability measure to use?• Technical Provisions? (possibly separate from Deferreds)• Best Estimate?• Solvency?
• Correct answer probably not know for decades!
Cost-Benefit Analysis – far from straight-forward!
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Post Buy-in management of the Plan
• Rolls in future pensioners for next three years
• Liabilities valued using same basic methodology as in original deal (but younger members, so possibly higher cost)
• Ability to opt-out if cost of annual tranche too high
• Consistent with ultimate buy-out aim of Flight Plan
Conditional extension of original buy-in contract
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2004 2005 2006 2007 2008 2009 2010 2011 2012
Eight Steps to a Stronger Business
A decade of De-Risking
Close Final Salary Scheme
Implement LDI
ETV Exercise
Pensioner Buy-in
Buy-in for Future Retirees
Close both Schemes to
accrual
Wind-up DC Scheme
Fiduciary Management
Data Work
24
The Impact of the Cookson Demerger
• Desire for demerged Electronics business to go ‘clean’ of pension liabilities created S75 debt and hence need for a mitigation payment
• Reduced size of Plan and risk reduction made mitigation payment manageable
• Risks of UK DB plan now borne by the demerged Vesuvius company
© Premier pensions management 2011
Separation eased by prior years’ de-risking actions
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De-Risking … The Story Goes On
• Parent Company Guarantee
• Liability apportionment
• Member options:• P.I.E. (at retirement?)
• Early Retirement Options
• TV at Retirement
• Further buy-ins (deferred members?)
• Non-UK pension arrangements
• US Lump Sum Offer – an ETV without the “E”
• US post-retirement healthcare benefits – contractual?
Leaving no stone unturned…
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Summary and Conclusions
• Ultimate destination or route-plan wasn’t known at start
• De-risking takes time … and good timing helps
• Prudent funding and good communication between Trustee and Company helped along the journey
• Members have benefited through more options, educated decisions and better security for their benefits
• Managing risk and cost is a step in the right direction –whatever the ultimate destination
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Reduced pensions risk makes for a stronger company
John Reeve BSc FIA
[email protected]: 07971 890440
Bryan Elliston FCA
[email protected]: 07785 310213