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Regulation

Rolls-Royce Reaches Pension Deal with Unions

DB plan to stay open until 2024 as contributions are increased for DC plan members.

By Michael Katz

UK automobile and aircraft engineer manufacturer Rolls-Royce has reached a new pension deal with unions that will keep its defined benefit plan open to existing members until 2024, and increase benefits to younger workers beginning in 2021. The move is expected to save the company £145 million ($196.1 million) over the next three years, according to The Financial Times.

As part of the deal, the company is reducing contributions to its defined benefit pension over the next three years in exchange for agreeing to allow benefits to accrue for the defined benefit plan’s 12,500 existing members until the beginning of 2024.

“It helps us to keep our defined benefit scheme going, at a time when more and more companies are fully closing theirs,” Joel Griffin, head of global pensions and benefits at Rolls-Royce told the FT. “It will also meaningfully improve retirement prospects for younger Rolls-Royce employees, helping them to be better prepared for the future.”

The company is also making changes to its defined contribution plan, which includes increasing its contributions to approximately 10,000 employees beginning in 2021. Under its previous plan, Rolls-Royce’s contribution levels were based on an employee’s age, with the base contribution set at 6% for a younger employee contributing 3% for a total contribution of 9%. However, under the new plan, this could potentially double with a base contribution as high as 12%, with employees kicking in 6%, for a combined total of 18%.

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Rolls-Royce estimates that this could translate to a 20% boost to a young worker’s final pension total, depending on the returns produced by the investments chosen by the employee.

However, this still leaves Rolls-Royce with a two-tier system with defined benefit members still likely to end up with larger pensions than those in defined contribution plans. 

“The current DC maximum contribution of just 6% is stingy for a blue-chip company, especially when the annual benefit to employees in the DB scheme is 30% of salary,” John Ralfe, an independent pensions consultant, told the FT. “Doubling the maximum contribution to 12% from 2020 is obviously an improvement but is not at the top end, and new joiners will get less.”

UK Union Unite and other unions representing Rolls-Royce’s 22,000 UK workers voted last week to accept the plan.

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Home > News > Research > Wilshire: State Pensions Are Over 70% Funded
Research

Wilshire: State Pensions Are Over 70% Funded

Although liabilities climb, shortfalls shrink by $58 billion. 

By Chris Butera

State pension plans increased by nearly three percentage points to 70.2% in fiscal year 2017, according to a report from Wilshire Consulting.

Ned McGuire of Wilshire’s pension risk solutions team said that a boost in global equity for the year was “a primary driver” of the funding ratio improvement. McGuire also noted that the estimated average value of assets is the highest since the agency began reporting on the subject.

The 71 state retirement systems that reported actuarial data for 2017 saw their assets climb more than nine percentage points to $3,170 billion. Liabilities also increased to $4,518 billion, almost five percentage points higher than the past year.

While liability increases may cause its woes, the average shortfall has decreased by $54 billion. According to Wilshire, it now stands at $1,348 billion.

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Pension plans are still lowering their discount rates as nearly half of the reviewed retirement funds reduced their rates. Ranging from 4.21% to 8%, the average discount rate in 2017 was at 7.25%. This is down 25 basis points from 2016.

Although allocations differ from system to system, the average state pension plan investments were rooted in private and public equities, which 57.6% of the studied funds put their money in during the fiscal year. On average, 22.8% allocated to fixed income and 19.8% of plans invested in real assets, alternatives, and cash.

In addition, the average rate of return also dropped by 25 basis points to 7.25%, Wilshire reports.

The report is based on the most recent financial and actuarial reports of 130 state pension systems.

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