UK Pension Deficits Widen in December | Chief Investment Officer

The total deficit of the nearly 5,600 pension plans covered by the Pension Protection Fund’s (PPF) PPF 7800 Index increased £16.2 billion to £103.8 billion during December, from a deficit of £87.6 billion at the end of November. During that time, the funding ratio decreased to 93.9% from 94.7%.

Despite the increase in the deficit for the month, it’s still down 54% from the same time the previous year, when liabilities outstripped the pension plans’ assets by £223.9 billion.

According to the PPF, the total assets for all plans increased 1.7% in December, and were up 7.7% from the previous year. Meanwhile, total liabilities were £1,693.3 trillion, up 2.6% at the end of December 2017, but down 0.4% over the year.

For the month, the number of plans in surplus fell to 1,878 from 1,925, but that was up from the 1,455 plans that were in surplus at the end of December 2016. And although the total surplus of plans in surplus decreased to £106.3 billion from £109.4 billion at the end of November, it was still well above the total surplus of all plans in surplus at the end of December 2016, when it was £66.4 billion.

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Meanwhile, the number of plans in deficit rose in December from 3,663 to 3,710, or 66.4% of all defined benefit plans in the index. However, this was still well below the 4,339 plans in deficit at the end of December 2016, which represented three-quarters of all plans at the time. Among the plans in deficit, their combined shortfall increased to £210 billion from £197 billion at the end of November. This is compared to £290.2 billion at the end of December 2016.

The PPF reported that liabilities increased by 2.6%, while conventional 15-year gilt yields fell by 12 basis points, and index-linked 5-to-15 gilt yields fell by 11 basis points over the month. At the same time, assets increased by 1.7% in December as a result of higher equity and bond prices. Over the year to December, 15-year gilt yields were down by 7 basis points, index-linked 5-15 gilt yields were up by 13 basis points, and the FTSE All-Share Index was up by 8.5%.

According to the PPF, equity markets and gilt yields are the main drivers of funding levels, and liabilities are sensitive to the yields available on a range of conventional and index-linked gilts.

Tags: Pension Deficit, Pension Protection Fund, UK Pensions

In its recent annual report, aluminum producer Alcoa said it will freeze its US and Canada salaried defined benefit pension plans, effective in 2021, and move its workers into defined contribution plans.

Alcoa said it was making the changes to its defined benefit pension plans, and to other post-employment benefits, in a move to strengthen the company’s balance sheet by reducing its liabilities.

The company said that effective Jan. 1, 2021, salaried employees in the US and Canada will no longer accrue retirement benefits for future service under defined benefit pension plans. It added that the US and Canada account for Alcoa’s largest portion of liabilities for pension plans and other post-employment benefits.

As a result of the move, approximately 800 affected employees will be transitioned to country-specific defined contribution plans. The company will contribute 3% of affected participants’ eligible earnings to defined contribution plans in addition to its existing employer savings match.

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It also said that benefits earned from the defined benefit pension plans through Dec. 31, 2020, will be protected and included in benefits provided to the employees at the end of their employment with Alcoa, or when they become eligible for retirement, as defined by the plans. Participants already collecting benefits under the pension plans, and those currently covered by collective bargaining agreements, will not be impacted by the changes, the company said.

Additionally, Alcoa said it plans to make discretionary contributions, beyond required contributions, of approximately $300 million to the US and Canada defined benefit pension plans in 2018. In connection with the discretionary contributions, the company will make annuity purchases to lower risk and cost while maintaining minimum required contribution levels.

Also effective Jan. 1, 2021, Alcoa will cease contributing to pre-Medicare retiree medical coverage for US salaried employees and retirees. As a result of both actions, Alcoa said it expects to reduce its liabilities from pensions and other post-employment benefits by $35 million, and record non-cash non-operating income of approximately $20 million in Q1 2018.

Earlier this month Arconic Inc., a specialty metal engineering and manufacturing firm that was spun off from Alcoa in 2016, announced plans to freeze its US defined benefit pension plans, affecting approximately 7,900 US workers.

Tags: Alcoa, Pension, Pension Freeze