UK Regulator Approves Hoover Pension Deal

Vacuum cleaner maker will contribute £60 million to fund.

The UK’s The Pensions Regulator (TPR) has approved a deal for British vacuum cleaner manufacturer Hoover to move its struggling pension plan into a protection fund.

TPR has endorsed a Regulated Apportionment Arrangement (RAA) in relation to the Hoover (1987) Pension Scheme. The purpose of an RAA is to apportion an employer’s share of the debt that would otherwise be due to the plan. According to TPR, RAAs are extremely uncommon, and were introduced into legislation with the expectation that they would rarely be used.

As a result of the RAA, the Hoover employee pension fund will receive a cash lump sum of £60 million ($77.3 million) from the company, which the TPR said “was materially more than the expected outcome on insolvency.” The pension will also transfer into the Pension Protection Fund (PPF). The PPF was created to compensate members of eligible defined benefit pension plans when there is a qualifying insolvency event in relation to the employer, and where there are insufficient assets in the pension to cover PPF levels of compensation.

“This deal led to a better outcome for the scheme than would otherwise have resulted from an uncontrolled insolvency, and maximizes the return for the PPF in very difficult circumstances,” said TPR in a statement. “It has also enabled the employer to continue trading.”

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The Hoover (1987) Pension Scheme has approximately 7,500 members, of which approximately two-thirds are retirees and the remaining third are deferred members. As of March 2016, the pension had a deficit on a buy-out basis of approximately £500 million, and a PPF deficit of approximately £300 million.

In 2015, Hoover approached TPR with a draft application for an RAA to separate the pension plan from the company. At the time, however, they were unable to meet the criteria for TRP approval. TRP said it had not been provided with sufficient evidence that insolvency was inevitable without an RAA. Hoover withdrew the application.

Shortly after, the employer approached the PPF about the possibility of entering into a company voluntary agreement (CVA), where a company can reschedule some or all of its unsecured debts to allow it to trade out its financial difficulties. However, the CVA was rejected by the PPF because, among other reasons, the payment amount offered was insufficient.

Then, earlier this year, Hoover made another RAA proposal, and met with TPR, the trustee, and the PPF to consider whether an RAA had become an appropriate solution, and began negotiations over the next few months. The TPR said expert analysis and advice was provided by Hoover “confirmed that insolvency was inevitable within 12 months,” adding “we concluded that an RAA was an appropriate and reasonable course of action.”

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IMF Urges Millennials to Prepare for ‘Pension Shock’

Young workers will have to work longer and save more than previous generations.

Young workers in advanced economies won’t be able to rely on pension funds like their parents or grandparents have, and will have to work longer and save more than previous generations, according to the International Monetary Fund (IMF).

The IMF said the so-called Millennial generation needs to take action now to make sure they will have enough money to make it through a retirement that could last as long as 30 years.

“Public pensions have played a crucial role in ensuring retirement income security over the past few decades,” said Mauricio Soto, a senior economist in the IMF’s Fiscal Affairs Department. “But for the millennial generation coming of working age now, the prospect is that public pensions won’t provide as large a safety net as they did to earlier generations,” he said, adding that “as a result, millennials should take steps to supplement their retirement income.”

The IMF cited statistics from the Organization for Economic Co-operation and Development (OECD) showing that pensions, and other types of public transfers, have accounted for more than 60% of retirees’ income in OECD-member countries.

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“Pensions also reduce poverty,” said Soto. “Without them, poverty rates among those over 65 also would be much higher in advanced economies.” 

However, the IMF pointed out that despite the benefits pensions provide, they are also expensive to maintain. According to the IMF, government spending on pensions has been increasing in advanced economies, more than doubling from an average of 4% of GDP in 1970, to close to 9% in 2015.

“Population aging puts pressure on pension systems by increasing the ratio of elderly beneficiaries to younger workers, who typically contribute to funding these benefits,” said Soto. “The pressure on retirement systems is exacerbated by increasing longevity—life expectancy at age 65 is projected to increase by about one year a decade.” 

To deal with the rising costs of maintaining pension funds, many countries and companies have initiated pension reforms, which the IMF said has been aimed primarily at limiting growth in the number of pensioners, while reducing the size of pensions. The number of pensioners is often kept in check by increasing qualifying retirement ages or tightening eligibility rules, and minimizing pension size is usually achieved by adjusting benefit formulas.

The IMF said that since the 1980s, public pension expenditure per elderly person as a percent of income per capita—the so-called economic replacement rate—has been about 35%. And that replacement rate is projected to decline to less than 20% by 2060, according to the IMF.
“This means that younger generations will have to work longer and save more for retirement to achieve replacement rates similar to those of today’s retirees,” said Soto.

To close this gap in the economic replacement rate, the IMF said one option for younger individuals is to lengthen their productive work lives. It said that for workers who will start to retire in 2055, increasing retirement ages by five years would close half of the gap relative to today’s retirees.  

“The good news for younger workers is that retirement is some four decades away, allowing time to plan for longer careers and to put money aside for later,” said Soto. “But they must start now.”

 

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