Reflections on Scheme Developments

	Association of Electricity Supply Pensioners Limited is a company financed by subscription limited by guarantee Registered Number 3148917

Wide Disparity of Benefits

When the ESPS was a public sector pension scheme we all knew where we stood; we all received pension and other benefits based on the one set of rules for defining benefits.

With the advent of privatisation and the arrival of our two-tier scheme it was always likely that benefits would start to diverge as group trustees made independent decisions.  This process was given the opportunity to develop as a result of the ‘surpluses’ of the 1990s.  Trustees made widely different decisions on how surpluses were to be used.

Council tried to monitor how surpluses were used to enhance benefits but this was not easy.  We were also well aware of the different arguments used to justify decisions.  When looked at locally each decision could be seen as fair and reasonable in the light of the structure of each group and its liabilities.

One of the key benefits offered by the ESPS is the spouses (partners) benefit.  Originally this benefit was 50% based on the pensionable entitlement at retirement subject to any inflationary increase.  This is not the same as 50% of the pension in payment at the death of the pensioner as the pension may have been enhanced in a number of different ways.

What has surprised us is how this very basic provision, and one which is so important to many of us, has diverged since privatisation.  We do not have a complete series but the information in the table shows how surplus distribution decisions by different groups have affected this benefit.

Members in the groups with the poorest benefits may well ask their trustees how they justify this seeming inequity.

Because of its importance we simply ask that all trustees use whatever flexibility they will have in the future to see that this benefit is the set at the highest level which can be prudently achieved.

SPOUSES’ BENEFITS 31 MARCH 2004

#     66.67% equivalent in 80ths scheme

*      In addition a special increase of 2% on attaining the age of 75

A Personal View

The cost of fuel is rising steeply and, if the newspapers are to be believed, some of our energy companies  (EdF, E.ON, and RWE) amongst them may have been involved in European market rigging policies designed to keep prices high.   We have already seen petrol and diesel prices go through the roof and it will not have escaped your notice that the oil companies have made vast profits as a result.   Will the energy companies do the same?  We shall see.

What relevance has this to us, as pensioners or potential pensioners?  Well, it’s this; the privatisation of our industry was an excellent idea so long as the British Government maintained a controlling shareholding - the so called” golden share”.   They could have thus influenced what the energy employers could do.   Once this control was abandoned it became a “free for all” which means that now the shareholders or foreign Governments can take all and the balance between treating their present and former staff “generously?” and rewarding business ownership has been seriously disturbed.

Most of our ESPS pension schemes were in substantial deficit at the last valuation in March 2004.  That was not actually their worst time; that was in 2001/2, when equity investments plummeted and the FTSE reached 3600.  It has recently peaked at over 6100 but has now dropped back to 5700.  Unfortunately, this is how the market goes and it gives our trustees a very uncomfortable ride!

Many employers have found defined benefit schemes such as ours more expensive to support. This has resulted in more than 50% of non-electricity DB schemes either being closed altogether, being closed to new members or being transferred to DC schemes.  Most of our Schemes have now also been effectively closed to new members.  In fact, the ESPS rules have also been changed to incorporate DC schemes although no ESPS employer has yet attempted compulsorily to transfer existing ESPS members from DB to DC.  We are, of course, watching this situation very carefully.

During the “crisis” period, there was a panic induced rush by the remaining DB schemes to transfer investments into bonds, which it was thought, would best cover their liabilities.  Boots were the best-publicised example of this but they have now reverted to a more balanced approach.  Of course, you must expect our trustees to invest our funds wisely and safely – that is their prime function – but bonds are now more scarce and, in any case, their purchase price makes it certain that they alone will not produce enough revenue to cover our increasing liabilities.  So what is the answer?

It’s all a question of risk and judgement.  If the investments do not cover the liabilities either the employers will have to make up the deficiencies on a continuing basis or some of our money must be invested in the equity market, which will outperform bonds in the long term. The risk of another equity market collapse has to be considered against the other options of alternative investments or a shortfall in income.  Where a scheme is “mature” (having a large number of pensioners) actuaries prefer to see funds located in bond-like investments; they also like schemes to be solvent.  In the end, it is down to the trustees, helped by their advisers, to wrestle with these problems.    

Having very recently considered these matters at some length, Council favours a strategy that takes advantage of the current equity market upturn but has safeguards to transfer funds speedily when adverse “trigger” events occur.  This will help to cover our present deficits more quickly and make us less dependent on the employers’ “generosity” which is always subject to their business strategy and their continued ownership of our scheme companies.

It is often said that members are only really interested in pension schemes when a crisis occurs which affects the likelihood or not of the pension being paid.  This is very evident in the ESPS, which certainly appears to contain safeguards in the Protection Regulations for members in service before April 1990.  We do, of course, have members who joined after 1990 and who are not covered by the Regulations.  Considerable doubt has recently surfaced about the ability of trustees to see that the Regulations are implemented; the current legal advice is that this is a matter between the member and the present or previous ESPS employer direct.  The Association is pondering this decision and may consider further action if any “trigger” event occurs.

Coming back to my opening comment; if the electricity employers do make large profits from their new pricing structures, we would expect a more generous approach to the clearance of all Scheme deficits.  After all, the employers have benefited in the past from our surpluses, so why should we not seek to pressure them to meet their scheme obligations more quickly in these circumstances?

Legal expenses can be very considerable, so we do not want to rush to the Courts unnecessarily but we do now have a legal fund which is sufficient to instigate legal proceedings if, or when, the need arises.  We are sure that the ESPS employers are aware of our existence and this, in itself, may afford our members some additional protection.   

                                                                                                                          JA■

Presentation by Tony Allen to 2005 AGM

Tony’s presentation explained how the Scheme had evolved since privatisation.   Two factors had dominated developments since 1990; changes in the employing companies as a result of key business decisions giving rise to mergers and acquisitions and changes in the organisation of the groups and the way investment decisions are made.

Initially there were sixteen principal employers and this grew to 28 at the maximum and this is now down to 20. (April 2006)  It was probable that the number of groups would decline further as companies continued to steam-line their operations.  One feature of the Scheme was that as a result of acquisitions some groups were not now the responsibility of traditional electricity employers.

The ESPS is to some extent unique in that it is a two-tier scheme.  The Customs and Revenue require that there shall be no cross subsidy between groups.   All assets of the fund continue to be held centrally in the name of the scheme trustee (EPTL) but individual groups of trustees are responsible for the investment performance of their group funds.  Group trustees may agree to invest in the unitised fund, which is managed by EPTL, or independently in segregated funds. This gives trustees the flexibility and freedom to meet their liabilities whilst maintaining security of the assets over all.

Ninety percent plus of the assets were now held in segregated funds.  Over 30 fund managers with in excess of 100 investment portfolios manage these funds on behalf of trustees.  The unitised fund contains over £1.3 billion of UK property, forestry, index-linked gilts and cash.

Like all pension funds the Scheme enjoyed very good returns in 1990s with significant surpluses up to 2001.  This resulted in benefit improvements for most members as well as employer and employee contribution reductions.  The 2004 Valuation showed widespread deficits as a result of poor investment returns over the previous three years.  There had been better investment returns in the last two years.  A major issue was that of significant increases in life expectancy. All companies had now agreed deficit repair plans with group trustees. 

The new pensions legislation, now in place, aimed to provide greater security to pension scheme members.  There was now an increased role for trustees who had to agree and publish a statement of funding principles.  There were to be annual funding checks between actuarial valuations.  Some of the checks and balances would increase the costs of pensions provision and there was the risk that pension provision for future generations would worsen.

The ESPS remained a robust scheme with a strong control framework.  The Pensions Protection Regulations enacted at privatisation remained in force.  There was also a no detriment rule.  The Scheme as a whole could not be would up without the agreement of the all the original principal employers.

Mr Allen responded to a number of questions.

Pension Protection Fund

All groups would be required to pay to the new pensions protection fund and there were detailed ongoing discussions on the level of the contribution given the nature of the Scheme and its inbuilt guarantees.

Longevity

The apparent sudden increase in longevity had to some extent caught actuaries by surprise.  There was a need to refine the mortality tables to obtain mortality trends within groups of the population rather than the population as a whole.  There was no evidence that the actuaries had not maintained a proper level of professionalism and the issues of longevity were not limited solely to the ESPS. 

How are actuaries appointed and performance determined

The actuaries were appointed on a competitive basis every three years after completion of the triennial valuation.  Their performance was assessed on the basis of cost and quality of service including response to emerging issues.

Indexation

Concern was expressed about indexation in the light of fuel and council tax increases which had a disproportionate effect on pensioners.  Mr Allen assured members that the 2½% restriction in recent legislation would not apply.  The ESPS would continue to apply the retail price indexing of benefits up to 5% and employers continued to have the ability to use their discretion above this figure. 

By passing elected trustees

Recent legislation had provided for the right of trades unions to be consulted.  This had not been the practice in the ESI.  There was now an obligation to consult through appointed representatives. This could include representatives of different types of member.

How open is the scheme

About one third of the scheme was still open to new employees although not all new employees received the same level of benefit as established members.

Self investment

No individual group held more than 5% of its assets in the sponsoring company.  This did not mean that groups did not invest in energy and electricity shares.  Any investment by trustees in this sector would be as a result of professional investment advice and a basket of UK equities would include energy and electricity companies.

for MANWEB members

In connection with the Return of Cash to Shareholders as a consequence of the sale its US investment Pacific Corp ScottishPower has reached agreement with the trustees of the Manweb Group Section, the ScottishPower Pension Scheme, the ScottishPower Group Final Salary Lifeplan to make special contributions to each scheme in order to fund the FRS17 deficit (as at 31 December 2005) in respect of each scheme over a period of up to five years.

ScottishPower has made an aggregate lump sum contribution of £28 million during March 2006 into the relevant schemes. On completion of the Return of Cash to Shareholders, an aggregate lump sum contribution of £100 million will be made to the relevant schemes and four further aggregate annual payments of £13.2 million will be made to the relevant schemes commencing on 31 March 2007, subject to an FRS17 deficit continuing in those schemes at each due payment date.

According to Professional Pensions (30 March) the DB schemes would close to new members from 6 April and a DC scheme would be offered. But last month the Company revealed it was in talks with the unions over plans to reopen the final salary scheme to employees who stayed with the firm for more than 10 years.

EDF trustees preparing to make switch from equities
by Jason Douglas 08-05-2006

EDF ENERGY trustees look set to switch assets out of equities as part of a new liability-matching strategy.

EDF operates a new £100m final salary scheme and a £2bn closed final salary scheme within the Electricity Suppliers Pension Scheme.

The new EDF Energy Group scheme was created in 2005 following the merger of the pension schemes of London Electricity and Seaboard, both acquired by EDF in 2001.

Pensions manager Ian Baines said the ESPS scheme had a membership of more than 20,000 – including more than 12,416 pensioners.

He said: “Having merged these two schemes in the middle of 2005, the combined trustees have taken as their first challenge to look at the asset allocation and the investment strategy of the combined group. We are now in the final throes of concluding that process.

“Logically, because of the maturing of the scheme and because of the drive for some form of liability-matching asset allocation we are going to see a move from our current equity rating to a higher bond-like weighting.”

Baines added this “did not necessarily” mean the pension scheme would move wholly into bonds or long-dated gilts, and nor had the new strategy been finalised.

“In common with many big schemes, we are asking if this is the right time to move out of equities and whether long-dated bonds are the right match for our underlying liabilities. There is also a timing issue. You might want to get there but you don’t want to do it now because it is too expensive and yields are poor.

“Or do you want to be more innovative and come up with something sexier that will do it but be more complicated? We are a pretty big scheme so we have to be pretty cautious about how we do it.”

He said the scheme was working with its investment consultants to boost the trustees’ knowledge of alternative investments.

Professional Pensions - 13 April 2006

ESPS Investment Returns 2004/2005

a)    Awaiting transfer of funds

b)    E.ON UK as from 1.4.2005 amalgamated Eastern, East Midlands, Midlands and PowerGen

c)    ) ESN  Wound up 31 March 2005