Published on February 27, 2014
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 Bryan Elliston FCA • • • • Vesuvius (formerly Cookson) Financial Controller Also a Trustee Company Sponsor for the Projects • • • • • Premier Consultant Advisor to Vesuvius Trustee Board Project Manager of these exercises Works with Companies and Trustees on all aspects of Pension provision
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 2
Cookson’s UK Pension Arrangements Final Salary Scheme in 2004 • 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
Cookson’s UK Pension Arrangements Defined Contribution Scheme (2012 – when wound up) • 680 members: 570 active; 110 deferred • £16m assets • Trust based • Outsourced administration 4
Eight steps to a stronger business – The Actions ETV Exercise Close Final Salary Scheme 2004 Pensioner Buyin Implement LDI Fiduciary Management 2005 2006 2007 2008 2009 2010 Data Cleanse Close both Schemes to accrual 2011 2012 Wind-up DC Scheme Buy-in for Future Retirees 5
Eight steps to a stronger business – The Result Members Active 1,208 Deferred 2,748 Pensioner 2,832 Members Active 234 Deferred 2,022 Pensioner 3,348 Total Total 2004 6,788 2005 Assets £180m Liabilities £(274)m Deficit 2006 2007 2008 2009 Increased liabilities: • Discount rates down c. 2-3% • Longevity improvements £(94)m 2010 2011 5,604 2012 Assets £470m Liabilities £(460)m Surplus £10m Company funding contributions c. £130m 6
Know Your Enemy - Key Risks Identified by Trustee/Company Identified Risks • Longevity Risk • Investment / Liability Risk • Equity Falls • Interest Rate • Inflation • Operational Risk • Administration • Governance • Regulatory Risks • Increased Levy costs • Governance • Solvency II • Covenant Risk • Escalating Costs • Administration • Governance • Levy 7
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 9
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 10
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 11
Eight steps became.… the Flight Path Mitigation / Management 2004 2005 2006 2007 2008 2009 Risk Reduction 2010 2011 2012 Agreed “Flight Path” to: • Reduce Risk • Reduce Operational Costs • Secure Benefits • Inform and educate members © Premier pensions management 2011 12
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” 13
Risk Reduction – Giving Members Options Enhanced Transfer Offer in 2011 • Opportunism - Sharing the CPI windfall • Targeting the same Critical Yield for all • Detailed evaluation of the offer • Cost • Benefit to members 14
Enhanced Transfer Value Offer Key Aspects of 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” 16
Enhanced Transfer Value Offer Lessons Learned • 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 17
Enhanced Transfer Value Offer Results • • • • • • • • 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 18
Risk Reduction – Giving Members Options Winding-up the Trust-based DC Plan • Reduced administration costs • Reduced Governance strain on the Trustee • Gives members control • Consolidate in the GPP, a Low-cost default or their own option 19
Risk Reduction – Pensioner Buy-in Removed Longevity, Inflation and Interest Rate Risks • 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! 20
Risk Reduction – Pensioner Buy-in Precursors to a smooth transaction • 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 21
Risk Reduction – Pensioner Buy-in Cost-Benefit Analysis – far from straight-forward! • 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! 22
Post Buy-in management of the Plan Conditional extension of original buy-in contract • 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 23
Eight Steps to a Stronger Business A decade of De-Risking ETV Exercise Close Final Salary Scheme 2004 Pensioner Buyin Implement LDI Fiduciary Management 2005 2006 2007 2008 2009 2010 Data Work Close both Schemes to accrual 2011 2012 Wind-up DC Scheme Buy-in for Future Retirees 24
The Impact of the Cookson Demerger Separation eased by prior years’ de-risking actions • 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 25
De-Risking … The Story Goes On Leaving no stone unturned… • 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? 26
Summary and Conclusions Reduced pensions risk makes for a stronger company • 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 27
John Reeve BSc FIA John.Reeve@premiercompanies.co.uk Tel: 07971 890440 Bryan Elliston FCA BryanEllistonMail@gmail.com Mobile: 07785 310213
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