The HPA committee is in active discussion about the contents of this circular, which is of great significance. We welcome participation by all members on the forum to seek opinions and information and get feedback. Clearly, unless we make our voices heard, we are going to be presented by the Trustees and CH2M with a fait accompli decision on a reduction in our pensions, distributed in a predetermined way, despite the assurances given by the CEO of CH2M at the time of the take-over.
If ever there was a time to get involved, this is it.
Chairman, HPA
I received the Trustees' notice by email yesterday, being overseas.
Whilst being fairly outspoken on the integrity and probity of the Group Board at the time of my departure in 2004 and the subsequent sale to CH2M, the Trustees of HPS are clearly doing their best on our behalf, if the notice is correct. The bare bones of the proposed "solution" to the intractable and unaffordable funding problem seems to be a scaling back of the escalation indices applied to our pensions.
These are the 3 bullet points from the Notice dated 29 April 2016:-
• Have the same Trustees as the Halcrow Pension Scheme;
• Benefit from a guarantee from CH2M;
• Provide identical benefits to the Halcrow Pension Scheme - with the exception that
pensions in payment and deferment would increase at a lower level than under the
Halcrow Pension Scheme (and so reduce the costs of the Halcrow Pension Scheme).
Some of us are lucky enough to have a built in 5% annual increase to that part of our pension up to (I think) about 1991 which of course compared with present day inflation and interest rates is remarkably generous. Obviously deemed perfectly affordable in the days before Gordon Brown raided pension funds and in effect caused the bottom to fall out of the market thus screwing us all forever. Then the GFC has destroyed interest rates for the remainder of my lifetime, so getting a 5% increase every year on a majority chunk of my pension is welcome but clearly unsustainable. If the removal of this generous component of our ongoing pension and its replacement by CPI or RPI is the price we have to pay to continue to receive what is a pretty reasonable pension, then it really is a small price. It will be far preferable to the HPS going into the PPF and all its inherent uncertainties. Remember that the PPF is not underwritten by government and will itself come under strain as more and more pension funds seek its protection, the latest being BHS which seems to have a deficit greater than £500 million. That will put a strain on the PPF resources. I would hate to have to rely on living on the interest paid by savings and investments in the present financial climate, the security of a final salary pension scheme was one of the reasons I stayed with Halcrow for 29 years.
If CH2M really is prepared to give a cast iron guarantee to keep HPS going if the growth indices are scaled back; and in doing so is able to keep Halcrow going as a solvent, trading entity, then given the opportunity I will vote to support it. It's all very well moaning about the promises which CH2M made at the time of takeover; we live in the real world and to oppose what appears to be a sensible, pragmatic solution to the problem would be a real "dog in the manger" attitude to take.
The legal judgement outlined in the Notice seems to imply that all members would have to vote to accept any changes, which is a big ask of 3000 odd people. However, if it only takes 1 or 2 to scupper an agreement then I shall feel very aggrieved - and not for the first time!!
I would urge everyone to think very carefully if presented with a pragmatic proposal which removes the threat of Halcrow going bust and the HPS being taken over by the PPF.
I would therefore take issue with the words of HPA's Chairman whereby he says that we face a reduction in our pensions. Yes, we may face lower future increases to our pensions but there is no proposal to reduce pensions. I'm sorry to say that his words appear to be scaremongering, which is not a good thing in such sensitive times. And yes, we may have to accept a fait accompli brokered in good faith by the Trustees, but if the outcome is limited to those 3 bullet points above, then that is a very good result indeed.
Couple of responses given by the pensions team in the consultation prior to closure Q&A document from 8th August 2007:
I understand that there is a plan and commitment for Halcrow to fund the HPS deficit over the
coming 15 years. If Halcrow is sold during that time what are the obligations (if any) for a
prospective purchaser to continue funding the deficit.
Any prospective purchaser would be obliged to fully fund the deficit, either by a one off payment to meet
the deficit in full, or by regular contributions agreed with the scheme actuary and the trustees.
Can the company come back at a later time and make further cuts to our accrued final salary
benefits?
No, the benefits accrued cannot be cut back further...
The court judgement is here (http://www.bailii.org/ew/cases/EWHC/Ch/2015/3685.html) for those who want to study it. There's a lot to read.
I essentially agree with Phil Alexander's comments.
I believe that the Trustees are doing their very best for members in very difficult circumstances and deserve our thanks.
My further comments are as follows:
There is no prospect of any new scheme, "HPS2", being accepted by all members as contact with some members with deferred benefits has been lost. An alternative solution doesn't look easy. If it had been easy then Hill and the Trustees would have adopted it in preference to the course of action they chose. To quote from the judgement "In fact, it is suggested that unless the Transaction is completed, HGL will be placed into administration and as a result HPS will in all likelihood go into the PPF". The "joint letter" dated 29 April says "the parties to the court case are continuing to work together to find a different solution that still achieves the objectives of the original proposal." We must hope that they are successful.
In any event our entitlement to increases in the future under HPS2, as disclosed in the written judgement but not in the "joint letter", would have been limited to "the statutory minimum". So this may be the best we can hope for.
Under the terms of "the Transaction", CH2M would guarantee HGL's payment obligations but there would be a cap of £120 million. Contributions from Hill would be £5.5 million per annum. This is significantly less than the current level.
We have not been advised of the cost of legal, actuarial and other professional fees to HPS resulting from the efforts to get a resolution. These must be very high and will continue until a resolution is found. There may not be much or any change out of £1m. The HPS accounts may give us a clue as to the scale of these costs. But the accounts for 2014 have not been published and are overdue. The accounts for 2015 are not yet due.
It is puzzling that Hill paid over £100m for Halcrow in 2011. The pension deficit was already large and growing. And Halcrow's financial situation, as shown later in the accounts for 2011 and subsequent years, was dire. This should have been evident to any purchaser. If Hill had not bought Halcrow, there is every prospect that the group would have gone into administration at the end of 2011 or in 2012. We would have received four or five fewer 5% increases than we have done. And there would have been no distribution to eligible employees and pensioners from The Halcrow Trust.
Sadly Steve King's post above illustrates we should read any information provided with a degree of wariness about its ultimate truth. Despite, I am sure, the best intentions at the time.
David Slater asked several excellent questions during the AGM – but alas we don't seem to have many answers between us. It seems to me that there are 2 key issues:
a) whether there is another option for CH2M/Trustees to force a change on members.
I doubt it since as HPS effectively stated themselves in 2007, retrospective benefits can't be changed (unless by individual agreement). If so, then we can probably expect a forthcoming communication to help persuade us to accept a change to our benefits, with a repeat (or new?) guarantee from CH2M. The second key issue is:
b) whether such "guarantee" has both a permanent legal obligation and is a definitive sustainable financial commitment to the end of the life of HPS.
If not, then from my perspective, why bother. I may as well take the risk of falling into the PPF.
We should also bear in mind that CH2M [Halcrow] operate in a competitive market, and other competitors have either found a way to fund their DB schemes or presumably gone insolvent.
Last comment – many thanks to those volunteers on the committee and the organising of the AGM. Its all appreciated.
Quote from: Adam Schofield on May 08, 2016, 04:04:33 PM
If not, then from my perspective, why bother. I may as well take the risk of falling into the PPF.
See para 135 of the Court Judgement: "Having considered that advice the Trustees concluded that they still wished to proceed with Project Gravity although there would be a higher number of members in HPS2 receiving benefits at around 100% of PPF compensation. There would still be a significant number of members who would be better off."
There's a lot of useful background information in the Court Judgement document (http://www.bailii.org/ew/cases/EWHC/Ch/2015/3685.html) so it's worthwhile browsing through it.
Quote from: Adam Schofield on May 08, 2016, 04:04:33 PMWe should also bear in mind that CH2M [Halcrow] operate in a competitive market, and other competitors have either found a way to fund their DB schemes or presumably gone insolvent.
Some of the competitors looked into their crystal balls and then took action. I recall that Mott-Mac closed their DB scheme at the turn of the century (I was working on a combined Halcrow-MM project at that time when their staff were informed of the change). Halcrow hoped that the funding problem could be overcome by growing the company - I recall attending a presentation about the strategy in 2002 or 2003.
I agree with Philip's analysis and conclusions, although I have not yet read the court judgement.
I would like to add that during my time with Halcrow I have known all the trustees and believe them to be trustworthy people who will act with integrity in the best interests of all HPS members - aren't they all also members? I would also like to pay tribute to Paula Gibbons who works diligently for us all.
I would also like to express my gratitude to the HPA committee for keeping this forum going.
(By the way, I'm sorry I was unable to vote during the AGM this year; I would have voted for all the motions).
Tony
Quote from: Adam Schofield on May 08, 2016, 04:04:33 PM
b) whether such "guarantee" has both a permanent legal obligation and is a definitive sustainable financial commitment to the end of the life of HPS.
If not, then from my perspective, why bother. I may as well take the risk of falling into the PPF.
Adam, that was my first reaction, but PPF comes with few guarantees, and is largely self funded from closed schemes. I think over time the not guaranteed 90% cap for those not yet pensioners, and the various rates of accrual will likely reduce. I would think that HPS2 has potential to offer a better "guarantee" (para 135 as John highlights). Even though there will always be a risk of entering PPF, or getting less than 100% from HPS2. As others have said, the Trustees are doing a good and difficult job.
I can see the funding situation calculated is now very different to what it was in 2007 when those promises were made.
I'm not sure if a third option for those in deferment, of accepting a transfer value would prove popular. Personally I think it worth retaining a Defined Benefit component (however big) alongside my other pots.
My attention has just been drawn to this relevant news report (http://www.legalweek.com/legal-week/news/2456827/hogan-lovells-dla-and-hsf-land-roles-on-gbp600m-pension-restructuring-case).
I thought that the Halcrow payroll (or are they now CH2M payroll?) was over 3,000 but that report says 2,500. It's also unclear to me how much work Halcrow has in its own right rather than work won by CH2M.
How do you read this without signing in?
Quote from: Jane Tordoff on May 09, 2016, 04:35:09 PM
How do you read this without signing in?
Ah! it's one of those pages which Google can get to but the direct link doesn't work. I attach a PDF version.
Also see this BBC news feature (http://www.bbc.co.uk/news/business-36246713) (which isn't hidden behind a paywall). Bob Scott has some first-hand knowledge of HPS as he has been the scheme actuary since at least 1998 (he's named in the 1998 HPS report to members). However, the comments by John Ralfe seem to be closer to the situation with HPS.
Quote from: John Ratsey on May 09, 2016, 01:52:21 PM
I thought that the Halcrow payroll (or are they now CH2M payroll?) was over 3,000 but that report says 2,500. It's also unclear to me how much work Halcrow has in its own right rather than work won by CH2M.
Hi John, the approximate head count quoted in the Halcrow circular to members is the correct one (corresponding to named individuals) for Halcrow Group Ltd. I believe all will have Halcrow Group Ltd named as the employing entity in their contracts.
Edit-Yes payslips say Halcrow
Quote from: Steve King on May 09, 2016, 08:35:49 PM
Hi John, the approximate head count quoted in the Halcrow circular to members is the correct one (corresponding to named individuals) for Halcrow Group Ltd. I believe all will have Halcrow Group Ltd named as the employing entity in their contracts.
Edit-Yes payslips say Halcrow
Thanks for the clarification abut the employment status.
The HPS circular of 29 April mentions 4,000 staff but I suspect that was the number when the dialogue about HPS started. Page 19 of the 2014 Halcrow Group Ltd annual report states "The average number of persons, including directors, employed by the company during the year was 2,488" while the corresponding number in the Halcrow Holdings annual report (page 23) is 4,029. I'm confused!
Quote from: John Ratsey on May 09, 2016, 09:38:08 PM
Thanks for the clarification abut the employment status.
The HPS circular of 29 April mentions 4,000 staff but I suspect that was the number when the dialogue about HPS started. Page 19 of the 2014 Halcrow Group Ltd annual report states "The average number of persons, including directors, employed by the company during the year was 2,488" while the corresponding number in the Halcrow Holdings annual report (page 23) is 4,029. I'm confused!
Sorry, me getting confused about names. The number referred to was for All Halcrow companies. Halcrow Holdings being the Parent CH2M bought. I don't know the number for Halcrow Group Ltd on it's own.
Quote from: Steve King on May 10, 2016, 10:12:28 AM
Sorry, me getting confused about names. The number referred to was for All Halcrow companies. Halcrow Holdings being the Parent CH2M bought. I don't know the number for Halcrow Group Ltd on it's own.
That makes sense - lump in Halcrow Middle East and a few other entities and there could be around 1,500 more people than are employed by Halcrow Group.
And another news snippet is attached. It's from here (http://www.pensions-expert.com/DB-Derisking/Halcrow-plots-rescue-of-DB-scheme?ct=true).
Members may be interested in this story
http://www.pensions-expert.com/DB-Derisking/Halcrow-plots-rescue-of-DB-scheme?ct=true
It is incorrect to suggest that HPS2 is an improvement on HPS. It allows HGL to vary the increase pensions by CPI, or any other percentage it sees fit, at its sole discretion. Like CPI, this percentage could be negative. The cap of £M120 is very small in relation to the total liabilities of over £1 billion. HPS2 is, in fact, a less secure option than entering the PPF and was quite rightly rejected.
We deplore the total lack of transparency and information being supplied to members in these secret negotiations.
Quote from: Stephen Brichieri-Colombi on May 11, 2016, 08:34:03 AM
Members may be interested in this story
http://www.pensions-expert.com/DB-Derisking/Halcrow-plots-rescue-of-DB-scheme?ct=true
You can read the full article in this PDF file http://www.halcrowpensioners.org.uk/forum/index.php?action=dlattach;topic=153.0;attach=56 .
Quote from: Stephen Brichieri-Colombi on May 11, 2016, 08:34:03 AM
The cap of £M120 is very small in relation to the total liabilities of over £1 billion
Just wondering where the £1bn figure comes from? I've read there are lots of ways of valuing the deficit/liabilities.
Is it not the case that the Fair Value Deficit (buy out value) would significantly reduce as gilt yields return. So CH2M may then be in a position to reinstate accruals/increases. If you join the PPF that's unlikely to happen.
Very interesting articles. I am very happy that Hogan Lovells et al have 'landed roles on a £600m "liability management exercise". Lucky them.
John – I salute you for reading the whole court judgment. I couldn't make it past about nr 10.
Anyone had any thoughts on why these discussions have to be kept so confidential? We will only find out if the Trustees have done a good job when we are informed what they are doing/have done.
The quote from the Judge does mystify me. "....had I taken a different view in relation to the legal issues, I would have approved the Trustees decision to enter into the transaction." Isn't this stating the bleeding obvious? If I could take the liberty of rephrasing – "had I taken the incorrect legal opinion, I would have recommended a different outcome". Surely the whole point of getting a legal opinion is to get the correct legal position...?
I know that gilts have been poor in the last 5 years, but I am also struggling to see how total deficit has increased from £100m to £500m in such a short timescale. That's a doubling of total liability in 5 years. That's quite remarkable. We should also note that the £500m is not a formal deficit valuation – it's stated as an approximate [i.e. unaudited] calculation. I hope the Trustees have valuations that they are completely confident of.
Steve – if we were to accept a reduced index (or have a change forced on us), then sure as eggs is eggs, no sensible business would ever reinstate increases in some future good times, whether through better gilts, or say if Halcrow struck gold and becomes the next Google (now there's a thought). Much as I admire your optimism. My view at the moment is that if the CH2M guarantee is limited at £120m, then it's probably just delaying the fall into PPF, regardless of the indexation issue.
The reason for the secrecy is explained in Clause 8 of the Judgement "one of the Trustees, in his witness statement, that if that information were publicly available the effect on HGL's business would be sufficiently serious that it might be plunged into insolvency in any event and, as a result, HPS might fall into the PPF". However, once the Judgement had been made in December 2015, the various Halcrow annual reports were released with a qualification about the going concern basis as discussed in Newsletter 13 (http://www.halcrowpensioners.org.uk/pages/news/newsletters/newsletter-no.-13.php). So the cat is now out of the bag and there is no justification for further secrecy.
More news here (http://www.professionalpensions.com/professional-pensions/news/2457705/halcrow-prepares-rescue-plan-for-db-scheme) (or see the attachment below if the link doesn't work) - HPS is becoming well known within the pensions industry.
"The alternative proposed solution is expected to be announced in the coming few weeks" indicates that time is of the essence if scheme members want to have a say in their future pensions.
Quite right Adam, I was being over optimistic.
The reason the deficit appears so high currently is that the future pension payments are converted to a Present Value for comparison against current assets. The discount rate is based on long term gilt yields, and since these are low, the PV is high. It's quite possible 10 years down the road gilt yields have improved as BoE project, and with the new discount rate the deficit is closer to £200m or whatever. Of course by then CH2M would have paid in more recovery money (say £50m), so the deficit should be even lower. Does beg the question of how much action does CH2M need to take now in reducing benefits if the deficit will reduce anyway.
Steve - thanks for that. Makes sense. Alas the system means our Trustees & CH2M cant wait.
There is an interesting article on the same professional pensions website about the Govt reducing indexation on British Steel pensioners from RPI to CPI.
It also comments "If [private] companies could be given the chance to change RPI to CPI regardless of their scheme's rules, this could help make their pension schemes more sustainable and provide more security for scheme members who would still receive inflationary increases of some kind....It seems perverse that some companies and trustees cannot move to the more modern and widely accepted CPI simply because their rules were drafted many years ago and do not give them the flexibility".
http://www.professionalpensions.com/professional-pensions/news/2457991/govt-mulls-switching-british-steel-to-cpi-to-cut-liabilities-by-gbp25bn
Here's a further report about the possible change to the Tata scheme: http://www.telegraph.co.uk/business/2016/05/12/warning-tata-pension-changes-plan-sets-illegal-precedent/ (http://www.telegraph.co.uk/business/2016/05/12/warning-tata-pension-changes-plan-sets-illegal-precedent/)
Quote from: John Ratsey on May 13, 2016, 11:24:09 AM
Here's a further report about the possible change to the Tata scheme: http://www.telegraph.co.uk/business/2016/05/12/warning-tata-pension-changes-plan-sets-illegal-precedent/ (http://www.telegraph.co.uk/business/2016/05/12/warning-tata-pension-changes-plan-sets-illegal-precedent/)
A switch from RPI to CPI seems entirely fair and reasonable given the RPI measure is statistically flawed. I'd be supportive if CH2M proposed this going forward (provided accruals to date are preserved). We can expect inflation increases, but not based on flawed statistics. Hopefully the legal precedent will be set quickly for a change.
I may even support a future switch to the lower CPIH (if it evolves and is adopted by PPF). Since that would be a truer measure of household inflation, and again could help in lowering the remaining deficit.
Which is where I came in a couple of weeks ago. We have to be pragmatic and probably accept a less than perfect solution to the problem. If we all put our engineering consultants' hats back on for one moment, when do we ever recommend the perfect engineering solution to a Client? Outcomes are always about compromise in order to reach a sensible, workable and affordable solution. I'd rather have 90% of my pension than nothing at all.
Perhaps I am wrong but I don't think anyone is suggesting reductions to pensions in payment. PPF applies a 10% reduction to deferred pensions. I have also not noticed any mention of abolition of the widow's (or the modern day equivalent) pension.
The main change would be to the rate of increase in any pension. I think that many of us consider the minimum 5% increase in the pre-March '99 accruals to be generous while inflation is low but it is part of the pension deal (arising from a requirement of the 1975 Pensions Act) which can only be changed by the agreement of both parties. The Trustees could have opted to have dropped to a lower accrual rate effective April '97 (as provided for by the 1995 Pensions Act) but did not implement the change until March 1999. The impact of a lower rate of increase would therefore be felt gradually but would be cumulatively very substantial.
Please correct me if I am wrong - views expressed here are personal opinions - and the forum's purpose is for the sharing of opinions and ideas.
Mike Tordoff has written to the Trustees and Pensions Team at BP. Should anyone wish to see a copy of this letter, please send me a message through the forum.
You are correct John. All comments posted here are personal and do not represent the HPA's views. We need to know what members's view are, so please let us know.
I have read the points listed and draw out of it that CH2M want to contain their costs and risks in their proposal.
Are they being fair/unfair, mean/generous, ethical/unethical, clever/devillish, pragmatic?
Whatever, CH2M say they cannot/will not continue to fund the HPS through the HGL business which, by itself, cannot support HPS and the other smaller schemes. In my view, they were sold a company on the brink of administration. They admit they misjudged the liabilities and we have benefitted from 5 bonus years of HPS pensions. It is, of course, pointless to dwell on the blame game and on worthless past promises. We must judge how to get the best result from this situation.
The worst case results in administration if CH2M carry out their threat and withdraw financial support with redundancy for 2,500 people and PPF for pensioners.
The question has been asked is this a bluff to coerce the Trustees into agreeing pension concessions? I suspect not. The sums are huge. CH2M surely have the legal and commercial muscle to place HGL in administration and re-engage staff in some restructured entity and continue in business without the millstone of £600m or so liabilities. Unethical, or unavoidable? Ask an employee!
A compromise case is being made to maintain the workforce in current employment and also maintain pensions, albeit with very modest annual increases, guaranteed by CH2M with £5.5m per annum contributions capped at £120m. This saves business face and internal disruption at a somewhat deferred cost of up to £120m, just possibly affordable by HGL. This sum, with the annual increases index are the only basic arguing/bargaining points which might be adjusted and which we must trust the Trustees to have optimised on our behalf. Therein lies the nub of some of our voiced discontent....and the lack of a view of these deliberations.
The final arrangements have yet to be formally published. Until they are, we speculate somewhat.
However, assuming HPS2 joins and pays its levy to the PPF, if the compromise fails some years down the line, it will fall into PPF anyway. It seems obvious to me that we and the Pensions Regulator should consent to better terms in the interim. If not, what are we aiming for? Realistically!
As I understand it, for pensions in payment, PPF pays no annual increase on pensions accrued up to 1997, i.e. they are capped on an age basis and frozen at current levels. Tables are available on their website. Examples of age cap in 2016 are:
60. £32,277
65. £37,420
70. £44,680
75. £58,277
80. £72,100
Surviving spouses generally receive one half of the benefit in payment.
Post -1997 element, 10% reduction and cap applies with inflation increases of up to 2.5 %.
I was glad to read Philip Alexander's post of 4th may as it mirrors my own view. Above inflation increases are clearly unsustainable but apart from 1 or 2 recent posts I've seen little acknowledgement of this on the forum . It certainly won't be in my interest if unrealistic demands of scheme members force the scheme into the PPF before my normal retirement date in the latter half of next year thereby reducing my pension by 10% for starters.
We are obviously all on tenterhooks, wondering what will happen if CH2M persists in trying to negotiate in secret with the Trustees to induce them to find a way of circumventing the UK laws which protect pension contracts.
We are not in the business of assessing or solving the financial problems of a company with a turnover of $5.5 billion and a market capitalization of $2.0 billion. At the time of purchase, CH2M were well aware of the state of the HPS, in terms of the deficit, the contributions due under the 2008 Recovery Plan, and UK legislation. The Trustees and the proto-HPA urged them to put the purchase price towards reducing the deficit, but CH2M chose not to insist that this be done. We can only suppose they did due diligence and were satisfied that, as the CEO insisted, Halcrow was a good buy. Certainly, business for CH2M's subsidiaries in the UK has picked up since the purchase, and its share price has increased by 16% since then.
CH2M's share price is fixed in much the same way as was Halcrow's, when it was an employee-owned company, using a formula which depends in part on its pension obligations, as reported each year to the US SEC. We have no reason to believe their accountants did other than to accurately report the pension liabilities in accordance with US law.
We are aware that there are companies in Canada and elsewhere that may be interested in purchasing CH2M. At the HPA, we would like to ensure that the purchase price fully reflects the HPS pension liabilities. But we would expect, as we expected of CH2M, that any purchaser would due due diligence before making an offer.
CH2M has a long history of taking over other companies, and no doubt the directors and employees are as aware of the threats and opportunities created in takeover situations, whether as prey or predator.
Our concerns are to ensure that the UK legislation is respected. If and when CH2M makes a legitimate offer to pensioners, the HPA will behave as we believe individual members of the HPS would behave. We will review and discuss the offer with colleagues and legal advisers, and assess whether it is indeed legitimate, and whether we should accept it, or ask for improved terms. For reasons made clear in the most recent newsletter, we would not have suggested accepting the proposed HPS2.
Meanwhile, we continue to ask the Trustees for more transparency, and that the Pensions Regulator insist on the publication of the overdue Valuation Reports for 2011 and 2014 in accordance with the law.
Will be interesting to see what CH2M offer in the coming weeks.
Quote from: Stephen Brichieri-Colombi on May 17, 2016, 08:32:38 AM
CH2M's share price is fixed in much the same way as was Halcrow's, when it was an employee-owned company, using a formula which depends in part on its pension obligations, as reported each year to the US SEC. We have no reason to believe their accountants did other than to accurately report the pension liabilities in accordance with US law.
The price formula can be viewed here:
http://www.sec.gov/Archives/edgar/data/777491/000104746910002646/a2197246zs-8.htm#dg41001_internal_market_information
See definition of Total Shareholders' Equity ("SE"). Did I read correctly that pension obligations are not included?
For the convenience of others what appears to be the pertinent clause says:
Quote Total Shareholders' Equity ("SE"). "SE" is CH2M HILL's total shareholders' equity, which includes intangible items, but does not include accumulated other comprehensive income or loss, as set forth on our most recent available quarterly or annual financial statements. Accumulated other comprehensive income or loss items generally represent non-cash estimates of potential future income or expense, such as the present value of estimated future pension and other postretirement liabilities and unrealized gains and losses on securities and foreign currency holdings that we may or may not actually realize depending on whether we hold or sell such securities and on whether we hold or convert such foreign currencies into dollars. Our Board of Directors believes that these estimated transactions would not generally be taken into account in valuing an equity security. Our Board of Directors, at its discretion, may exclude from the Shareholders' Equity parameter nonrecurring or unusual transactions that the market would not generally take into account in valuing an equity security.
At least the company does have a stated methodology. I don't ever recall seeing one for the Halcrow share valuation which might explain why Halcrow shares didn't take a big drop in 2008 along with the rest of the market. Hindsight suggests there should have been.
This is also a suitable place for pointing out that the CH2M 10-K filing at SEC lists the expected pension outgoings for the next 5 years. I have extracted the relevant pages and they are attached. Note that about $40M/year is allowed for the non-US schemes.
The formula is Share Price = [(7.8 × M × P) + (SE)] / CS where M is a market factor, kept more-or-less constant, P is Profit after tax and SE is Shareholder Equity.
SE, as you rightly say, the latter excludes pension obligations, because - believe it or not - "Our Board of Directors believes that these estimated transactions [among others] would not generally be taken into account in valuing an equity security".
P takes into account on-going contributions to HPS and other schemes. Again, there is discretion "Our Board of Directors may determine to exclude other future unusual or non-recurring items from the calculation of "P"". They knew the exact trajectory of HPS contributions under the 2008 Recovery Plan (and even indicated to the Trustees that they would increase the contributions), so no surprises there.
The Director's determination to close their eyes to large liabilities and risks in the valuation of shares may explain why CH2M bought Halcrow without paying adequate attention to the pension liabilities. But, as the formula makes clear, they are the people who decide what is included in the factors, no one else, and certainly not the members of the HPS.
I only have an estimate of the HPS pension for the year 2007 when the scheme was closed. I wonder whether anyone has a spreadsheet which would be able to calculate
(i) what the deferred HPS pension might be in today's terms (2016) for those who have not yet reached the normal retirement age (65yrs in my case)
(ii) what it might be if this came under PPF
I am slightly flumoxed by the various components (pre -1999, post-1999, post 1988 GMP) rising at different rates and what the LPI is from 2008 to 2016. Is it now based on RPI or CPI?
Also, in my case, the additional linking to the final salary for a further 5 years would not apply as the revised pension increases would be less than if calculated using the standard scheme increases based on my 2010 salary.
I am also a bit alarmed (if I understand it correctly) by the statement extracted from the PPF handbook "Compensation payments will rise in line with inflation each year, subject to a maximum of 2.5 per cent. But this will only relate to pensionable service dating from 5 April 1997. Payments relating to pensionable service before that date will not increase." My understanding is that under HPS, the pre-1999 service component of the pension would increase at a minimum rate of 5%. Am I correct in assuming that under PPF, this component will increase at a rate of 0% instead of 5%?
Grateful for any clarification.
The current increases given by HPS are explained here (http://www.halcrowpensioners.org.uk/media/2016_increases.pdf).
The GMP (Guaranteed Minimum Pension) uses the CPI (Consumer Prices Index) which is currently 0.3% (http://www.bbc.co.uk/news/business-36311126) and has recently been negative. HPS pension accued before March 1999 less the GMP is subject to the generous minimum 5% increase. This generosity was wtitten into the 1975 Pensions Act when no one could imagine inflation being around zero. The 1995 Pensions Act recognised that inflation was lower and allowed the minimum 5% to be dropped effective April 1997 with future accruals using the RPI (Retails prices Index). However, the trustees of HPS did not implement the change until March 1999 so HPS members have nearly two extra years at the higher inflator. The post-March 1999 component of HPS pensions is subject to RPI. The formula currently used by HPS is here:
(http://www.halcrowpensioners.org.uk/media/HPS_Pension_components_and_increases.jpg)
PPF calculates using the April 1997 change point. Effectively, the generous rises in the pre April 1997 component become balanced by a zero increase under PPF rules while the post April 1997 component is increased using CPI (RPI until 2011). Hence PPF compensation (or the proposed HPS2) will have minimal long term increase for many HPS members.
Edit: One small correction to the above is that people who joined HPS after March '97 get the RPI increase from the date of joining and not the 5% up to March '99. I recall that the pensions team overlooked this detail a couple of years ago and had to send out downward corrections to statements for those who joined between April 97 and March 99.
I did a google search for "pension liability management exercise" - which is what the articles said was now underway.
Particularly interesting webpage was this one:
https://www.barnett-waddingham.co.uk/finance-directors-guide-pensions/liability-management-and-risk-reduction/liability-reduction-exercises/
This indicates that other companies have reduced scheme liability by offering members choices of:
a) One single large increase in lieu of no further annual increases (for existing pensioners)
b) early retirement (for over 55s)
c) enhanced transfer value (for deferred members)
These options reduce scheme liability because they crystalize future risk, therefore helping the scheme.
Personally I think we will also be offered:
d) For those with 5% index qualification years, request to accept all future increases at RPI to help 'save the scheme'.
Another useful website page is this one (thanks to Steve King who found it). This link from LCP (Scheme Actuary and Investment Advisors!)
https://www.lcp.uk.com/media/557951/lcp_liability_management_exercises_web.pdf
I remain disappointed that the Trustees took such poor advice to have the court case to try and force a change on members - when they knew full well that retrospective benefits in a DB scheme cannot be changed without individual consent. Clearly we have to find a reasonable compromise to get the best outcome for all, but their secretive action hasn't helped build trust in their decision making.
My attention has been drawn to page F-37 of the recently released CH2M European Prospectus (https://ch2mstockholder.com/assets/CH2M-HILL-European-Prospectus.pdf) which shows the non-US pension plans as underfunded by $M425.631 (about £290M) so that's yet another number to float in the air and not as big as some other versions of the deficit. It's annoying that the HPS trustees have this information but haven't released the relevant reports to scheme members.
Quote from: John Ratsey on May 18, 2016, 09:24:53 PM
that's yet another number to float in the air and not as big as some other versions of the deficit
Googling indicates different Deficit measures:
1.
corporate accounting (FRS17 or IAS19) - Discount Rate based on Long term AA Corporate bonds + inflation risk premium (typically close to zero %)
2.
scheme funding - Discount Rate based on Long term Gilt yields + equity risk premium (1.5% in 2008 valuation)
3.
solvency (aka buyout) 4.
PPF (eg the PPF 7800).
Apparently the largest will be the 'Solvency' (buy out) Deficit.
We can speculate/estimate the 'scheme funding' deficit, but surely the Trustees have the actual unaudited number, instead of I believe quoting a 'solvency' measure for maximum impact!
However it's still clear (based on John's post above (European accounts)), CH2M need to address the funding deficits and come up with a compromise solution with the Trustees.
Please see the Analysis page on this the website for a definition of the different measures of deficit used.
The Press tends to headline the largest of these, but in fact it is the least likely to apply.
Received a response from HGL about the non publication of the valuations
Dear Clive
At the time of the 2011 valuation, HGL told the Trustee that, due to the state of its finances, it was not in a position to engage with the Trustee on the valuation for some time. It became clear in early 2013 that the valuation would not be agreed within the required 15 month window and the Trustee informed the Regulator that it was unable to reach agreement with HGL.
By August 2013 it had become clear that there was no prospect of agreeing a normal valuation, and this has remained the position since then. The Trustee is not able to conclude actuarial valuations unilaterally, and although the Regulator has certain powers that it can exercise where an actuarial valuation is not agreed within the specified period, it did not seek to exercise those powers in relation to the HPS. Given the offer that has now been made to members, actuarial valuations for the HPS as at 2011 and 2014 will not now be concluded.
However, throughout this period, HGL has continued to pay the contributions required by the recovery plan which was agreed as part of the 2008 valuation.
Regards
So there is no prospect of any further information about how badly funded the pension is
Just to let you know that I was told over the phone today that a fact sheet with FAQs is currently being prepared by the Pensions Team which addresses many of the concerns expressed here and will be sent out probably by the end of the day.
I was told that even if you transferred from HPS to HPS2 (?) and for any reason somewhere down the line HPS2 (?) were to go to PPF, you would not be worse off than going straight from HPS to PPF. I hope the fact sheet explains this more clearly.
I was also told that the Transfer Out from HPS2 will be on better terms than from HPS as HPS2 will be better funded. Currently the transfer out value is 53% of a fully funded scheme.
Apparently, at the moment there is no prospect of getting a current deferred pension statement (value in 2016) but there are plans to prepare such statements after the transfers have taken place to the new scheme by the end of the year.
Quote from: meelit on June 10, 2016, 10:39:01 AM
I was also told that the Transfer Out from HPS2 will be on better terms than from HPS as HPS2 will be better funded. Currently the transfer out value is 53% of a fully funded scheme.
If the transfer out value is close to 90% I think it would be very attractive prospect and someone more cynical than I might wonder if CH2M would welcome such a view.
It would be interesting to know if 53% of current future benefits is actually a higher or lower cash value than the 90% of the new schemes future (reduced) benefit. That would give an idea of what is being lost in the move HPS to HPS2, even if a little higher I doubt it would be that 'attractive' though still better than the alternative PPF.