Trustees' News about the Halcrow Pension Scheme on 29 April 2016

[jsouthwell]

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.

[Stephen Brichieri-Colombi]

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.

[Steve_2]

Will be interesting to see what CH2M offer in the coming weeks.

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?   

[John Ratsey]

For the convenience of others what appears to be the pertinent clause says:

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.

[Stephen Brichieri-Colombi]

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.

[meelit]

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.

[John Ratsey]

The current increases given by HPS are explained here.

The GMP (Guaranteed Minimum Pension) uses the CPI (Consumer Prices Index) which is currently 0.3% 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:



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.

[Adam Schofield]

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.

[John Ratsey]

My attention has been drawn to page F-37 of the recently released CH2M European Prospectus 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.

[Steve_2]

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.

[Stephen Brichieri-Colombi]

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.

[Clive Williams]

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

[meelit]

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.

[Clive Williams]

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.

[Tony Green]

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.