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

[John Ratsey]

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.   

[Stephen Brichieri-Colombi]

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.

[John Ratsey]

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 .

[Steve_2]

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.

[Adam Schofield]

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.

[John Ratsey]

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. So the cat is now out of the bag and there is no justification for further secrecy.

More news here (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.

[Steve_2]

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.

[Adam Schofield]

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

[John Ratsey]

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/

[Steve_2]

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/

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.

[PhilipAlexander]

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.

[John Ratsey]

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.

[Jane Tordoff]

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.

[Jane Tordoff]

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.

[vicscott]

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 %.