Ultimatum Options: Which should members chose? Some considerations
On 27th May 2016, Halcrow Group Ltd. (HGL) issued an ultimatum to the 3,200 members of the HPS to select between two options regarding the future of their pensions by 5 August 2016 (a date later changed to 31 August 2016). In fact, this ultimatum presents members with four options:
In the case of members who do not take Option A, we have been told that “The company which will become legally responsible for HPS under the Regulated Apportionment Arrangement (RAA) is called Project Magnolia Limited and is incorporated in England (registered number 10164541). As has been explained, this company has been set up especially for this purpose. It has no assets and will become insolvent very shortly after the RAA takes effect.” What are the implications of each? Here are some considerations, based on the evidence available to us. However, remember we are engineers by training, not financial advisors.
Value of Offers
Many members have asked how their putative HPS2 pensions compare with their actual HPS pensions, but the Trustees have declined to give any figures. Individual circumstances vary greatly, but can broadly be classed into three groups. Pensioner Members (PM), Deferred Members with pensions below £35,000, (DM<) and Deferred Members with pensions above £35,000 (DM+), the £35,000 being very roughly where the PPF cap kicks in. There are simply too many variables for the latter two groups, but the graph below shows the effect for pensioners of different ages. Depending on when they did their service with Halcrow, their current pensions will have been growing at somewhere between 2.5% a year and 4.5% a year (something you can check by looking back at what you have been getting). The graph is based on the assumption that the pensioner is a married male retiring at age 60 with a wife three years younger, and that both are fortunate enough to have the life expectancy of a person in the UK two years younger than they actually are. These assumptions are close to what the scheme actuary has been using in the Valuation Reports that have actually been published. The present values are the sum of the amounts paid each year to the member and his widow (at 50% of the member’s rate), discounted at 3% a year, which is the estimated post Brexit inflation rate.
So if you are 70 years old and your pension has been growing at 3.5% a year, the total present value (PV) of PPF compensation is about 63.6% of your HPS pension, a reduction of 36.4%. If you transfer to HPS2, the reduction is marginally less at 34.8%. Either way, your lifestyle will need to change very considerably, particularly in your latter years. To put this into perspective, if the man in the case above now has a pension of £20,000 a year (close to that of the average HPS pensioner), his pension has a lifetime value of £516,000 but he would get £239,000 from the PPF, and an extra £6,000 by giving up his rights and entering HPS2. This may help explain why so many pensioner members think Option A is not worth accepting, and would rather fight for a better offer.
The situation for deferred members and those with additional pensions is different and more complex, not amenable to a presentation as in the graph above. It appears that the ratio of PPF compensation to HPS pension will be similar to that for a man age 60, but HPS2 will generally show a bigger improvement on PPF than is the case for pensioners. Whether it is big enough to justify losing your pension rights (see below) is harder to say.
Implications of Each Option
Under Option A, you sign away your accrued rights to a pension under the HPS, something only each individual member can do. No one else can take away your rights. Under Option B, you say you understand you will be transferred to the PPF. That implies you accept there are only two choices, which we do not. Under the other options, you retain your rights, because, as made clear by Justice Asplin, you cannot be deprived of your accrued pension rights unless you so agree. The ultimatum refers to benefits being paid by PPF, but in fact, for this reason, the PPF does not pay benefits, it pays compensation in lieu of benefits. HPS states that Option C is equivalent to Option B, but silence is not consent, and cannot be construed as such. But it could be used against you.
Option D makes it very clear that you want to preserve your pension rights, and a letter along the lines below makes this clear.
“I have seen the two Options you are offering me and reject both. I do not wish to be transferred to HPS2 nor do I wish to be transferred to the PPF. I have accrued rights under the HPS which I wish to keep. Since I have not had any information about HPS’s liabilities since December 2008, I do not accept that I have been given enough information on which to base consent, nor do I have enough information to be satisfied that the Trustees have settled for the best deal possible with CH2M, or even whether the proposed RAA are in accordance with the law. Until I do get this information, I expect the Trustees to ensure I am paid my pension in accordance with the laws”.
We understand from the Trustee of HPS that by early August, around 70% of the 3,200 pensioners of the HPS had selected Option A and that only a handful had selected Option B. The remaining 1000 or so members had not replied, i.e. selected Option C or D. Before August 31 (or later, if the deadline is extended again), these numbers will change, as some of those who have signed exercise their right to change their mind and ask for a new Option form; and others select among all four options. The Trustees have more recent figures which they have chosen to disclose to the Pensions Press, but not to members of the scheme. HGL and the Trustee have been economical with the truth with regard to all choices, and has declined to provide members with any meaningful financial information since 2008. They have also failed to provide information about the RAA itself, having refused to send HPA a copy on the grounds, once again, of confidentiality. The HPA and individual members are pressing for answers, but on present performance, full disclosure is extremely unlikely. So we have to speculate to some degree about (a) the future of CH2M and (b) the future of the PPF and (c) whether the RAA is legal and will actually work as suggested by HGL.
Future of CH2M
The US Security Exchange Commission (SEC) filings for 2016-Q2 by CH2M suggest the future of the company uncertain. Its share value rose from $18.70 in Aug 2006 to $54.35 in Aug 2011 (just before it bought Halcrow), peaked at $69.4 in Feb 2014 and slumped to $52.23 in Aug 2016. Sell trades in its internal market by both directors and staff massively exceed buy trades. The CEO explained earlier this year that funds of around $1 billion would be required for the company to repurchase the shares of staff approaching retirement. There are also questions about its solvency. Without the assets (goodwill and residual intangibles) attributed to the purchase of Halcrow in 2011 and subsequently adjusted, liabilities exceed assets, a fact that undermines threats to make HHL insolvent (and thereby have to write off the goodwill). It is therefore surprising that it is proposing to make an immediate cash payment of £60 million to the PPF instead of continuing HPS contributions in accordance with the 2008 recovery plan.
Ms Hinman said in the staff briefing video that the company is looking at various funding options, including sale. Following the precedent set by CH2M, any purchaser would be likely to take all possible steps to evade legal responsibility for HPS2, and the Trustee and tPR have already demonstrated their impotence to assure the future of pensioners in the face of a powerful and ruthless employer. At best, HPS2 members could end up with the PPF within a very short time. It is not inconceivable that they could be soon faced with another ultimatum offering even lower pensions as the financial power moves further and further away from the reach of UK courts. This is not to suggest they would get no pension at all, only that the amount is unlikely to increase, and could fall. Thus, for pensioner members, who are being offered a one-off increase of 2.5%, opting for such an uncertain future involves risks, and any decision to accept should not be taken lightly. For deferred members, the incentive to do so is greater, especially if their pensions are above the PPF cap. Their choice is less obvious.
Future of PPF
The recent report from the PPF suggests that they are financially secure and well able to continue to provide the level of compensation now paid. A case in the Court of Appeal referred to the European Court of Justice in July 2016 may oblige the PPF to provide at least some level of inflation in the future and to modify the cap. This will negatively affect their financial stability, but the extent may be small and covered by changes in the levy imposed on contributing firms. Brexit, if it actually occurs, would not automatically ensure that UK would cease to be bound by the ECJ.
It is also evident the Government believes that no special exceptions can be made for particular industries and firms, such as Tata Steel. Various UK Governments were instrumental in encouraging the private sector to create pension schemes, and also set conditions referring to annual increases and maximum scheme assets which have contributed to the uncertainly of the pensions of 11 million people in Defined Benefit schemes. One way forward that has been suggested is to put all private and state pensions on an equal footing and increase pensions at a consistent basis, not necessarily the “triple lock”, but certainly inflation related. Thus, although the PPF looks a marginally less good option at present, this may no longer be the case in the future. HGL have been asked if they will guarantee that they will ensure that any pensioner selecting Option A will always be better off than if they had been transferred to the PPF, but they have not yet responded. It seems unlikely that CH2M would give such a blanket guarantee.
Application of RAA
As its name implies, the Regulated Apportionment Agreement (RAA) was designed to apportion the assets and liabilities of pension schemes when one employer in a multi-employer pension scheme became insolvent. The Trustees state that post-ultimatum, responsibility for the remaining members of HPS will be transferred to Project Magnolia Ltd (PML), a company which will become the participating employer but which will have no assets and which is outside the CH2M group. It is not clear that this is legal as it appears to fly in the face of Judge Asplin’s 2015 ruling, nor is it clear how PML could become an employer and have a portion of the HPS liabilities transferred to it under an RAA. However, it appears that something similar was done when Monarch Airlines was on the verge of (real) insolvency and the pilots’ pension scheme was transferred to Stonehouse South East Ltd (SSEL), a company which, like PML, was owned by Richard Favier, had a share capital of £1 and said its business would be stated before the next annual return (it entered voluntary liquidation before that date).
HPA believes this an abuse of the RAA process and could be fraud under the Companies Act, and is submitting evidence suggesting this is the case to the Solicitor General, Robert Buckland, for onward transmission to the Minister for Work and Pensions; and to the Parliamentary enquiry chaired by Frank Fields. We do not know how these submissions will affect the present proposals but there is a possibility that the rump HPS (comprising those members who do not sign Option A) will find a more attractive alternative may be offered, especially if 500-1000 members do not unconditionally transfer to HPS2 and so remain in HPS. In principle, PML is outside the control of the CH2M group, and therefore cannot be controlled by CH2M. In ordinary circumstances, on the transfer of HPS to PML, tPR should issue a Financial Services Directive to CH2M to secure the future of the rump HPS. We will do everything we can to ensure it does.
If you are a pensioner already, think hard before taking Option A. You get a tiny one-off benefit, but lose your rights if there are changes or retrospective legal decisions that would entitle you to a pension closer to your HPS pension. If you are not yet in receipt of a pension, you may well be better off taking Option D. Please carefully evaluate the options. Note that you can change your mind at any time prior to the deadline by submitting a new decision and asking the HPS admin team to discard your previous submission. Meanwhile, HPA continues to explore ways of contesting the ultimatum.