case study of 10 years pension plan derisking at Vesuvius (formerly Cookson)

1. 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

2. John Reeve BSc FIA
Bryan Elliston FCA
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Vesuvius (formerly Cookson)
Financial Controller
Also a Trustee
Company Sponsor for the Projects
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Premier
Consultant
Advisor to Vesuvius Trustee Board
Project Manager of these exercises
Works with Companies and Trustees on
all aspects of Pension provision

3. 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
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4. 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
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5. Cookson’s UK Pension Arrangements
Defined Contribution Scheme (2012 – when wound up)
• 680 members: 570 active; 110 deferred
• £16m assets
• Trust based
• Outsourced administration
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6. 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
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7. 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
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8. 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
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9. 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
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10. 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
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11. 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
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12. 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
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13. 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
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14. 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”
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15. 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
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17. 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”
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18. 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
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19. Enhanced Transfer Value Offer
Results
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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
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20. 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
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21. 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!
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22. 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
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23. 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!
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24. 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
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25. 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
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26. 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
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27. 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?
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28. 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
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29. John Reeve BSc FIA
John.Reeve@premiercompanies.co.uk
Tel: 07971 890440
Bryan Elliston FCA
BryanEllistonMail@gmail.com
Mobile: 07785 310213