As trustees of the fund, it is our job to look after your interests as members of the fund. Over recent months there has been speculation in the media that C&W were going to ‘offload’ or ‘sell’ your pension fund to an insurance company. The reality, as we said last year, is that the trustees have been looking at opportunities to reduce risk in the fund through insurance, because this is in the best interests of both members and C&W. We are happy to announce that we have now achieved a significant agreement to do this.
We have invested just over £1 billion in a Prudential bulk annuity policy that will back most of the pensions already in payment from the fund, for as long as we have to pay them. We have not ‘offloaded’ or ‘sold’ any part of the fund and everything remains under trustee control. We have simply re-arranged the investments that the fund holds, with the new annuity policy now representing around 50% of the fund’s total investments.
As you would expect, in deciding to make this investment we have taken a lot of professional advice from our existing investment and actuarial advisers, led by their specialist team that advises in this area, and legal advisers. We have made it because it reduces the risk that the fund’s investments might be insufficient to meet all of the benefits due in the future, and we have made it now because the market price and terms of these policies have become much more attractive recently.
The good news is that risk in the fund is reduced for all members, not just current pensioners, and for C&W as sponsor of the fund. C&W has also given the trustees £10 million towards the cost of the policy.
In terms of your own pension and your dependant’s pension, nothing changes. The same payments will be made from the same place. You will also have the same payment and increase dates, and the same people will handle everything for you.
So, whatever you read in the press articles that will no doubt follow this announcement, the message you should take away is that nothing has changed that will affect your individual benefits, and that it’s business as usual.
Some questions and answers....
What is the impact on me and my pension benefits?
If you are receiving your pension, it will continue to be paid at the same rate, at the same time and from the same place. Nothing will change. If you are a deferred member of the fund, your benefits are unchanged.
Are my benefits secure following the transaction?
We have made this investment decision because we believe it will strengthen the security of your pension benefits by reducing risk within the fund. At worst, the security of your benefits will be unaffected by this transaction.
Who decided to go ahead with the deal?
The decision was made by the fund trustees, whose role is to act in the best interests of all fund members. The trustees consulted C&W, as they do on all investment strategy decisions. The trustees own the investment policy, so you can be sure that we believe this investment is in the best interests of members.
The trustees make investment decisions all the time – why are we writing to you to explain this one?
In the past 12 months, we have bought and sold assets with a total value of £500 million – this is fairly normal for a fund like ours. Today’s announcement is noteworthy because it is a single transaction with a very large value and so will be reported in the press. We wanted to make sure that you got the facts direct from us, rather than having to rely on the press for an understanding of what it means.
Does this put pensioners in a better position than others if the fund is wound up?
No, because the annuity policy does not belong to them. In the event of the fund being wound up, the value of the policy is available to the trustees to meet the benefits of all members, just as the other fund investments are.
Does this affect future pension increases?
No, the fund provisions for increases are unchanged.
Why do this now?
Because of advantageous terms currently available within the insurance market. Prices in the bulk annuity market are much lower now than they have been for a long time. This has given us the opportunity to reduce risk within the fund at a sensible cost.
What’s in it for C&W?
Reduced pension liability on its balance sheet and reduced risk of calls for extra funding in the future.
What’s in it for me?
Increased security of your pension benefits because of reduced investment and longevity risk within the fund.
What is longevity risk?
It is the risk of people living longer than expected. If that happens, their pensions cost more than we reckoned they would. For example, in 1947 a man aged 65 could expect, on average, to enjoy his retirement for a little less than 1 year. Today, the expectation is around 25 years. Put another way, life expectancy for 65 year old men in the UK has been increasing at the rate of around 60 days a year, over the past 20 years. The transaction we have announced reduces the risk to the fund that costs will increase as a result of further improvements in life expectancy.
What happens if the Prudential goes bust?
This is extremely unlikely, because of the financial strength provisions that regulated insurers have to meet. However, our advisers have also negotiated strong security provisions within the policy, which is also covered by the Financial Services Compensation Scheme.
Is this a ‘buy out’ or a ‘buy in’, and what’s the difference?
It is a ‘buy in’. A ‘buy in’ is where a bulk annuity contract is bought as a fund investment and held by the trustees. It belongs to the fund, not individual members. The trustees hold the policy as a fund asset to meet their liabilities, and receive income from it to pay pensions (as they would from their other assets). A ‘buy out’ would involve the purchase of individual annuity contracts held by the members outside the pension fund, who would then cease to be members of the fund.
What action do I need to take?
None – it is business as usual. However, if you have any more questions, please contact us.
