Tate & Lyle: a journey plan in half the time
Tate & Lyle is a global provider of solutions and ingredients for food, beverage and industrial markets. We have been their advisers since 2007, providing support on a range of issues relating to their pension and other post-retirement plans in the UK and the USA.
Our actuarial, investment and specialist bulk annuity advice centred on their £1billion+ UK DB pension scheme. Initially we supported fairly typical pension issues such as actuarial valuations. However, this evolved in 2011 when the scheme closed to accrual and the Company and Trustees started a journey plan to their end game – eventually securing all members’ benefits with a bulk annuity insurer in 2019, successfully de-risking the scheme seven years ahead of plan.
Here we outline the key stages of this resounding success story.
- In 2011, Tate & Lyle closed their £1billion+ UK DB pension scheme to future accrual. Shortly afterwards the trustees and the company agreed a formal de-risking journey plan with the aim of reaching full funding on a low-risk self-sufficiency basis – that is, still supported by the company – by 2026.
- In 2019 the scheme successfully completed a second buy-in of £930m, securing the liabilities for all members, resulting in no further investment, longevity, interest rate or inflation risk remaining in the scheme.
- What were the key steps to get from a 15-year self-sufficiency plan to fully securing all the scheme benefits with an insurance company in only eight years?
- In September 2011 an investment de-risking framework was put in place, with trigger mechanisms for switching out of growth assets into hedging assets to lock in investment gains.
- The plan was to reach “self-sufficiency” by 2026 – meaning a low dependency basis, recognising that they could still be responsible for additional funding if things went wrong but structured in a way that should mean that the impact of things going wrong should be small and containable.
- Achieving this goal would put the trustees and company in a strong position to consider taking the next step to secure the scheme’s benefits with an insurance company, when it was affordable and desirable to do so.
- As part of the 2013 actuarial valuation cycle, the company proposed aligning the scheme’s funding plan with the self-sufficiency investment target.
- To support this, a financial support framework was put in place incorporating contingent security via an escrow account, funded through additional contributions. Escrow funds could be released into the scheme under various trigger events, including investment underperformance and changes in employer covenant metrics – forming a complete financial management plan for the remaining lifetime of the scheme.
- This framework enabled the company to meet its objective of keeping cash commitments at their target level, while also delivering sufficient security for the trustees to remain comfortable with the pace of funding, the level of investment risk being run, and the 2026 target for self-sufficiency.
- This innovative and integrated approach to risk management also ensured full compliance with The Pensions Regulator’s key funding principles.
- Some of the desired investment gains emerged and the scheme was able to capture these through the investment triggers in place. There were also other upsides to capitalise on.
- Like many schemes, the level of transfer values increased – by ensuring this option was communicated appropriately to members, both the trustees and the company could be comfortable with the member engagement process and resulting beneficial impact on the journey plan.
- Taking advantage of favourable pricing in the bulk annuity market and an opportunity to further manage both financial and demographic risk, in 2012 the scheme put in place its first buy-in with Legal & General, for £347m, covering around 43% of the pensioner liabilities at the time.
- On the downside, the scheme was faced with interest rates falling even further, despite having been at previously historic lows at the outset of the journey. Here the scheme benefited from its decision to materially hedge this risk from the start, a difficult choice at the time, but one which paid dividends when the unlikely downside played out in practice.
- Through a combination of strategic planning and emerging experience the scheme was able to move substantially ahead of its journey plan.
- Alignment of the parties on the ultimate aim of achieving security and removing risk was a critical factor in enabling effective planning, rapid action in response to change, and the continued focus on accelerating progress.
- Security for the trustees meant a de-risking plan that set the funding level and the investment strategy heading in a suitable direction, taking account of the employer covenant and contingency planning. For the company it meant taking steps to progressively lock down the pension risk, and positively manage the potential financial impacts in terms of both cash commitments and corporate accounting.
- Most important was a good discussion between the trustees and the company and each party having good proactive pragmatic advisers who wanted to help to get to an agreed position. The company also needed to be prepared to be flexible in its use of assets in the escrow account.
- In early 2018 this alignment enabled the company to take the initiative in suggesting further de-risking to the trustees, which allowed the scheme to crystallise strong investment outperformance and anticipated liability experience gains.
- Despite the strong progress, in 2018 it was still anticipated that full buy-in was likely to remain a reasonable distance away. However, together with their advisers, the trustees and company decided it made sense to be proactive and explore the market to see if sufficiently competitive pricing may potentially be achievable.
- The company and the trustees agreed in summer 2018 there was sufficient opportunity to progress further, and looked to secure a full buy-in for the remaining members. The investment strategy was refined further to reflect this new time horizon, including removing the majority of return-seeking assets and adjusting hedging levels to help mirror pricing as far as possible.
- Following a competitive tender process, by working with the preferred insurer over an extended exclusivity period, Legal & General were able to optimise their pricing and meet the stretching target set by the scheme.
- The successful completion of the second buy-in transaction with Legal & General in summer 2019 secured the liabilities for all the remaining members, resulting in the underlying risks being passed to the insurer and achieving both the trustees’ and company’s objectives, with no further funding needed.
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