The Vesuvius story - 10 Years of Pension Plan Derisking

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

John Reeve BSc FIA

• Premier• Consultant• Advisor to Vesuvius Trustee Board• Project Manager of these exercises• Works with Companies and Trustees on

all aspects of Pension provisionBryan Elliston FCA

• Vesuvius (formerly Cookson)• Financial Controller• Also a Trustee• Company Sponsor for the Projects

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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Cookson’s UK Pension Arrangements

• 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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Final Salary Scheme in 2004

Cookson’s UK Pension Arrangements

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Defined Contribution Scheme (2012 – when wound up)

• 680 members: 570 active; 110 deferred

• £16m assets

• Trust based

• Outsourced administration

2004 2005 2006 2007 2008 2009 2010 2011 2012

Eight steps to a stronger business– The Actions

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Close Final Salary Scheme

Implement LDI

ETV Exercise

Pensioner Buy-in

Buy-in for Future Retirees

Close both Schemes to

accrual

Wind-up DC Scheme

Fiduciary Management

Data Cleanse

2004 2005 2006 2007 2008 2009 2010 2011 2012

Eight steps to a stronger business– The Result

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MembersActive 1,208Deferred 2,748Pensioner 2,832

Total 6,788

Assets £180mLiabilities £(274)m

Deficit £(94)m

MembersActive 234Deferred 2,022Pensioner 3,348

Total 5,604

Assets £470mLiabilities £(460)m

Surplus £10m

Increased liabilities:• Discount rates down c. 2-3%• Longevity improvements

Company funding contributions c. £130m

Know Your Enemy - Key Risks Identified by Trustee/Company

• Longevity Risk

• Investment / Liability Risk• Equity Falls• Interest Rate• Inflation

• Operational Risk• Administration• Governance

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Identified Risks

• Regulatory Risks

• Increased Levy costs• Governance• Solvency II

• Covenant Risk

• Escalating Costs

• Administration• Governance• Levy

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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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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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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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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2004 2005 2006 2007 2008 2009 2010 2011 2012

Eight steps became.… the Flight Path

Mitigation / Management Risk Reduction

© Premier pensions management 2011

Agreed “Flight Path” to:

• Reduce Risk

• Reduce Operational Costs

• Secure Benefits

• Inform and educate members

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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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Risk Reduction – Giving Members Options

• Opportunism - Sharing the CPI windfall

• Targeting the same Critical Yield for all

• Detailed evaluation of the offer• Cost• Benefit to members

Enhanced Transfer Offer in 2011

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Enhanced Transfer Value 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”

Key Aspects of Offer

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Enhanced Transfer Value Offer

• 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

Lessons Learned

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Enhanced Transfer Value Offer

• 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

Results

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Risk Reduction – Giving Members Options

• Reduced administration costs

• Reduced Governance strain on the Trustee

• Gives members control

• Consolidate in the GPP, a Low-cost default or their own option

Winding-up the Trust-based DC Plan

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Risk Reduction – Pensioner Buy-in

• 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!

Removed Longevity, Inflation and Interest Rate Risks

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Risk Reduction – Pensioner Buy-in

• 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

Precursors to a smooth transaction

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Risk Reduction – Pensioner Buy-in

• 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!

Cost-Benefit Analysis – far from straight-forward!

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Post Buy-in management of the Plan

• 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

Conditional extension of original buy-in contract

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2004 2005 2006 2007 2008 2009 2010 2011 2012

Eight Steps to a Stronger Business

A decade of De-Risking

Close Final Salary Scheme

Implement LDI

ETV Exercise

Pensioner Buy-in

Buy-in for Future Retirees

Close both Schemes to

accrual

Wind-up DC Scheme

Fiduciary Management

Data Work

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The Impact of the Cookson Demerger

• 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

Separation eased by prior years’ de-risking actions

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De-Risking … The Story Goes On

• 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?

Leaving no stone unturned…

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Summary and Conclusions

• 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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Reduced pensions risk makes for a stronger company

John Reeve BSc FIA

[email protected]: 07971 890440

Bryan Elliston FCA

[email protected]: 07785 310213