Newsbrief No 40 21st May 2001
CLAUSE 11 APPEAL.
We have been advised that the date for the Hearing of this Appeal is 25th February 2002, and that it is expected to last 2 or 3 days.
VALUATION 2000
As advised in the Trustees letter of 4thApril, the Actuary's report on the 2000 Valuation is now available to Beneficiaries. Members will no doubt be disappointed that the completed Valuation differs so radically from the Draft Valuation, published in October 2000, and that the Disposable Surplus has now been certified as £150m. Sufficient it is said to provide an Employer Contribution Holiday for 4 years.
It is instructive to compare the figures in the 1998 Valuation (produced prior to the Merger proposal) with those contained in the draft 2000 Valuation and the completed 2000 Valuation.
Firstly, we must remember what was said at the recent Court Hearing on the methods used in the previous Valuations.
Mr. Inglis Jones Counsel for the Beneficiaries, pointed out that the Actuary had used a method which in his opinion could not be used to decide the amount of the Disposable Surplus.
Mr. Justice Lloyd replied, "Mr Inglis Jones is therefore clearly right to say that the Actuary cannot use that method to decide the amount of the Disposable Surplus which he should certify. That is not in dispute."
The Actuary has now used the "Attained age method" and Market value approach for the 2000 Valuation, as opposed to the Aggregate method used previously.
Direct comparisons are difficult because of the different methodology used; but we can make the following points on the basis of actuarial advice received:
1. There remains a significant inconsistency between the calculation of the "Disposable Surplus" and the investment strategy adopted by the Scheme. If the Actuary is comfortable with the Investment Strategy he should be prepared to sign off far more of the surplus as Disposable. If not, he should be recommending a much faster switch from Equities into Bonds (not necessarily Gilts) If he did this he would still be able to certify a higher Disposable Surplus.
2. If it is necessary to allow for the investment risk of being in Equities, then that can only be because a higher return is expected. If that is so, then why anticipate that Equities will only perform in line with index-linked Gilts ?
3. It is not in the Pensioners interests for the Funds of the Scheme to be invested in Equities rather than Bonds. The purpose of investing in Equities is to try to generate higher long term returns and therefore a higher long term surplus. (ABAP comment : This is a policy which mainly benefits the Employer as the increase in the value of Equities is a paper gain until the Equities are sold and the profit realised.)
4. The Actuary has created various Contingencies & Reserves. These are outlined in sec. 5. of the Valuation Report, but it needs careful reading and calculation to quantify them, they are estimated as follows:
a) Mortality Allowance made through a reduction in the Investment Return £140m.
b) Reserve for Investment Management Costs £35m. (this we are told is unusual)
c) Reserve for Administration Costs £42m.
d) General Contingency Reserve, 5% of the value of liabilities £237m.
These total some £450m, plus of course the Investment Reserve of £670m., Grand Total of £ 1120m.
SURPLUS POSITION APS VALUATIONS 1998 - DRAFT 2000 - 2000 FINAL VALUATION.
In the 1998 Valuation the Residual Surplus was £152m after reserving for future liabilities (30yr Employer Contribution Holiday) and expenses together with the MFR Reserve of £584m. In the Draft 2000 Valuation the excess of Assets over Liabilities was £1239m. The Actuary suggested an Investment Reserve of £550m. MFR was declared not a problem. The result was a possible Residual Surplus of £361m. after allowing for future service liabilities of £328m. (Employers Contribution Holiday net of future Member contributions.)
In the final Valuation 2000 the picture has all changed . After providing for the £450m of Contingencies referred to above, the Excess of Assets over Liabilities leaves a raw surplus of £820m. The provision of an Investment Reserve of £670m. reduces the Disposable Surplus to £150m. sufficient to meet only a four year Employer Contribution Holiday. This is of concern since there is therefore a remaining Employer Balance of Liability outstanding. It should be remembered that over the past 11 years since APS came into surplus, the full Future liabilities have been met.
This is a disturbing development, particularly if APS Reserves are to be used by the Employer using his Clause 24 powers, which would impose further Liabilities on the Scheme, given that the Current Liabilities have not been met. All this seems extraordinary given the massive Contingency & Investment Reserve of £1120m. APS is a closed Scheme and is important that the Employer Contribution Holiday of up to 30 years provided for in Clause 11(d)(ii) is reserved before Funds are utilised for any other purpose.
No explanation has been given as to how the Investment Reserve has been calculated, it would appear that the Employer Contribution Holiday has simply been subtracted from the £820m Surplus to produce the resultant Investment Reserve. It is notable that in the Valuation which covers only 2 years, not the usual 3, that there are no figures whatsoever for the future liabilities (Employer liabilities), or for Members Future Contributions.
As stated there are implicit Reserves of some £450m, before the Raw Surplus was struck and there is then the Investment Reserve of £670m. So there appear to be Contingencies & Reserves of £1120m. What prudence !
Could we remind you that this is the same Actuary who in 1999 agreed with his colleague that a Merger of APS & NAPS was in the interests of APS Beneficiaries. Only to advise the Trustees in October 2000 that the Merger should not go ahead on the proposed terms.
You could be forgiven for wondering why this Valuation has so many Contingencies & Reserves built in. Is it really in the Best Interests and Protection of the Beneficiaries ?
CRYSTALLISATION & VARIABLE PENSION OPTIONS.
The Draft Valuation 2000 had cost of £30m for Crystallisation, this has disappeared in the Final 2000 Valuation, but in the "Analysis of Result" (para. 6.3) there is an item "Actuarial Factors for Benefit Calculations" for £47m.
Could this be the Crystallisation costs suitably disguised ? If so is the cost now £47m., or what does the other £17m.cover ? If this is the cost of Crystallisation, could it be that BA Pensions are unwilling to explain the cost of a supposedly neutral option ? We have asked BA Pensions for an explanation. We have been told " There was no mistake."
WHAT RUBBISH ! A supposedly Neutral Option that cost the Fund £30m.
We have suggested that in this light , the Trustees should reconsider their decisions on the Variable Pension Option. Where Pensioners have repaid, with interest, far more than they received in extra benefit.
What is sauce for the Goose…………
INVESTMENT POLICY.
There is considerable emphasis by the Trustees in their most recent letter of the need for prudence and an appropriate matching Investment Policy for APS.
The Actuary also makes much of these issues in the 2000 Valuation.
This concern is touching, coming as it does from a Board of Trustees, who for the past 6 years have ruthlessly pursued an Equity driven policy, despite constant appeals from ABAP (on Actuarial advice) to adopt an Investment strategy which would more closely match and reflect the liabilities of a scheme such as APS.
This is quite a staggering U-turn. Can the Trustees, the Chairman and the Actuary have forgotten their previous Investment Policy, which was to form the basis of the ill fated Merger proposal ? The rationale was "Wealth Creation."
Let us refresh their memory. The rationale for the Merger was to remove all restriction which the Minimum Funding Requirement (MFR) would place on a Mature Scheme such as APS ( more Gilts less Equities). We were blithely informed that merging APS with NAPS would enable the Trustees to invest a much greater proportion of Assets in Equities. An MFR Reserve of £584m was allocated, under the terms of the Merger Proposal, BA would receive 50% of the Reserve when it was released, and a proportion of the remaining 50% would be allocated to NAPS, presumably to further reduce the Employer Contribution to NAPS.
Clearly, at that time prudence was not on the Agenda. Perhaps the Trustees believe that when people retire, their brains retire as well. Why were the Trustees adopting a High Risk Policy for a closed mature scheme, most of whose Beneficiaries were Pensioners ? Who benefits from such a strategy, which is now exposed with all its flaws ? Certainly not the Pensioners !
Step forward BA. Who wanted to access the APS funds to reduce their contributions to NAPS, and offered paltry benefits which the Trustees wanted you to accept as a trade-off for weakened Security.
Bad Enough ? It Gets Worse. The Goode Committee on Pension Law Reform reported, and their recommendations were adopted into the Pensions Act 1995, coming into force in 1997. One of the main recommendations was a policy of substantial investment in Gilts for Mature Schemes.
The Act also introduced the Minimum Funding Requirement (MFR) with effect from the first Valuation after April 1997 (for us, this was the 1998 APS Valuation). In Dec. 1995 ABAP first wrote to the Trustees advocating a more balanced Investment Policy. We advocated more Gilts & less Equities, but this approach and all subsequent approaches were dismissed by the Trustees.
In April 1997 the Trustees, as required by the Pensions Act published a Statement of Investment Principles. Yes, you are right. Their stated policy remained Equity dominated despite the fact that ABAP had a month earlier written to the Chairman of Trustees, Mr Stevens, pointing out that this policy would not comply with MFR.
In May 1997 the Actuary at last advised the Trustees that they should have a greater weighting of Gilts and less Equities. So a new Statement of Investment Principles was issued in June 1997.
This stated: "The envisaged longer term objective is an allocation in index-linked gilt edged Securities of 30% of Scheme Total Assets", it continued "...it is the Management Trustees current policy to ensure that on a reasonable balance of probabilities (bearing in mind the dependence of MFR on market valuations), MFR will be satisfied as one of the outcomes of pursuing the Investment Strategy set by the Management Trustees."
Fine words. Needless to say little was done.
The 1998 Valuation revealed that the value of Scheme Assets were written down by reference to a "Notional Model Portfolio", comprising 30% index-linked Gilts, 15% fixed interest Gilts, and 55% Equities. This was to meet the MFR test. A further funding cushion of £584m.was allocated as an MFR Investment Reserve.
The confidence expressed in the April & June 1997 statements evaporated in the 1998 Valuation with a need to create an MFR reserve of £584m.
Commenting on the Investment Reserve of £584m, the Actuary stated : "We consider it necessary to establish an …(investment reserve).. against adverse market conditions which would otherwise render the Scheme insolvent for MFR purposes."
Despite all these Reserves and high sounding words the "Notional Model Portfolio" remains just that and nothing more.
We are still no nearer to achieving an appropriate Investment Strategy than we were in 1997.
The Trustees and their Advisers are responsible for the adherence to an Equity dominated Investment Strategy, and for ignoring their own stated policy. This is self inflicted injury and is the cause of the present position.
The Trustees and their advisers complain of a "Gilts famine" but it has been clear since 1995 that a mature Scheme with a predominance of Pensioners made it a necessity to purchase Gilts which at that time were available at a reasonable price. It is even more important now as Pensioners & Deferred Pensioners comprise over 87% of the APS Scheme. In any case, other higher yielding Investment Grade Bonds are available besides Gilts - Gilts now only represent half of the relevant Bond market.
This Equity Policy was not, and is not, in the best interests of the APS Beneficiaries. Capital gains are only paper gains until the investment is sold and the profit realised. To date, the main beneficiary has been the Employer who has enjoyed a Contributions Holiday since 1989, and who has utilised the Surplus as a tool during wage negotiations, and in reducing staff numbers through early retirements, the costs of which have been borne by the APS Fund.
BA & EMPLOYEE CONTRIBUTIONS TO APS.
From its inception in 1948 to 31st March 2001 BA & Employees contributed the following:
BA contributions £ 782.9m(This includes deficiency contributions from 1980-89, it excludes the cost of pension augmentation, which was provided at BA's sole discretion in staff reduction programmes in the late 70s' & early 80s'.)
Employees contributed £496.4m over the same period, a ratio of 1 to 1.58.
Since 1989 BA has not paid a single penny to APS. Actuaries for ABAP have assessed the cost of that benefit as £658m.
In addition BA have used Clause 24 to improve benefits for Active Members in 1989, and has over the period from 1989 to 31st March 2001 again been reducing staff numbers, and at its sole discretion has been granting augmented pensions the cost of which is assessed at £339m.
Total Benefit to BA since 1989 is therefore £997m.
TRUSTEES INTERPRETATION & IMPLEMENTATION OF CLAUSE 11.
Following the Court's decision on Clause 11 the Trustees claim the Judgement was in line with their interpretation. We chose to ignore it at that stage. However in their letter of 4th April they returned to the theme stating
"The effect is consistent with the way in which the Trustees have dealt with Clause 11 in the past." " The effect is consistent "….consider these words carefully, they are clever Lawyer's words. They do not say " we have carried out the provisions of Clause 11 to the letter." Why ?
We highlight below what they have not done, and we leave it to you to judge the merits of their self congratulation:
1. The Actuary must certify a Disposable Surplus. No Disposable Surplus was certified in 1989, 1992, 1995, and 1998. The word Disposable is not used, instead we get "Residual." The Trustees failed to ensure that the Actuary complied with this provision.
2. Clause 11 provides that the Employer Contribution Holiday is the First Charge on a Disposable Surplus. As no there was no Certificate and declaration of a Disposable Surplus should a Contribution Holiday have been approved ?
3. The Trustees should not have permitted the Actuary to deduct the cost of the Employer Contribution Holiday from the surplus. It was their responsibility to dispose of the Disposable Surplus, and to approve the Employer Contribution Holiday.
4. The cost of the Holiday must be stated in Annual Amounts, apart from the 1992,1998 & 2000 Valuations this has not been done, instead Future Liabilities have been used as the Cost of a 30 year Holiday.
The Aggregate Method used in the Valuations could have had the effect of reducing the Surplus. ABAP wrote to the Trustees on this issue, but the Chairman's reply was that the Trustees did not need to change this.
5.BA used its Clause 24 powers to make Benefit improvement in 1989, at a cost of £136m from the Residual Surplus after the Surplus had been finalised. According to Mr Justice Lloyd & BA's Counsel during the Court Hearing, BA had to give prior notice to the Disposable Surplus being struck. As far as we are aware no such notice was given.
6. The Trustees have never disposed of all the Disposable Surplus, their scheme has been mainly to allow the Employer Contribution Holiday. No decision was made on the balance available, it was simply left. There was no decision to hold it as a Reserve.
MEETING WITH BRITISH AIRWAYS.
The ABAP Chairman & Vice Chairman met with Mr. Lebrecht Head of Industrial Relations & Reward and Mr. T Howie, Financial Controller Shareholder Value, at the request of BA on 2nd May 2001. They were given a presentation on BA's views, and the 2000 Valuation of APS & NAPS. BA desires a better relationship with Pensioners and is considering a possible future Merger proposal. It was stated that one of their considerations was the level of support that would be generated by any proposal.
The ABAP views on the Valuation & previous Events was made clear. It was also made clear that if BA wished for further discussions ABAP would require a climate of full disclosure, as confidence and trust in Management and Trustees is non-existent.
The main concern of Pensioners was expressed as the Security of the Funds. We wait to see if BA decide to pursue these discussions.
MR D STEVENS & MRS J ROSSER.
BA News (17/05/01) has announced Mr Stevens is leaving BA in September. Strangely it does not mention his pensions role. According to reports in the national press he is to remain as Chairman of the BA Pensions Management Trustees. A pensions magazine has reported that Mrs Rosser is retiring from BA Pensions in June.
As yet there has been no statement from BA Pensions on these changes.
CHAIRMAN'S INVITATION
George Bell makes a space limited invitation to Members to attend the ABAP Committee Meetings without obligation to see the Association in operation. Please check with Roy Hutchings for details.
Complementary coffee & biscuits are available.
(Regrettably no Allowances are payable)
ABAP WEBSITE
In Newsbrief No. 39 the website address was incomplete as many Members have rightly complained. Here is the correct version: www.abap.org.uk
The Committee of ABAP 21st May 2001