Journey. BAE Systems Pension Scheme Annual Review For in-service and deferred members

Transcription

1 Journey BAE Systems Pension Scheme Annual Review 2016 For in-service and deferred members

2 Welcome Welcome to Journey, the Trustee s 2016 Annual Review of the BAE Systems Pension Scheme ( the Scheme ). I hope you like the new look which reflects the BAE Systems refreshed corporate visual identity. You can find more information about this on page 3. If there is anything you would like to see covered in a future issue, please get in touch In the following pages you can read a summary of the 2016 Report and Accounts and obtain an overview of the past year. As you may know, the next triennial actuarial valuation of the Scheme is due as at 31 March This will be important in determining whether the current deficit Recovery Plan is judged to be adequate. Over the coming months, the Trustee and Scheme Actuary will start their preparations for the valuation. You can read more about this and the funding update at 31 March 2016 on pages 4 and 5. Following a review across all BAE Systems pension schemes, there has been a change to the Scheme auditor. We are delighted to announce that the auditing firm Grant Thornton UK LLP has been appointed to this role. On pages 8 and 9, David Adam, Chief Investment Officer at BAPFIM, who heads up the team that manages the Scheme s investments, provides an update on how well the Scheme s investments have been performing over the last year. Earlier in the year, the Trustee wrote to the members notifying them of a change to the structure of the Scheme, called sectionalisation. The Scheme was sectionalised into an Airbus section and a BAE Systems section. You can read more about this on page 7. To round off, we have included the latest pensions news to bring you up to date with developments that may have an impact on our Scheme. Please let me know what you think of this Annual Review. If there is anything you would like to see covered in a future issue, please get in touch using the contact details on page 15. Guy Griffiths CBE Chairman of the Trustee 2 BAE Systems Pension Scheme Annual Review 2016

3 What s inside 4 Funding update 6 Money in and money out 7 Who s in the Scheme? 8 Investment update 10 Pensions news 12 Defined Contribution (DC) pensions round-up 14 More information 15 Getting in touch Scheme membership 123,195 Scheme s assets worth 12,732m Earlier this year, BAE Systems refreshed its visual identity to better reflect its position as an innovative, technology-led defence business. You ll note a number of new elements including a revised colour palette and new distinctive typefaces. As well as in our printed communications, you will also see elements of this distinctive branding when you visit our website: This site hosts a range of helpful tools and information to support you in building a good understanding of your pension. It s another one of the ways we aim to provide you with all the information you need about your pension. BAE Systems Pension Scheme Annual Review

4 Funding update It s been a busy year for the Scheme due to the creation of a new, separate, section for Airbus members and the subsequent transfer across of the corresponding assets and liabilities. We have been closely involved with the Trustee, its other professional advisers and with the Group Pensions team advising the Trustee on various aspects of the process. This included seeking to ensure that a fair split of the Scheme s assets was achieved, and agreeing how future employer contributions should be directed between the two sections between now and the actuarial valuation at 31 March 2017, when the contributions will be reviewed. Over the year ahead I ll be working with the Trustee to plan for the next actuarial valuation and to engage with the teams at BAE Systems and Airbus so that both Scheme sections maintain an appropriate long-term plan to deliver your pensions. Mike Parker Hymans Robertson LLP The Scheme Actuary prepares regular valuations and advises the Trustee on funding matters. The valuations provide an assessment of the funding position of the Scheme and help the Trustee and the Employers to reach agreement on an appropriate Recovery Plan and the contributions payable to the Scheme. Triennial Actuarial Valuation Every three years, our Scheme Actuary carries out a full actuarial valuation. This gives a snapshot of the Scheme s financial health. The next valuation is at 31 March 2017 and the Scheme Actuary will soon start preparations for this. A valuation is a complex process that will take about a year to complete. Its purpose is: > to work out how much money the Scheme needs to set aside to be able to pay the pensions that have already been built up > to work out what level of contribution should be paid by the Employers to cover the cost of pensions earned in the future > to form the basis of discussions between the Trustee and the Employers to agree a Recovery Plan (a funding strategy for making up any shortfall) if the Scheme s assets are not sufficient to cover the value of the pensions already built up To carry out these calculations, the Actuary uses detailed Scheme data along with a range of carefully considered assumptions, which include what allowance to make for future investment returns, future rates of inflation (which affect what level of pension increases are assumed) and how long current and future pensioners are likely to live. Following the sectionalisation of the Scheme into an Airbus section and a BAE Systems section, there will be two actuarial valuations at 31 March 2017, one for each section. 4 BAE Systems Pension Scheme Annual Review 2016

5 What happened to the funding level in the year to March 2016? 31 March 2016 m 31 March 2015 m Assets 12,494 12,688 Amount needed to provide benefits 16,936 16,423 Surplus/(shortfall) (4,442) (3,735) Funding level 74% 77% AVCs/DC Retirement Plan and Level 100+ Retirement Accounts are excluded from the above figures. In the year since 31 March 2015, the funding level has reduced from 77% to 74% at 31 March This is largely attributable to lower than expected returns on assets over the year and a decrease in interest rates. This has been partially offset by lower than expected inflation and contributions paid to reduce the deficit. However, the funding position fell further over the summer, particularly after the Brexit vote. The Trustees are keeping this situation under review in the run-up to the 2017 actuarial valuations, and we concluded that no further action is required at this time. Following the previous full valuation on 31 March 2014, the Trustee and the Company agreed that the Employers would increase their deficit contributions into the Scheme to a lump sum of 75m for the year ending 31 March 2015 until 31 March 2026, along with 8% of contribution earnings. These payments, together with an allowance for investment returns on the Scheme s assets, are expected to be sufficient to remove the deficit by March The Employers also pay additional contributions to cover the cost of the ongoing accrual of benefits. There has been no change to member contributions or benefits as a result of the 31 March 2014 actuarial valuation. The figures shown in the table above fulfil the statutory requirements to update members annually on the Scheme s financial health, which the regulations call a Summary Funding Statement, and are shown pre-sectionalisation (see page 7 for more details). What would happen if the Scheme had to be wound up? Whilst there is no intention to wind up the Scheme, it is a requirement to provide members with the information on the Scheme s position if that were to happen. At the time of the last actuarial valuation at 31 March 2014, the Scheme Actuary estimated the cost of securing all members benefits with an insurance company at 31 March 2014 to be around 20,282m. Since the Scheme s assets were worth 11,653m, the shortfall was 8,629m. This is approximately the amount the Employers would need to pay into the Scheme if it had been wound up on 31 March In the event of the Scheme having to be wound up because the Employers became insolvent and the Scheme having insufficient assets to provide a certain minimum level of benefits for members, compensation might be provided by the Pension Protection Fund (PPF). Further information and guidance is available on the PPF s website at: > Or you can write to: > PPF, Renaissance, 12 Dingwall Road, Croydon, Surrey, CR0 2NA We are also required to confirm to you that there have been no payments to the Employers out of Scheme funds during the year, except to reimburse administration and investment expenses, and the Pensions Regulator has not had to intervene in the running of the Scheme. BAE Systems Pension Scheme Annual Review

6 Money in and money out The table below is a summary of how the value of the Scheme s assets changed during the year ended 31 March Income and expenditure Year Ended 31 March 2016 m Fund at beginning of the year 12,932 Total Income 564 Total Outgoings (619) Excess of outgoings over income (55) Change in the market value of assets (145) Fund at the end of the year 12,732 Net Investments 12,679 Net Current Assets 53 Net assets of the Scheme at year end 12,732 These figures exclude the DC Retirement Plan, but include AVCs and Level 100+ Retirement Accounts and are shown pre-sectionalisation (see page 7 for more details). Trustee Directors and Advisers The Scheme s Trustee Directors: Guy Griffiths CBE (Chairman) Mike Byfield* Pat Cauldwell* David Cole Andy Dean* Andreas Drabert Andrew Gallagher *Member Nominated Trustee Trevor King Steve Olsson* Carol Paul* Mark Stewart Louise Wallwork Chris Williams* Andy Wishart* The Scheme s Advisers: Actuary Mr M Parker, Hymans Robertson LLP Auditor KPMG LLP (up to 08/02/2016) Grant Thornton UK LLP (appointed on 07/03/2016) Legal Advisers Travers Smith LLP For a copy of the full Annual Report and Accounts, please contact the Pensions Service Centre (see page 15) 6 BAE Systems Pension Scheme Annual Review 2016

7 Who s in the Scheme? At 31 March 2016 the Scheme had a total of 123,195 members. This total was made up as follows: Active Members Deferred Members Pensioners Is your Expression of Wish form up to date? 26,959 40,740 55,496 Membership numbers exclude any DC Retirement Plan members and are shown pre-sectionalisation (see page 7 for more details). The Scheme provides valuable benefits in the event of your death. The Trustee is responsible for deciding who these benefits are paid to, but takes your wishes into consideration. It is important that you tell us what you would like us to do by completing an Expression of Wish form. You can nominate your dependants and you can ask the Trustee to consider splitting the benefit between two or more beneficiaries. It is important to keep your Expression of Wish form up to date if your circumstances change. You can obtain an Expression of Wish form at any time from the Pensions Service Centre or online at Member Representative elections The BAE Systems Pension Scheme held elections for in-service Member Representatives during 2016 and the results will be available on the BAE Systems pensions website ( from late November. There you will also find a leaflet with the contact details of your Representatives. Airbus Sectionalisation In February 2016 you will have been sent a letter explaining a change to the structure of the Scheme, which took effect at the start of April The Scheme was sectionalised into an Airbus section and a BAE Systems section, with all members allocated to one of the sections and the Scheme assets split accordingly, taking into account the allocation of the membership. As background, Airbus in the UK used to be part of BAE Systems, however since 2007 the two companies have operated independently. Nonetheless, Airbus employees continued to be members of the BAE Systems Pension Scheme. This was an unusual arrangement that has been brought into line with market practice by sectionalising the Scheme. Sectionalisation was agreed by the Trustee, BAE Systems and Airbus. It gives the companies direct responsibility and increased transparency for the funding of the benefits for their members. The change in structure does not affect Scheme benefits. The amounts and value of benefits are unchanged including pension and death benefits. If you did not receive the letter regarding sectionalisation, your details may not be up to date with the Pension Service Centre. Please be sure to inform them of any changes using the contact details on page 15. BAE Systems Pension Scheme Annual Review

8 Investment update David Adam, Chief Investment Officer of BAE Systems Pension Funds Investment Management (BAPFIM), brings members up to date on the Scheme s Investments. The year to the end of March 2016 was a challenging one for most types of investment. Declines in economic and company earnings forecasts, political uncertainty, Chinese economic growth concerns and divergent central bank policy, led to increased financial volatility. Looking broadly at the major types of assets, bonds delivered flat returns, the UK equity market fell by almost 4% and, with the exception of US equities, most overseas equity regions posted negative sterling returns. Private equity and UK property performed strongly. Against this difficult backdrop, the Scheme s overall asset value increased marginally during the year but the Scheme s performance lagged the benchmark set by the Trustee due to our property investment strategy. The Scheme invests in properties that can deliver consistent long term returns in excess of 4% a year above inflation. These properties, which generate strong rental income for the Scheme, have produced robust returns (almost 8% per annum over the last five years), but have underperformed the broader property index - which includes higher risk, shorter lease, more speculative properties - used by the Scheme for benchmarking purpose. In a volatile year for equity markets, the Scheme s equity managers produced mixed results. In the UK equity portfolio, strong contributions from the UK smaller company managers led to outperformance against the benchmark. The Scheme s European equities manager also outperformed, but its US and Asian equities managers underperformed. The Scheme s bond portfolios outperformed. Looking at the year ahead, global economic growth is expected to remain weak and political uncertainty, in the UK and elsewhere, will continue to be elevated. Financial asset returns are likely to be subdued. In this difficult environment, the Scheme is increasingly looking to diversify the sorts of assets it holds in order to enhance the Scheme s returns. These alternative assets include wind farms, water treatment facilities, selective infrastructure assets, European student housing and financing for a variety of small and medium sized companies in the US and Europe. Overall, the Scheme continues to enjoy strong, positive returns from these classes of investments. The UK s vote to leave the EU came as a shock to financial markets and analysts, resulting in an immediate drop in sterling and a short term fall in UK equities. The UK s exit is another uncertainty facing the global economy and financial markets, leading the Bank of England to cut interest rates and investors to buy Government bonds which offer guaranteed, albeit historically low, yields. This has led to a lower discount rate which has adversely impacted the valuation, in current terms, of the Scheme s future liabilities. Any repercussions of this on the scheme s Recovery Plan will be explored fully during the March 2017 triennial actuarial valuation review. The uncertainty about the timing of the EU exit and the nature of any subsequent trade deals is likely to continue to slow down the UK economy for a number of years, but is unlikely to have a significant negative impact on the scheme s assets. The scheme s equity holdings are diversified internationally and even the UK equity market has over 75% of its sales outside of the UK. The scheme s property assets are focused in the UK, but are deliberately orientated towards lower risk properties with strong tenants and long leases offering high rental yields. 8 BAE Systems Pension Scheme Annual Review 2016

9 Asset allocation The net asset allocation of the Scheme is shown below: Spread of investments at: 31 March March 2015 UK Equities 22.7% 23.1% Overseas Equities 18.6% 19.2% Government Bonds 0.0% 5.0% Corporate Bonds 6.6% 9.9% High Yield Bonds 1.9% 1.6% Best Ideas Fund* 3.4% 3.5% Unquoted 8.5% 7.8% Property 8.7% 7.7% Cash and Other Assets 0.2% 1.2% Matching Assets** 29.4% 21.0% Total 100% 100% * The Best Ideas Fund is a concentrated portfolio, consisting of UK, North American and European equities, offering a higher return equity vehicle. ** Matching Assets consists of long dated Government bonds, index linked bonds and inflation and interest rate swaps. Matching assets are designed to generate a return based on estimated future pension payments. Investment performance 1 Year 31 March 2016 % 3 Years to 31 March 2016 %pa 5 Years to 31 March 2016 %pa Years to 31 March 2016 %pa Scheme (total) Scheme Performance (excluding unquoted & matching assets) Performance Benchmark* * The total performance assets exclude unquoted assets and matching assets. This is because unquoted assets are highly illiquid and accordingly do not have an active market against which performance can be assessed. Matching assets are designed to generate a return based on estimated future pension payments. Accordingly, the Scheme s future pension payment profile is specific to the Scheme and there is no benchmark which these assets can be assessed. The Scheme s performance assets should be compared against the performance benchmark shown. The performance for the Scheme includes unquoted and matching assets but there is no relative benchmark against which the total assets can be assessed. The figures on this page exclude AVCs, Level 100+, Retirement Accounts and DC Retirement Plan Investments and are shown pre-sectionalisation (see page 7 for more details). BAE Systems Pension Scheme Annual Review

10 Pensions news Auditor Review As part of a continued commitment to good governance practice, the Trustee has undertaken a review of the Scheme s audit provider. A full review of a number of auditing firms was carried out as part of the contract renewal process. We are pleased to report that the Trustee has appointed Grant Thornton UK LLP as their Scheme auditor from 7 March Budget 2016 The former Chancellor of the Exchequer, George Osborne, had been thinking about changing tax relief for pensions. However, he decided not to make this change in his 16 March 2016 Budget. Instead, he announced a new Lifetime ISA or LISA for those aged between 18 and 40 which may help young people save both for their first home and for retirement. Individuals can save up to 4,000 each year and will receive a 25% bonus from the Government for every pound they invest until they reach age 50. Investment returns will be largely tax free and the accumulated fund can be used tax free to purchase a first property up to the value of 450,000 or be withdrawn from the age of 60 onwards. Any other withdrawals will see the Government bonus returned and a 5% charge applied. The LISA is expected to be available from 6 April 2017 with final details being announced later this year. Pension scams: don t be next Thousands of people have lost their life savings after falling for a pension scam. A recent survey estimates that there are over 1600 suspicious companies or schemes involved in UK pension scams, and between April and August 2015 they stole more than 9 million from savers. Scammers use a variety of methods to get their hands on people s savings. Often they will entice members of legitimate pension schemes to transfer their benefits to a new scheme by offering incentives and loopholes which in reality do not exist. For example, it is common for scammers to claim that they can unlock pensions before age 55, or to offer guaranteed investment returns. These claims are untrue. Victims of these scams face hefty tax charges of between 55% and 70%, or simply have their funds stolen. This is in addition to the extortionate fees levied by the scammers. The perpetrators of pension scams often have professional looking websites and brochures. They may even claim to be acting on behalf of a legitimate organisation such as the Government or Pension Wise. This makes it even more important to remain vigilant. There are resources available to help members protect themselves from pension scams. As a starting point we would urge all members to read the Pensions Regulator s guidance on pension scams ( In addition, the Financial Conduct Authority s website has a list of known scams ( as well as a register of authorised financial advisers ( 10 BAE Systems Pension Scheme Annual Review 2016

11 Changes to the Lifetime Allowance and Annual Allowance The Lifetime Allowance is the maximum amount of pension savings you can build up over your lifetime, across all registered pension schemes, without incurring an additional tax charge when your benefits come into payment. From 6 April 2016, the Lifetime Allowance is 1 million. For this purpose, pensions from a defined benefits scheme are treated as being worth 20 times their initial annual amount, so a pension less than 50,000 a year is within this Lifetime Allowance. If the value of your pension savings exceeds the Lifetime Allowance, the excess benefits are taxable at an additional rate of tax. You may qualify for a higher Lifetime Allowance if you have registered for protection with HMRC. The Annual Allowance is the amount by which your individual pension benefits can increase each year without incurring a tax liability. From 6 April 2016 the Annual Allowance is 40,000 for most people. From April 2016, for members who have a total adjusted income of more than 150,000, the Annual Allowance will reduce by 1 for every 2 of taxable income above 150,000. This is called tapering. Tapering will normally not apply if taxable income is less than 110,000. The maximum reduction will be 30,000, so anyone with an adjusted income of 210,000 or more will have an Annual Allowance of 10,000. Adjusted income includes personal sources of income (such as investment income or income from a buy-to-let property), together with employment related income and the value of the increase in pension benefits over the tax year. Unused Annual Allowance for the three previous tax years can be carried forward and used if required. Any excess benefit increase over the Annual Allowance may be subject to a tax charge, at your marginal rate of income tax, which is collected through the HMRC self-assessment process. For those impacted by a tax charge, the Trustee has introduced a facility called Scheme Pays. This gives a member (meeting certain conditions) an option to consider reducing their pension benefits in exchange for the Scheme settling the tax charge. If applicable, this would be communicated to you by the Scheme Administrator. This is a brief summary to remind you about the Lifetime Allowance and the Annual Allowance. The way they work in practice can be highly complicated. If you believe you may be affected by the Lifetime Allowance or Annual Allowance, you should consider seeking independent financial and/or tax advice for which you will be charged a fee. Further information is available via: Change of address reminder for deferred members It is important to keep the Trustee informed of your current address to ensure you continue to receive Journey and any other mailings issued. Deferred members can update their address by writing to the Pensions Service Centre (see page 15 for their contact details). BAE Systems Pension Scheme Annual Review

12 Defined Contribution (DC) pensions round-up Additional Voluntary Contributions (AVCs) If you are an active member you can pay AVCs to boost your retirement benefits. AVCs normally qualify for income tax relief at your highest rate, in the same way as your Scheme contributions. When deciding whether or not to pay AVCs, please remember that the Annual Allowance restricts the total amount of pension contributions and benefits that can receive tax relief. Further information on the Annual Allowance can be found on page 11. Whilst most AVC payers contribute a regular monthly amount, it is also possible to make lump sum AVC payments throughout the year. If you want to pay a lump sum AVC from your March 2017 salary (to count within the 2016 /17 tax year allowance), the Pensions Service Centre must receive your AVC form from you by mid-february 2017 (the actual cut-off date and AVC form will be posted on the BAE Systems pensions website in early 2017). Under the Scheme it is now possible to transfer just your AVCs into an alternative pension arrangement. This may be of interest to members who wish to access the additional flexibilities now available for DC pension schemes. Following the introduction of DC flexibilities, the Trustee has undertaken a review and is now in the planning stages of instigating a move to a new DC provider. More information will be provided to you at the appropriate time. New DC code of practice The Pensions Regulator s revised DC Code of Practice became effective from July and applies to all of the Scheme s DC arrangements. The Trustee, with assistance from its DC pension advisers, continues to ensure that our DC arrangements comply with the Code s provisions and are managed in an efficient, engaging manner, helping contributors to take full advantage of this valuable facility. Pension flexibilities for defined contribution benefits Pension freedoms introduced last year mean the current generation of retirees with defined contribution or AVC funds have more options to choose from than ever before taking lump sums, withdrawing pension income more flexibly over time, using your fund to provide a secure regular income for life through an insurance company, or leaving funds in place for your beneficiaries after your death. To help you make an informed decision on how best to use your defined contribution benefits to suit your circumstances and objectives, there are two facilities available to DC savers: > you can seek guidance from the Government s free and impartial Pension Wise service available face to face, online or over the phone. Visit or call for further information. > Hargreaves Lansdown has been appointed to provide you with guidance on your options. If required, you can also access their chargeable advice service. The Hargreaves Lansdown service focuses on defined contribution (or AVC) benefits only and they are unable to provide advice on transferring defined benefit arrangements (where your pension builds up by reference to service and salary). More information is available at: or by calling BAE Systems Pension Scheme Annual Review 2016

13 New Chair s Statement The Trustee is required to disclose certain DC related information by issuing a new Chair s statement. The statement demonstrates how the Trustee applies robust governance to the Scheme s DC arrangements and explains how the arrangements provide value for members. Our first statement is now available for inspection within the Trustee s Report and Accounts. In brief, the Statement: > Describes the robust governance around the Scheme s investment fund options and the Trustee s thinking behind the structure of the default investment option and overall fund range. > Describes how the Trustee monitors the scheme administration services and ensures that core financial transactions are processed efficiently. > Explains the steps that the Trustee and its advisers are taking to provide enhanced transparency in the area of investment transaction charges. > Confirms the Trustee s view that the Scheme provides good value both in those areas where our members meet some/all of the costs (through the Annual Management Charge) and also where the related costs are met solely by BAE Systems (e.g. Scheme governance). > Includes an independently scored assessment of the good value provided by the Scheme in the key areas of Investment, Administration and Communication. > Confirms the process by which the Trustee Directors maintain the highest levels of pensions / Scheme knowledge and understanding. 13

14 More information MyPension You can log into the MyPension service at: > If you cannot access this service, please contact Member Web services on: > or > if calling from overseas. Useful Documents Below is the list of documents that provide further information about the Scheme. If you would like a copy of any of these, or have any other questions, please get in touch with the Pensions Service Centre. Statement of Investment Principles Explains the investment strategy of the Scheme. Statement of Funding Principles Explains how the Scheme will be funded. Schedule of Contributions Shows how much money is being paid into the Scheme to cover the cost of the benefits which are accruing. There is lots of information on the pensions website: Annual Report and Accounts of the Scheme Shows the Scheme s income and expenditure and Statement of Net Assets in the year to 31 March Actuarial Valuation Report Includes details of the Scheme s financial situation at 31 March Annual Funding Update Includes an estimate of the Scheme s financial position at 31 March BAE Systems Pension Scheme Annual Review 2016

15 Getting in touch Need help? We cannot give you financial advice, but if you need help with your pension options, the Pensions Advisory Service provides independent and impartial information and guidance about pensions, free of charge, to members of the public: > They can also help with any unresolved complaints, as can the Pensions Ombudsman: > If you would like to find out more about pensions and how to make the most of your retirement planning, visit the Money Advice Service website: > Pensions Service Centre contact details We are here if you need to get in touch with us or if you ve got any questions and importantly, if you need to give us your updated contact details. You can contact us using the details below: > Freephone: > If calling from overseas: > If you want to write to us our address is: > BAE Systems Pension Scheme, Pensions Service Centre, PO Box 1193, Crawley, West Sussex, RH10 0FY You can also go to Pension Wise, a free and impartial guidance service set up by the Government to help people understand their defined contribution pension options. For more information visit: > If you are not sure what to do, you can speak to an independent financial adviser. You will find one in your area on this website: > If you want to make a formal complaint about the Scheme, please contact Nigel Tinsley, Pensions Director at: > PO Box 87, Farnborough Aerospace Centre, Farnborough GU14 6YU If your complaint remains unresolved you can contact the Pensions Ombudsman or the Pensions Advisory Service. BAE Systems Pension Scheme Annual Review

16 For more information visit: BAE Systems Pensions Website w: BAE SYSTEMS. All rights reserved. BAE SYSTEMS is a registered trade mark of BAE Systems plc TC2912f.123