BAE Systems Pension Scheme

Transcription

1 BAE Systems Pension Scheme Annual Review for Pensioners 2016 Welcome to the Trustee s 2016 Annual Review of the BAE Systems Pension Scheme ( the Scheme ). 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 2 and 3. 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 6 and 7, 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 4. Guy Griffiths CBE Chairman of the Trustee

2 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. 2 BAE Systems Pension Scheme Annual Review for Pensioners 2016

3 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 4 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 for Penioners

4 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 26,959 40,740 55,496 Membership numbers exclude any DC Retirement Plan members and are shown pre-sectionalisation (see page 4 for more details). 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 the back cover. 4 BAE Systems Pension Scheme Annual Review for Pensioners 2016

5 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 4 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 back cover) BAE Systems Pension Scheme Annual Review for Penioners

6 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. 6 BAE Systems Pension Scheme Annual Review for Pensioners 2016

7 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 4 for more details). BAE Systems Pension Scheme Annual Review for Penioners

8 More information 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 There is lots of information on the pensions website: 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 TC2919h.123