pensions review09 Since the last issue of Pensions Review we have seen some of the most in this issue Chairman s message

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1 pensions review09 Chairman s message Since the last issue of Pensions Review we have seen some of the most difficult economic conditions for over two decades. As set out in my letter of 31 August, the Fund completed its first actuarial valuation to be governed by the Pensions Act 2004 in June this year. Following constructive dialogue with AkzoNobel and ICI, we have agreed a recovery plan to rectify the deficit by March The Company has agreed to pay around 60 million into the Fund over the nine-year period until then (with half the cash being injected into the Fund in the first three years of the plan) despite the current economic background. For most pensioners of the Fund, this is the first year in the lifetime of this Fund that no annual pension increase has been given. As a result, we have decided to issue Pensions Review a little earlier than usual to provide members with some background information. The reason that there will have been no pension increase for most pensioners with effect from 1 October 2009 (for former Unilever members) or 1 January 2010 (for former Williams and Hunting members) is due to the fact that the measure of inflation, which is used under the Fund s Rules, has been negative. According to the Retail Prices Index (RPI) as at both 31 July and 31 August 2009, prices were actually lower than a year earlier. However, Fund Rules protect pensions from being cut, so no one will see a reduction in their pension despite the fact that inflation has been negative. For most pensioners, whether pension increases will resume next time will depend on whether the RPI for July 2010 or August 2010 is higher than for July or August this year, respectively. We have included some of the more frequently asked questions on this topic on page 3. We also wanted to give those members who are affected the opportunity to consider the implications of changes to early retirement legislation. From 6 April 2010, the minimum age that a member can request early retirement will increase from age 50 to 55. Full details of this change to the law is given on page 4 and I would urge any member who will have reached age 50 but not age 55 before 6 April 2010 to read this article in detail. Finally, we have enclosed a Summary Funding Statement as at 31 March 2009 which provides an updated funding position. This statement shows a marginal deterioration in the funding level, from 89% to 87% on an ongoing basis. This is principally due to the volatility of financial markets in the year ended 31 March Having reviewed the overall position of the Fund, the Trustee Board is of the view that this drop in funding level does not warrant any changes to the current recovery plan. Indeed, the valuation as at 31 March 2008 included an allowance for lower than expected investment returns in the period since that date. However, we will continue to monitor the financial health of the Fund and to update the membership about the position on a regular basis. Charles Morgan The Law Debenture Pension Trust Corporation p.l.c. Chairman, ICI Specialty Pensions Trustee Ltd Charles Morgan, Chairman in this issue Financial summary Fund membership No pension increase Change to minimum retirement age Investment review How does investment performance affect my AVCs? Actuarial update Being a Trustee Director Secretary s postbag Pension Protection Fund Trustee Board and Advisers December 2009

2 Financial summary Ins and outs of the Fund for the year to 31 March 2009 How the money came in m Member contributions 0.0 Employer contributions 2.1 Investment income 1.2 Total income 3.3 How the money went out Pensions Fund membership The pie chart and table below show that active membership has again fallen over the year due to no new members joining the Fund. The deferred membership has increased, whilst the pensioner category continues to rise, partly due to the population living longer, resulting in pensions being paid over lengthy periods. Cash lump sum in exchange for pension (including AVCs) -4.9 Transfers to other funds -0.6 Death benefits -0.2 Total expenditure Change in the Fund Balance of income and expenditure Change in market value of investments -1.9 Total change in the Fund Net assets as at 31 March 2009: million These figures have been extracted from the Fund s Annual Report and Accounts, as audited by KPMG LLP. Pensioners 28% Deferred members 66% Contributing members 6% Pensioners Deferred 1,035 1,107 members Contributing members Total 1,982 1,985* 2 * The increase in the membership is due to the reinstatement of deferred benefits for members who were due to transfer to the Henkel scheme but then left employment before the transfer of assets was completed.

3 No pension increase a sign of the times This is the first time since the Fund was set up in 1998 that it has not awarded an annual pension increase to all pensioners. We understand how important inflation-linked increases are to members, so we have done our best to anticipate some of the questions that this could prompt. Who is affected? All pensioners of the Fund are affected by the lack of pension increases this year, except a small number of former BJN members who have guaranteed fixed increases as at 1 October each year as part of their pension entitlement. Why is there no increase this year? This is purely because the Fund Rules on pension increases are tied to the movement in the Retail Prices Index (RPI) each year. For former Unilever and Hunting members, the reference date is 31 July (with any increases awarded on the subsequent 1 October) and for former Williams members, the reference date is 31 August (with any increases awarded on 1 January the following year). At both 31 July and 31 August 2009, this index was actually lower than at July and August 2008, due mainly to lower prices for things like housing and petrol. However, Fund Rules prevent pensions from being cut when inflation is negative and will ensure that, as inflation picks up again, pension increases resume although subject to an annual limit of 5% (or 3% for part of former Williams and Hunting members benefits). Why does the Fund use the RPI index and these dates? These increase rules were written into Fund Rules by ICI when the Fund was established for former Unilever members, and when it accepted the transfers from the Williams, Hunting and BJN schemes. They reflect the provisions in the schemes from which Fund members transferred. Within the last decade, the Government has sponsored additional inflation indices, such as the Consumer Prices Index (CPI), but the Trustee still has to follow the Fund Rules, which refer to RPI. Is the lack of an increase due to falling stock markets? No, pension increases are driven solely by Fund Rules. They have nothing to do with short-term performance of the Fund s investments. Investment performance is dealt with through the valuation process (see the actuarial update on page 6) and is addressed through additional Company contributions spread over several years. What does this mean for deferred members? Deferred pensions are revalued in accordance with statutory requirements that apply a similar RPI-linked formula to that used for increases to pensions in payment. Deferred pensions are revalued when benefits come into payment or are transferred out of the Fund by reference to the entire period of deferment, rather than year-by-year. If inflation goes up again, could anyone stop us getting increases in future? The RPI-linked annual increase formula is protected both by the Trust Deed & Rules and by the 1995 Pensions Act. Neither the Trustee, nor ICI nor AkzoNobel can change this in relation to pensions already earned (although the Company does have some flexibility in relation to terms of future service benefits earned by people still working for ICI). The only people who could possibly change pension rights already earned would be Parliament. 3

4 Change to minimum retirement age For all active and deferred members of the Fund From April 2010 the minimum age from which members of the Fund can take their pension benefits will change, to comply with legislative requirements. The questions below aim to give affected members an understanding of the change. What is the change? From 6 April 2010, the minimum age from which pension benefits can be paid without incurring a tax penalty will rise from 50 to 55. The Fund must implement this change in order to keep paying pensions in the most tax-efficient way possible. The change was enacted in the Pensions Act Who is affected? The change will affect all members of the Fund who have not retired and received their pension benefits before 6 April There is no increase to the statutory minimum pension age for people who were already members of a scheme on 6 April 2006 (the date on which the Pensions Act 2004 change came into force) that entitled them to retire below the age of 55. This is known as a Protected Pension Age. Does the Fund have a Protected Pension Age? No. The Normal Retirement Age under the Fund is 65 for the majority of members. Members who leave employment may, in certain circumstances, receive their pension on or after the age of 50. However, early payment of benefits requires the agreement of the Trustee and is not therefore an entitlement. Consequently, the Fund does not have a Protected Pension Age for the purposes of the Pensions Act 2004 and so the Fund s minimum pension age must rise to 55 from 6 April What if I retire early due to ill health? If you satisfy the requirements in the rules of the Fund for an ill-health pension, this can still be paid below the statutory minimum pension age. What action do I need to take? If you will not have reached your 50th birthday before 6 April 2010, you do not need to take any action. You will just need to be aware that it will generally not be possible for you to retire and receive your pension benefits before you reach the age of 55. If your 50th birthday is before 6 April 2010 and you were planning on retiring before the age of 55, you should contact the Pensions Helpline as soon as possible, particularly if you have made Additional Voluntary Contributions, to discuss whether it will be possible for you to retire before the increase in your minimum pension age takes effect. Note that you will still need the Trustee s consent to retire before your Normal Retirement Age and your benefits will be reduced to reflect the fact that they are expected to be paid for longer. You can contact the Pensions Helpline using the details on page 11. 4

5 Investment strategy Spread of investments as at 31 March 2009 Inflation-protected bonds 56% Fixed-interest bonds 24% UK equities 3% Global equities 9% Emerging market/high yield bonds 8% The table below shows the performance of the investment managers over various timescales against the benchmarks set by the Trustee Board. The Fund s investment advisers and investment managers (details are shown on page 11) are appointed by the Trustee Board to provide expert professional advice on the Fund s investment strategy and to manage the Fund s investments. As you can see, this year the Fund performance was behind that of the benchmark. However, over longer periods of time, they have outperformed the benchmark. It s important to remember that investments should be considered over the long term and, naturally, economic events affect the returns in the short term. ICI Specialty Chemicals Pension Fund Performance vs Fund benchmark Year 2008/9 Last 3 years Last 5 years Actual 1.5% 4.1% 8.6% Benchmark 2.8% 3.9% 8.2% Investment review The Trustee Board decided on changes to the investment strategy during the year to 31 March 2009 in light of the relatively strong current funding position, the assessment of the ICI covenant and in order to match a proportion of the Fund s expected future liabilities. They decided to reduce the level of return-seeking assets from 30% to 20% by the end of September 2008 and to invest in more stable assets, such as inflation-protected bonds. The Trustee Board regularly reviews the Fund s investment strategy, balancing the necessary financial security to ensure liabilities can be met with the opportunities available for financial gain. The markets Last year saw a dramatic intensification of the credit crunch that started in Summer Over the year to 31 March 2009, the world s developed economies entered a period of severe recession. Although equity markets initially staged a cautious recovery during the second quarter of 2008, Autumn saw a return to uncertainty and a full-scale financial crisis with a major US investment bank (Lehman Brothers) going bankrupt and many UK banks needing rescue by the Government. The pressure on financial markets, combined with expectations of a global economic decline, caused a significant drop in the value of equities and poor performance in most other asset classes, such as property, bonds and cash. The future Recently there have been signs of economic recovery, and it s important to remember that financial markets go through ups and downs, meaning that pension investments should be viewed over the long term. There have been recessions in the past which have led to periods of recovery. Also remember, as a final salary member, your benefits are linked to your salary, not investment performance, so these falls do not directly affect your benefits. 5

6 How does investment performance affect my AVCs? If you pay Additional Voluntary Contributions (AVCs), the value of these is directly linked to the performance of the funds you chose, so you may be concerned about what this means for your pension. Ill-advised, short-term decisions may make things worse over the longer term; the important thing is to seek independent financial advice. If you re invested in a With-Profits Fund, remember that there can be significant exit penalties for switching out of these funds before the specified retirement date. If you are nearing retirement, these exit penalties may be quite significant compared with any advantage you might hope to get from changing to another arrangement; but you may also want greater certainty about what your AVC pot will provide. This is why taking your own independent advice is important different people will have different priorities. Actuarial update A major exercise for the Trustee over the last year has been completing an actuarial valuation of the Fund. The actuarial valuation is a formal review of the financial position of the Fund. It looks at the target level of assets held in the Fund and compares them to the benefit payments, which are expected to be provided from the Fund in future years, and the future level of employer contributions to achieve this funding target. Full actuarial valuations are typically undertaken every three years and the latest valuation of the Fund has been carried out as at 31 March Note: The Company and the Trustee are not permitted to give you any financial advice, so if you re considering changing your AVC investment options, we suggest you speak to an Independent Financial Adviser (IFA) by contacting IFA Promotion Ltd at: Contributing members If you have a query about your benefits, please contact your local HR Department. You can also ask questions by ing the Membership Secretary at: membership.secretarial@watsonwyatt.com David Donneky, Scheme Actuary Recent changes to pensions legislation have given trustees a new central role in the valuation process. This new funding regime is supervised by The Pensions Regulator, which ultimately can become involved in the valuation process for schemes where the trustees and employer fail to agree the funding arrangements. In line with the new legislation for the 2008 valuation, the Trustee and ICI have agreed the principles to be followed in establishing the target level of assets to be held in the Fund and the resulting employer contribution requirements. The funding target reflects assumptions about: how long pensions are expected to be paid from the Fund; and the future investment returns which may be anticipated on the Fund assets. 6

7 Given their inherent uncertainty, these assumptions have been set prudently and having regard for the extra security provided to the Fund through a letter of credit guarantee of some 95 million, and the reliance which the Trustee ultimately places on ICI supporting the Fund. The valuation results and agreed contribution arrangements were set out in a Summary Funding Statement, which the Trustee issued in August. The valuation disclosed a shortfall in the Fund assets compared with the funding target of 43.8 million, with Fund assets equal to 89% of the funding target. This shortfall includes an agreed allowance of some 20.3 million, specifically in respect of the deterioration in the financial position of the Fund after the valuation date, due to worldwide falls in financial markets. In the light of the funding shortfall, the Trustee and ICI have agreed a recovery plan under which contributions totalling 60.3 million will be paid over the next eight years, as follows: 9.2 million by 30 June 2009; 10.7 million by 31 March in 2010 and 2011; and 4.95 million by 31 March in 2012 to 2017 inclusive. The participating employers are also paying monthly contributions of just over 27% of pensionable salaries in respect of the cost of benefits arising from the future pensionable service of current employees. In addition, any costs and expenses met by the Fund (apart from investment expenses) will be reimbursed by participating employers. Accompanying this edition of Pensions Review is a further Summary Funding Statement from the Trustee, providing details of an approximate review of the funding position at 31 March Annual reviews help the Trustee monitor the agreed funding arrangements between formal actuarial valuations, which have to be undertaken at least every three years. Although the 2008 valuation included an agreed adjustment to the funding position, acknowledging the deterioration in investment markets after the valuation date and the need for increased shortfall contributions, over the year to 31 March 2009 the funding position has further deteriorated with the shortfall increasing from 43.8 million to 50 million. This deterioration is explained in part by the timing of the revised employers contributions to the Fund, as the monthly ongoing contributions (back-dated to the 2008 valuation date) commenced in July 2009, once the 2008 valuation was finalised but after the annual review date of 31 March Given the nature of occupational pension scheme funding arrangements, it is to be expected that there will be short-term fluctuations in the financial position of the Fund, which ultimately relies on the support of ICI and the additional security provided through a 95 million letter of credit issued by a bank as a form of guarantee. The contribution arrangements will be reviewed again as part of the next formal valuation, which is due to be completed as at 31 March I shall be reporting on developments affecting the financial position of the Fund as at 31 March 2010 and the results will be shared with members in the Trustee s annual Summary Funding Statement. David Donneky Scheme Actuary Watson Wyatt Limited 7

8 Being a Trustee Director Tony Atkinson, Pensioner In a recent interview with Tony Atkinson we asked him to share his experiences as a Trustee Director. Tony, who joined the board when it began back in 1998, was appointed for the second time in September Please provide an overview of your time at ICI. Most of my career was with Unilever and I moved to uest in 1985, more than 11 years before we were sold to ICI. uest was one of four companies that ICI purchased in 1997 and it operated in over 30 different countries. I was the UK Personnel Director during ICI ownership but at different times my roles have included international management development, graduate recruitment and development, and management remuneration. This is your second time as a Trustee; what interested you in becoming a Trustee both the first and second time around? When uest was bought by ICI there were a number of HR issues. The major one was the continuity of pension rights. It was decided that setting up a new fund that mirrored the Unilever scheme would be better than transferring into the main ICI Pension Fund and after being heavily involved in the transfer to the new Fund, it was a natural evolution to become a Trustee of the new ICI Specialty Chemicals Pension Fund. I retired in 2006 and was invited to join the Trustee Board for a second time in I had always enjoyed working with the Fund and being already half-trained or hopefully not having forgotten too much I decided to begin another term. What has changed since the last time? Since 1998 when it was first set up, the biggest change has been the make-up of the membership. We started with 100% active contributing members, now most of our members are pensioners and deferred members. This means the Fund has a very different focus our objectives are now more towards predictable investments which are not too exposed to market fluctuations. The secure financing of the Fund has always been important and is especially relevant in the current environment. The cost of financing the Fund has more than doubled over the last 11 years. We were pleased to be able to agree a nine-year recovery plan* with the Company this year. * More details of this can be found in the Summary Funding Statement accompanying the newsletter. Something that has not changed over the last 11 years is the support provided by the Pensions Secretariat and our professional advisers. Both in my first period as a Trustee and in rejoining the Trustee Board, I have found this tremendously valuable. What do you consider to be the three most important qualities of a trustee? Firstly I think you need a real interest in making the Fund work. Second, there needs to be a willingness to put in the hours being a trustee involves time and commitment to work through new propositions and detail. It takes you into areas that I have certainly found stretching, for example understanding all the different (and changing) investment vehicles was new and challenging for me. Finally, I think you have to have an ability to stand back from your personal background and apply the discipline to work as a trustee for all members of the Fund, rather than any specific section.

9 What do you think are the key challenges facing the UK pension industry or trustees over the next few years? For the overall pension industry I think the major challenge is funding, with the problems of lower investment returns, increased longevity and loss of tax relief driving many employers to seek lower cost alternatives in providing pensions. In our own case, the Fund has been closed to new members since 2000, and the challenge is to ensure secure funding of our known commitments. What are your interests outside of work and being a Trustee? I continue as a Governor of the local grammar school that our daughter attended. I came from a grammar school myself, both our children went to grammar schools and I have been a Governor now for 15 years. Our daughter now lives in Canada and our son is in New Zealand so travelling for my wife and myself is both an opportunity and a requirement. At home I keep myself busy with walking, gardening and decorating. Secretary s postbag &As Can I be sure that the Fund will look after my partner if I die before them? If you are married at the time of your death, your spouse will automatically be entitled to a pension based on your pension entitlement. If your spouse is more than 10 years younger than you, their pension is likely to be reduced. Since December 2005, Civil Partners may also have some rights. If you are not married or in a civil partnership but have a partner, they may still be able to obtain a nominated dependant s pension. However, this is not payable automatically. Your partner will have to apply for this benefit and show to the satisfaction of the Trustee that they meet all the relevant criteria. In broad terms, this means that they will have to show that they were wholly or partly financially dependent on you at the time of your death. Where a nominated dependant s pension is awarded, they may not receive the same level of pension as a spouse. Subject to these criteria, we will usually pay a nominated dependant s pension to the person listed on the Expression of Wish form completed by the member. However, the Trustee has the power to pay this pension to anyone it considers appropriate and who meets all the relevant criteria. Decisions regarding nominated dependants pensions are made based on your partner s eligibility at the time of your death, so we cannot say in advance whether they would qualify. I haven t filled in an Expression of Wish form do I need to? The Trustee has the power to award a nominated dependant s pension even if you haven t completed an Expression of Wish form. However, you should complete an Expression of Wish form so that the Fund is clear about your preference. It is also important to remember to update this form if your personal circumstances change. If you need a form, please contact the Membership Secretary, who will send you a copy. Alternatively, you can download a form from the Fund website at Why can t I just contact the Pensions Helpline to change my bank account/ address details? The Trustee takes the security of your personal information very seriously. Given the rise in identity fraud, it is prudent to continue with the current practice of requiring members to request changes to their details in writing with the signature of the relevant member. 9

10 Pension Protection Fund The Pension Protection Fund (PPF) has been set up to provide a degree of financial protection and security for eligible final salary pension scheme members, by providing compensation should their pension fund be wound up due to company insolvency. Our Fund is currently able to meet liabilities and there are no plans to wind it up, but it is useful for you to know what specified minimum benefits the PPF provides. Members are often unaware of what they are, or are not, entitled to in certain circumstances. The diagram opposite shows what benefits are payable by the PPF. Independent Financial Advisers The Trustee Board is, by law, unable to offer financial advice. If you would like financial guidance you can obtain information about an Independent Financial Adviser (IFA) at: PPF initial compensation level Are you over your normal Fund retirement age? Do you have an ill-health pension? Do you have a widow s/dependant s pension? Yes PPF compensation = 100% of ICISCPF pension No Is your pension entitlement at age 65 currently over 31,936 pa (before commutation)? No PPF compensation = 90% of ICISCPF pension (before commutation) Yes PPF compensation capped at 31,936 pa (before commutation) at age 65 or lower if younger Notes The PPF compensation cap is reviewed from time to time (eg in the light of inflation), but there is currently no guaranteed formula for increasing this. Subject to the cap, compensation for deferred pensions is increased in line with inflation up to a maximum of 5% (or 2.5% in respect of service after 5 April 2009). PPF annual increase compensation formula Did you leave service before 5 April 1997? Yes No increases on PPF compensation No PPF increases on service after 5 April 1997, but only for inflation up to 2.5% 10 We have done our best to make this chart a fair summary of the PPF compensation rules, but the Trustee cannot accept any responsibility for any discrepancy between this summary and the actual PPF rules, which may change. For full information on PPF compensation, see the PPF website at:

11 Trustee Board and Advisers Trustee Board at September 2009 The Law Debenture Pension Trust Corporation p.l.c. * (generally represented by Charles Morgan and/or David Felder) Tony Atkinson Adrian Dufton * Richard Eden-Green, MND John Murphy, MND * Secretary to the Board Pensions Secretariat Services Limited The Board uses two committees to help in the running of the Fund: Administration & Appeals Committee * Investment Committee Membership Secretary Lorraine Davey: Membership Secretary, Watson Wyatt Limited Principal Advisers at September 2009 Scheme Actuary: David Donneky, Watson Wyatt Limited Auditor: KPMG LLP Investment Adviser: Watson Wyatt Limited Investment Managers: Custodian: Solicitors: Ashmore Management Company Limited Barclays Global Investors Limited M&G Investment Management Limited PIMCO Europe Limited Southeastern Asset Management, Inc. JP Morgan Europe Limited Allen & Overy LLP Hammonds LLP Pensions Helpline If you have a query about your benefits you can contact the Pensions Helpline, which is operated by the Fund s administrator, Watson Wyatt, at: Tel: Address: ICI Pensions Services, PO Box 545, Redhill, Surrey, RH1 1YX The Pensions Helpline is open from , Monday to Friday. Please have your payroll number (on your payslip) with you when you call, as it will help us to trace your record quickly. Any change of address or change in bank details must be given in writing, due to the risk of fraud. The ICI Pensions Services team cannot alter these details without your signature. If you have a general query, you may wish to refer to the Trustee website at: 11

12 December 2009