ValuationTalk. Results of the 2009 valuation of the Lafarge UK Pension Plan December 2010 PENSIONS

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1 ValuationTalk Results of the 2009 valuation of the Lafarge UK Pension Plan December 2010 PENSIONS

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3 Introduction The assets of the Lafarge UK Pension Plan ( the Plan ) are held separately from Lafarge. Every three years the Plan is required to undergo a valuation. The latest valuation was performed as at 30 June 2009 and was completed in December this year. The valuation provides a snapshot view of the Plan s funding position. It compares the value of the Plan s liabilities with the value of the Plan s assets, assessed at the same date and identifies any funding shortfall or surplus. Although there are a number of different ways to measure funding, the details given look at two methods: the Plan s ongoing basis, and a method applicable in the event that the Plan was to wind up (known as the solvency basis ). The Trustee discusses and agrees with the Company how to value the Plan s liabilities and, if there is a shortfall, agrees how the Company will meet this over time this is known as a Recovery Plan. They also agree the rate of contributions required to meet the benefits being built up in the future by current employees. 3

4 The valuation results in brief The main results of the valuation on the Plan s own ongoing basis at 30 June 2009 are summarised below: Value of past service liabilities Assets at market value Shortfall 2,491 million 1,877 million 614 million Funding level 75% Future service contribution rate 33% of Pensionable Pay The funding level has declined from the position confirmed previously. This is principally due to a decline in the value of the Plan s investments and the assumptions used to allow for longer life expectancy. Also, the expected cost of future pension provision for active members has increased and this has meant that increased employer contributions are required from 1 November

5 Meeting the shortfall The size of the shortfall at 30 June 2009 was 614 million. The Trustee has to balance the desire for the shortfall to be met as quickly as possible with what the Company can reasonably afford to pay. The Trustee took specialist advice to help it assess what was affordable, and following discussions with the Company this has resulted in an agreement for the Company to make a series of deficit contribution payments to the Plan to achieve full funding of the Plan on an ongoing basis over 21 years. Additional assurance As part of the discussions on how to value the liabilities and to structure the Recovery Plan, additional security (which would not normally have been directly available to the Plan) has also been provided by the Company. The value of this security is 200 million and some or all of it will be payable to the Plan if the Company fails to make the payments due under the Schedule of Contributions or Recovery Plan. In summary the Recovery Plan is made up of: Minimum guaranteed annual payments starting at 12 million and increasing to 25 million over time, and From 2012 additional annual payments based upon the financial performance of the employers. The valuation relates chiefly to active, deferred and pensioner members with Final Salary benefits. For PensionBuilderplus members, liabilities are equal to the accumulated balances held in each individual s investment account. 5

6 Valuation on a solvency basis Although neither the Trustee nor Lafarge has given any notice, or has any intention, of winding up the Plan, the Trustee is required by legislation to advise members what their position would be if the Plan had to be wound up. At 30 June 2009 the estimated amount identified by the Plan actuary, which is needed to ensure that all members benefits could have been paid in full if the Plan had started winding up, was approximately 3,143 million, a shortfall of 1,266 million. This is the measure which considers how much an insurance company would require in order to take over responsibility for the payment of benefits. Due to a number of factors, this is a very high amount and so there is a large shortfall on this measure. The shortfall is, in fact, the amount the employers would be required to pay into the Plan if the Plan was to be wound up. Pensions Regulator The Pensions Regulator has made no directions or imposed any schedule of contributions against the Plan. Pension Protection Fund The Government has set up the Pension Protection Fund (PPF) to pay benefits to members of Final Pay pension schemes in circumstances where the scheme is wound up and the scheme and the participating employers do not have enough money to cover the cost of buying all members PPF benefits with an insurance company. In these circumstances, the pension benefits you would receive from the PPF will be less than the full benefit you have earned in the Plan, depending on your age and when your benefits are earned. 6

7 Payments to Lafarge There has not been any payment to Lafarge or any participating employer out of Plan assets in the year to 30 June The importance of Lafarge s support The Trustee s objective is to have enough money in the Plan to provide full pensions now and in the future. However the success of the Plan relies on Lafarge continuing to support the Plan because: Lafarge UK will pay the balance of the cost of employed members benefits; The funding level can fluctuate as a result of changes in investment conditions and, where there is a funding shortfall at a valuation, Lafarge UK will need to put in more money; and The target funding level may turn out to be too low when the next valuation is conducted for instance as a result of improved life expectancy so that more money would need to be put in if benefits are to be provided in full. 7

8 A bit of detail the sectionalisation of the Plan When the former Blue Circle and Lafarge Redland schemes merged in October 2003 there was a continuing requirement to identify the assets and the liabilities of both groups of members in the sections separately. In effect, the Trustee had to carry out two valuations, one for each section. Until the 2009 valuation, there have been only slight variations between the two sections. At this valuation, as the two sections have matured at different rates, the variations are more marked and some of the outcomes of this valuation are therefore different. In particular, the funding levels of the two sections are different. The Lafarge Redland section has a funding level calculated on the ongoing basis of 78% (a shortfall of 22%) while the other section, formed mainly of former Blue Circle members, has a funding level of 74% (i.e. a shortfall of 26%). The payments due under the Recovery Plan will be apportioned between the two sections, with the aim that the Plan will achieve full funding in both sections at the same time, in approximately 21 years. Similarly, the contribution rates for active members for future service benefit accrual will now be different between the two sections but are on average 33% of Pensionable Pay. 8

9 What happens next? Now that the 2009 valuation is complete, and the Trustee and the Company have agreed the basis of the Recovery Plan, a number of actions are required: The valuation and Recovery Plan is sent to the Pensions Regulator who will check to see that it meets their requirements. From 1 November 2010, the employers have begun paying at the new contribution rate. In all cases, the contributions paid by employees in the Plan will remain unchanged at 10% of Pensionable Pay, with their employer meeting the difference. currently in the process of looking at the funding position a year on from the valuation (so, at 30 June 2010). We know the value of the Plan s assets has increased and it is possible the funding position may have improved slightly. This will all be clarified in the next issue of PensionsTalk which will include a new Summary Funding Statement, as well as the usual news and information, all of which will provide an update on the Plan s financial position as at 30 June By 31 December 2010 the Plan will be paid 12 million, being the next of the planned employer deficit contributions. We usually send you an annual newsletter (PensionsTalk) in December each year, but because we are sending you ValuationTalk now, PensionsTalk will be issued early next year. It should be noted that the actuary is 9

10 Trustee resolution to preserve powers to deal with payments to the Employers The Trustee currently has power to make payments from the Plan to the Employers in certain circumstances as set out in the Plan Rules. Due to changes in pensions legislation, the Trustee may lose these powers and needs to pass a resolution under Section 251 of the Pensions Act After consideration, the Trustee is satisfied that it is in the interests of Plan members to preserve these powers in their current form. It is the Trustee s intention to pass the resolution so that it takes effect on and from 5 April Before doing so, the Trustee has to give members at least three months notice which is why we are telling you about this now. The resolution will have no adverse effect on members benefits or the administration of the Plan. By passing the resolution, the Trustee is not giving the Employers any additional powers, nor is it agreeing to any specific payments. The Trustee is not seeking to expand the circumstances in which payments can be made to employers only to preserve the status quo. You need take no action as a result of this notice. 10

11 Glossary We have used a number of terms in this ValuationTalk which are explained in a little more detail below. Liabilities: the benefits (for active, deferred, pensioner and dependant members) which the Plan has an obligation to pay in the future. Company: we use this to mean, together, Lafarge SA and the Employers. Employer(s): the UK companies who have active members in the Plan. Value of the liabilities: the estimated amount of money needed now to meet the liabilities. Past service liabilities: the value of benefits earned by members up to the valuation date. Assets: the investments held by the Plan. Market value of assets: the price at which assets might reasonably be sold in an open market. Full funding: there are a number of ways to measure the Plan s funding level. In this ValuationTalk we use it to mean having sufficient money to meet the liabilities as they fall due assuming the Plan continues in its current form. Active members: employees who are members of the Plan and are continuing to build up benefits in the future. Deferred members: members who have left Lafarge but whose pension has not yet come in to payment. Pensioners: members who are in receipt of their pension. Dependants: members who did not work for Lafarge but who were dependent on someone who did and are now in receipt of a pension. 11

12 Where can I find out more? The details of the future service contribution, deficit contributions and additional funding payments are available on request to the Pensions Department. The following documents will also be made available on the Lafarge Pension website ( in due course: The Statement of Funding Principles The Recovery Plan The Schedule of Contributions. LAFARGE PENSIONS DEPARTMENT Lafarge UK Services Limited Regent House, Station Approach Dorking, Surrey RH4 1TH Tel: (pensioners and deferred pensioner members) (employee members) Fax: info@lafargeukpensions.com