LCP 2017 pensionswatch A SUMMARY REPORT AND ACCOUNTS FOR THE MEMBERS OF ARMSTRONG PENSION SCHEME ("THE SCHEME") DECEMBER 2017 Welcome Welcome to the latest edition of the Armstrong Pension Scheme newsletter. Since last writing to you in August 2016, investment markets have continued to be fairly volatile, in particular due to continued uncertainty surrounding Brexit. The Scheme continues to hold a large portfolio of assets intended to move in line with the liabilities. This protection against market movements along with positive returns on the Scheme s return seeking assets has enabled the Scheme to benefit from its own significant favourable investment returns in the current environment. So the funding level of the Scheme has, in the main, been protected from this market volatility although some volatility remains. We expect the volatility in global investment markets to remain, in the short term at least, as markets take time to settle and terms of the UK's exit from the European Union become clear. Some of you may have seen in the press that the parent company of Armstrong World Industries Limited has entered into an agreement to sell some of its businesses to the Knauf Group. We have provided more information on this on page 5. An actuarial valuation of the Scheme is carried out every three years and has recently been completed with an effective date of 31 December 2016. The valuation is a legal requirement and has two main purposes, firstly to assess the funding position of the Scheme and secondly to form the basis of determining the contributions to be paid into the Scheme to make good any deficit over an agreed period. The results of the actuarial valuation show an improved funding level of 104% compared to the previous update (96%). Despite being fully funded on the valuation basis, the Company has demonstrated its continued support to the Scheme and has agreed to pay contributions of 0.9m annually until 31 December 2020 to further improve the funding level of the Scheme and to cover ongoing expenses. Further details can be found on page 7 and an update of the investment performance of the Scheme on page 3. As you are aware, significant changes to pension rules came into effect from 6 April 2015. Most of these changes are designed to increase the flexibility and choice for members of defined contribution (DC) pension schemes, but as a member of a scheme with defined benefits (DB) you could take advantage of the new flexibilities such as pension drawdown by transferring your Scheme benefits to a DC arrangement. Since this change to the pensions environment more and more members have become interested in transfer values and we have included some information about transfer value calculations and how they can change over time on page 4. We have included a reminder on page 5 of this newsletter of the information that is available to you as a member of the Scheme. Find out about... P2 YOUR SCHEME REPORT & ACCOUNTS P3 UPDATE ON SCHEME INVESTMENTS P4 ADMINISTRATION UPDATE P7 FORMAL VALUATION OF THE SCHEME P8 WHAT ELSE?
Your Scheme Report & Accounts Financial highlights for the year ending 31 December 2016 Defined benefit net assets 1 January 2016 124.46m 2016 IN Company contributions Investment growth (after costs) 1.38m 29.57m Membership As at 31 December 2016 0 Actives 435 Deferred members 877 Pensioners Another 100 annuitant pensioners are paid directly by Legal & General. 30.95m 2016 OUT Pensions paid monthly Pension lump sums Member transfers Administration expenses 3.91m 0.95m 0.43m 0.38m 5.67m Defined benefit net assets 31 December 2016 149.74m (includes AVCs) pensionswatch 2
Update on Scheme investments LCP 2017 Investment commentary Since last writing to you the Trustees decided to increase further the investment in the BlackRock Liability Matching Funds to increase the level of interest rate and inflation protection in the Scheme. This is in addition to the increase applied in 2015, leading to more protection against adverse movements in market conditions. Market conditions deteriorated considerably during 2016, heightened by the economic uncertainty followed from both the EU referendum result and the US presidential election. The allocation to the BlackRock Liability Matching Funds has benefited the Scheme considerably by protecting against a potential significant rise in the deficit as a result of these events. Throughout the year the Trustees meet to review performance against the benchmarks set and the development of the investment strategy. The Trustees are chaired by the Independent Trustee and the investment consultant is in attendance. The Trustees are currently reviewing the investment strategy now the 2016 triennial actuarial valuation is complete. An update will be provided in the 2018 newsletter. % return pa HOW THE INVESTMENTS PERFORMED IN RECENT YEARS 25 20 15 10 5 0 24.724.6 14.314.2 Over 1 year Over 3 years Over 5 years Over 10 years Performance at 31 December 2016 Scheme performance Benchmark performance 11.811.6 7.8 7.5 How the Scheme assets are invested Multi Asset Absolute Return funds are designed to deliver positive returns whether markets are rising or falling. To do so they use a wide variety of assets such as equities, bonds, property and cash. Multi Assets Absolute return 24% Property 7.5% Property refers to a range of commercial investments across the office, retail and industrial sectors. Absolute Return Bonds are designed to deliver positive returns whether bond markets are rising or falling. To do so they use a wide variety bond type assets and cash and are lower risk than the Multi Asset Absolute Return funds. Equities are shares in companies. Absolute Return Bonds 20% Liability Driven Investments 35.0% Global equities 13.5% Liability Driven Investment (LDI) funds are focussed on aligning assets to liabilities more closely. pensionswatch 3
Administration update What's been happening Your 2017/18 pension The increases that may apply to certain parts of your pension with effect from 1 April each year are based on inflation measured by the Consumer Prices Index (CPI) over the year to the previous September. CPI to September 2016 was 1.0% therefore this increase was applied to pensions, which were subject to increase, with effect from 1 April 2017. Similarly, increases applied with effect from 1 April 2018 will be in line with CPI to September 2017 which was 3.0%. Please contact a member of the administration team at LCP if you have any questions regarding your pension. Alternatively, there is further information about the Scheme on the member website. Budget News A reminder Since April 2015, the Government has relaxed the rules surrounding DC savings, giving people more freedom as to how they can take their benefits so long as the DC provider gives access to the relaxed rules. Here is a refresher of the key points: You no longer have to purchase an annuity with your DC savings (though you can if you wish to). You can choose to take your entire DC fund as cash. You can take an income as and when you want to and continue investing with the rest (known as income drawdown). For all these options, you can take up to 25% as a tax-free cash sum (under current law). You can mix and match any of these options to suit your circumstances. For example, you could withdraw 25% as a tax-free cash sum and leave the rest invested as part of income drawdown. The Armstrong Pension Scheme is not a DC arrangement so these flexibilities do not apply to your Scheme benefits directly. However, you will be able to take advantage of the increased choice and flexibility, if you so wish, by transferring your Scheme benefits to a DC pension arrangement, such as a personal pension plan, which offers the new flexibilities (not all DC arrangements will offer the new flexibilities). Experience since April 2015 shows that an increasing number of people are transferring benefits from DB arrangements like the Armstrong Pension Scheme to access these flexibilities. Indeed, approximately 80,000 people across the UK transferred their benefits over the year to 31 March 2017. Transfer values some important points to note You are entitled to one transfer value quotation free of charge every 12 months. There will be a charge for further requests in a 12 month period. A transfer value quote is guaranteed for a 3 month period. Within this 3 month period you must confirm in writing your intention to transfer out of the Scheme and the arrangement you wish to transfer to. This is a strict deadline and if you make a decision after this 3 month period you will have to request a new transfer value and if that is within 12 months of a previous quote there will be a charge. The transfer value must be paid within a 6 month period from the date at which the value was calculated (the Guarantee Date ). If the value of your DB benefits is more than 30,000 you will need to seek appropriate independent financial advice. This is a legal requirement. We will require, within the 3 month period, a statement from your adviser confirming that they have given you advice in relation to the proposed transfer and that they are appropriately authorised to do so. The basis for calculating your transfer value changes from one month to another to allow for changing financial conditions. For example, if interest rates rise then it is likely that your transfer value will fall. The Trustees also review the basis of calculation periodically to ensure that the basis remains appropriate given the Scheme s investment strategy. Therefore it is possible for your transfer value to rise or fall, sometimes by a significant amount, during the period between quotes. Expression of Wish The Expression of Wish is your nomination of the person(s) you would like to receive any lump sum benefits payable from the Scheme following your death. You can nominate anyone to receive such a lump sum and it may be split between as many people as you wish. The choice of recipient(s) is at the Trustees discretion but your wishes will be taken into account. To update your nomination(s) you can visit http://armstrong.lcp.uk.com/ to find the form. Please return the completed form in a separate sealed envelope by post to Lane Clark & Peacock LLP. pensionswatch 4
Armstrong World Industries Inc agrees to sell its businesses in Europe (including the UK) Some of you may have seen in the press that the US parent company of Armstrong World Industries Limited (Armstrong World Industries Inc) has entered into an agreement to sell its businesses in Asia, Europe the Middle East and Africa ( EMEA ) to the Knauf Group; this includes Armstrong World Industries Limited (the UK company). Enclosed with this newsletter is an announcement that explains that as part of the sale agreement the Knauf Group will assume full responsibility for the pension plans in EMEA. It is the UK Company that has the legal obligation to fund the Armstrong Pension Scheme and this continues to be the case after the transaction completes. You will see from the information in this newsletter that the Scheme is in a very good funding position, supported by a strong company and we can reassure you that the Trustees regularly and independently monitor the financial strength of the UK Company in the context of the pension scheme as part of their routine governance. Pension fraud Unfortunately, the new freedoms for DC pensions may have created confusion which can be easily exploited by fraudsters. You can normally only take your pension after your 55th birthday, so please be wary of anyone who says they can help you cash in your pension early by transferring it to another arrangement. Whilst everything may seem legitimate, you may find yourself subject to a hefty tax charge and the loss of some, or even all, of your savings. The Pensions Regulator has produced an updated guide to spotting potential pension scams, 'Scamproof your savings' which covers what to do if you suspect a scam and who to contact. Visit www. thepensionsregulator.gov.uk to download a free copy. You can report any offer you think is fraudulent to Action Fraud on 0300 123 2040. If you have been asked for personal information relating to your Armstrong pension and you think this may be a scam, please contact the administration team using the contact details below. Contact details What to ask for and when As Trustees we thought it would be useful to remind you what information is available automatically to you and when to help you decide what information you need and when to ask for it. Under the current disclosure regulations, members are entitled to ask for a transfer value quotation free of charge once every 12 months. If you require an additional transfer value within the 12 month period, please contact the Scheme s administrators for further information as a charge will be payable. At normal retirement, the Scheme s administrators will automatically try and contact you broadly six months before your normal retirement date asking you to complete identity checks before providing you with an estimate of your benefits and options available at your normal retirement date. Please make sure you keep us up to date with any changes in your address so that we can contact you with information regarding your benefits in the Scheme. For those members that wish to consider early retirement or late retirement (this is subject to both Trustee and Company consent), as with a request for a transfer value, you can ask for one quotation every 12 months free of charge. A charge will be applied for any additional retirement requests received within the 12 month period, so please contact the Scheme s administrators for further information before requesting further quotations. The recent changes to pension rules have introduced additional options for members. We understand and encourage the need to seek financial advice before making any decisions. The Scheme s administrators have produced a benefit summary that can be provided on request to you or your financial adviser. Please note that a charge may be applied for any additional requests for information. Brexit It is now over a year since the UK voted to leave the EU. In March this year, the Prime Minister, Theresa May, wrote to the EU, triggering Article 50 and confirming the intent of the UK to leave within the next two years. Negotiations regarding how the UK leaves and its future trading relationship with the EU are at a very early stage. At the moment, it's difficult to know how discussions will affect investment markets and pension fund investments, but the markets are likely to remain volatile for the foreseeable future, reflecting the uncertainty. The Trustees will continue to monitor developments closely with its advisers. Tel: 01962 870060 Email: ArmstrongAdmin@lcp.uk.com Website: http://armstrong.lcp.uk.com pensionswatch 5
Data protection changes In order to administer the Scheme, we as the Trustees, our advisors and administrators need access to personal details about you as members and your dependants. The Data Protection Act (DPA) 1998 currently governs how we use and store your personal details. However, a new set of regulations, The General Data Protection Regulations (GDPR), is due to come into effect from May 2018. The GDPR is the biggest shake-up of European data privacy laws for twenty years. While many aspects of the GDPR are similar to the current rules, it strengthens the law and introduces a number of new protections. The position is unlikely to change as a result of Brexit. We will be revisiting our data collection, security and handling processes and member communication materials to take all steps necessary to ensure we (and our administrators and advisers) continue to meet the expectations set out in the data privacy laws. We will be contacting you again about this over coming months so that you understand how we may use your personal data, and what new rights you will have once the current data protection laws are replaced by the GDPR. Pension taxation The Government limits the amount of pensions savings you can make while still benefitting from tax relief and these limits have recently changed. For many people, the changes will have little or no impact. But some people will need to consider these changes carefully, particularly those who have already built up large pension benefits and savings, and those who are saving or earning large amounts in their pension schemes. Lifetime allowance (LTA) reduction Just before pension scheme benefits are paid they are assessed against the LTA. If the total value is more than the LTA, extra tax will be due on the excess: broadly at 55% instead of your rate of income tax. The LTA is currently set at 1 million, but will start increasing with inflation with effect from April 2018. The LTA will primarily affect those with larger pension benefits and savings. Such people may be able to retain an LTA larger than 1m if they have special protection from HMRC. Annual Allowance (AA) reduction Annual pension savings which total more than the AA will incur a tax charge payable upfront. Extra tax is due only on any savings in excess of the AA; that tax is payable at an individual s marginal rate of income tax. The AA is remaining at 40,000 for most people. However, with effect from April 2016, a lower AA was introduced for higher earners. This charge may affect you if you earn 110,000 a year or more. Money purchase (MPAA) annual allowance The MPAA was set at 10,000 when it was introduced, but the Government has confirmed that this will reduce to 4,000 from tax year 2017/18. If you have accessed pension savings from a DC arrangement and your annual contributions continue at a level above 4,000 then you may be affected by this change. If you think you may be affected, you should: Collect information from your pension schemes Speak to your employer s pension team Consider taking appropriate independent advice. pensionswatch 6
Formal valuation of the Scheme At 31 December 2016 The actuarial valuation of the Scheme with an effective date of 31 December 2016 was completed in August 2017. The valuation has two main purposes, firstly to assess the funding position of the Scheme taking into account its experience since the previous December 2013 actuarial valuation, and secondly to form the basis of determining the contributions to be paid into the Scheme to make good any deficit, if one exists, over an agreed period. These contributions need to be agreed between the Trustees and the sponsoring employer, Armstrong World Industries Ltd. The valuation revealed a surplus of 5.1m (compared to a deficit of 5.6m at the previous update issued with an effective date of 31 December 2015). The main reasons for this change was the positive experience captured as part of the formal actuarial valuation along with strong returns on the Scheme s investments and deficit contributions made by the Company. The Company continues to show its support to the Scheme by agreeing future contributions with the Trustees that intend to further strengthen the funding level. The Trustees aim to target a self-sufficient level of funding one that will enable the Scheme to support itself with no future financial support from the Company. To help achieve this target and cover future expenses the Company agreed to pay 0.9m pa until 31 December 2020. This commitment will be reviewed if the Scheme reaches their self-sufficient funding target before 31 December 2020. Formal valuation results at 31 December 2016: Assets Liabilities* Surplus 148.9m 143.8m 5.1m Funding level 104% *ie the amount assessed as needed to provide benefits, allowing for expected investment returns on the Scheme s assets Regulations require us to confirm to you whether the Company has taken any money out of the Scheme since the date of our last newsletter. We can confirm that they have not. We also confirm that the Scheme has not been modified over the last year nor is it subject to any direction or Schedule of Contributions imposed by the Pensions Regulator. Employer covenant As part of the valuation process, the Trustees need to consider the financial ability and willingness of the sponsoring employer to fund the Scheme s benefits this is known as the employer covenant. Assessing the strength of the employer covenant helps the Trustees to determine both the degree of prudence to incorporate in the funding target for the valuation, and the period over which any funding deficit, if applicable, should be met by additional employer contributions. During the valuation as at 31 December 2016 the Trustees undertook an independent review of the employer covenant to help them understand the Company s financial position and prospects. The review concluded that there had been no material change in the employer covenant in the period since the previous review. What affects the funding level? The Trustees monitor the funding position between valuations, reviewing how the assets and liabilities have changed. There are several reasons why the assets and liabilities change over time. In general, the Scheme s assets increase if investment performance is good and as contributions are paid in. The assets reduce if investment performance has been poor and as benefits are paid out to members. The liabilities increase each year as members get closer to retirement. The liabilities would also increase if economic conditions become less favourable (eg higher inflation) which makes benefits more expensive to provide. Liabilities are reduced if economic conditions become more favourable and also reduce as benefits are paid out to members. The value of liabilities will also be affected if experience turns out better or worse than had been previously assumed when assessing the current liability value. 7 pensionswatch
What would happen if the Scheme started to wind up? There are no current plans to wind up the Scheme, but we are required to tell you how much money an insurance company would have required as a premium to guarantee to make all the payments to the members. At 31 December 2016, the estimated amount that the insurance company would require was 196.3m compared with the assets at that time of 148.9m. In the event of a wind up, it may be the case that the Company and Pension Scheme are unable to pay the full amount required by the insurance company. If the Company became insolvent, the Pension Protection Fund (PPF) might be able to take over the Pension Scheme and pay compensation to members. The PPF has been set up by the Government to help protect members pensions where a company becomes insolvent, although it does not guarantee to pay full benefits. Further information and guidance is available on the PPF s website at www.pensionprotectionfund.org.uk, or you can write to the Pension Protection Fund at Renaissance, 12 Dingwall Road, Croydon, Surrey, CR0 2NA. If the Scheme had more than enough money to buy-out the benefits in full a refund could be paid to the Company. No such payment from the Scheme has ever been made to the Company. What else? Where can I get further information? If you have any other questions, or would like any more information about the Scheme, please contact the administration team at LCP using the details on page 5. Please help us to keep in touch with you by telling us if you change address. Useful documents Documents which provide more information about the Scheme are listed below and available on request. STATEMENT OF INVESTMENT PRINCIPLES Explains how the Trustees invest the money paid into the Scheme. SCHEDULE OF CONTRIBUTIONS Shows how much money is being paid into the Scheme. ANNUAL REPORT AND ACCOUNTS OF THE SCHEME Shows the Scheme's assets, income and expenditure. FULL REPORT ON THE ACTUARIAL VALUATION Provide more details on the check of the Scheme's funding as at 31 December 2016. What do you think of pensionswatch? Useful contacts GOV.UK www.gov.uk PENSIONS REGULATOR www.thepensionsregulator.gov.uk TPAS www.pensionsadvisoryservice.org.uk PENSIONS OMBUDSMAN www.pension-ombudsman.org.uk INDEPENDENT FA www.unbiased.co.uk AGE UK www.ageuk.org.uk The Trustees HR Trustees (represented by Mark Fletcher), Ian Rose, and Graham Taylor Supporting the Trustees PENSIONS ADMINISTRATOR Lane Clark & Peacock LLP, St Paul's House, St Paul's Hill, Winchester, SO22 5AB SCHEME ACTUARY AND SECRETARY TO THE TRUSTEES Nick Clark and Jim Little, LCP LLP, St Paul s House, St Paul s Hill, Winchester SO22 5AB INVESTMENT CONSULTANTS Kenneth Ettles, Aon Hewitt, 40 Torphichen Street, Edinburgh, EH3 8JB. LEGAL ADVISORS Kate Atkinson, Baker & McKenzie LLP, 100 New Bridge Street, London EC4V 6JA. Email us at ArmstrongAdmin@lcp.uk.com pensionswatch 8