New British Steel Pension Scheme Actuarial factors Technical note This note has been prepared on behalf of the Trustee to help members of the New British Steel Pension Scheme (the Scheme ) and their financial advisers understand the assumptions and methodology that it is anticipated will be used to calculate early and late retirement pensions and cash equivalent transfer values for the Scheme. It also outlines the commutation factors used in calculating a member s tax free cash lump sum entitlement. All the information in this note is based upon the assumptions and methodologies that it is anticipated will be used to calculate these benefits from the time when members transfer into the Scheme, expected by 29 March 2018. They will be reviewed regularly for appropriateness by the Trustee and the Company (Tata Steel UK Limited), and are therefore subject to change in future. 1. Cash Equivalent Transfer Values ( CETVs ) Method of calculation A cash equivalent transfer value reflects the expected cost of providing future benefit payments from the Scheme to the member and their spouse. It is determined by the Trustee, having taken the advice of the Scheme Actuary. The following is a simplified description of the method used to calculate a member s CETV: 1. The benefits that are due to the member at their Normal Retirement Age are estimated. In most cases this will include an estimate of the annual increases that will apply to the deferred pension each year until the member s Normal Retirement Age, based upon unknown levels of future inflation. 2. The estimated cost of paying the benefits at and after Normal Retirement Age is then assessed. This calculation considers how the payments are expected to increase each year (often based upon unknown levels of inflation), how long the pension is expected to be paid for (based upon how long the member is likely to live after retirement), an estimate of the amount of spouses pension payments to be made after the death of the member, and how long the spouse s pension is expected to be paid for. 3. The estimated cost is adjusted to allow for the fact that the assets held by the Scheme are expected to increase each year with investment returns, and that these investment returns can be used to help pay for the member s benefits in future. The CETV calculation makes a number of assumptions about the future, including future expectations of investment returns on the Scheme s assets, expectations of future inflation, and expectations of life expectancy. The assumptions used are described below. Assumptions In line with the transfer regulations, the Trustee determines the method and assumptions to be used in the calculation, having taken advice from the Scheme Actuary. The regulations governing the calculation of transfer values stipulate that these assumptions should be on an overall best estimate basis (although there is flexibility for trustees to agree with the sponsoring employer to adopt a basis that produces higher transfer values than this minimum level, should they wish). The Trustee of the Scheme has chosen to adopt a best estimate basis, which means that the assumptions are set with the intention that there is an equal chance of actual future experience being more or less favourable than the assumptions.
The long-term assumptions to be used for calculating transfer values were set based on financial conditions as at 31 March 2017. Transfer values are calculated using these assumptions as shown in the table below, and are then adjusted to allow for the impact of changes in financial conditions since 31 March 2017. More detail regarding this adjustment is provided below. The assumed rate of investment return is set taking into account the Scheme s proposed long term investment strategy. This is to hold around 50% of Scheme assets in investment grade bonds, 30% in gilts (including a gilt-based derivatives portfolio), and the remaining amount in property and alternative low-risk investments. Demographic assumptions, such as mortality, are based on the main characteristics of members of the old British Steel Pension Scheme (the old Scheme ). In particular, the Trustee undertook a study of the mortality rates that were experienced by the old Scheme to help it derive a mortality assumption that is appropriate for new Scheme members. The method and assumptions used will be kept under regular review. A summary of the initial long-term financial assumptions is set out below: CETV assumptions Investment return (before and after retirement) 2.75 Pension increases in deferment: % pa - Main Section Pre 2006 (CPI) 2.60 - Acquisition Section Pre 2006 (CPI capped at 5% pa) 2.55 - Post 2006 / Pre 2012 accrual (CPI capped at 4% pa) 2.40 - Post 2012 / Pre 2016 accrual (CPI capped at 3% pa) 2.05 - Post 2016 accrual (CPI capped at 2.5% pa over whole deferment period) 2.50 - GMP Section 148 increases 4.60 Pension increases in payment: - Pre 1997 Nil - Post 1997 / Pre 2005 (CPI capped at 5% pa) 2.55 - Post 2005 (CPI capped at 2.5% pa) 1.85 - Post 88 GMPs (CPI capped at 3% pa) 2.05 Market value adjustments The investment return assumption set out above was set using market conditions as at 31 March 2017 and is adjusted having regard to changes in market conditions, namely gilt yields, at the date of the transfer value calculation, to reflect how the expected cost of providing benefits varies over time. For ease of administration, the transfer values are adjusted for changes in market conditions monthly using a Market Value Adjustment ( MVA ). The MVA depends upon the age of the member and financial conditions at the calculation date. The MVA represents the impact of movements in gilt yields compared since those at 31 March 2017, with fixed interest yields used to adjust the value of benefits that do not increase, and index-linked yields used to adjust the value of benefits that increase in line with inflation.
Mortality The transfer value calculations are unisex. Base mortality tables: The subset of the standard S2 series of tables, published by the CMI 1, relating to the experience of Self-Administered Pension Schemes for All Pensioners have been used. Mortality rates for members are in line with the male table and a multiplier of 115%, and mortality rates for spouses are line with the female table and a multiplier of 121%. The above base tables and multipliers are applied with mortality improvements from 2007 to 2016, based on the CMI 2015 Core Mortality Projection Model with a long-term rate of improvement of 1.50% pa. Mortality improvements from 2016 onwards are applied based on the CMI 2016 Core Mortality Projection Model with a long-term rate of improvement of 1.50% pa. Family statistics The age difference between members and spouses (male female) is assumed to be three years. The proportion of members assumed to have a spouse is 75% at Normal Retirement Age. Member options No allowance is made for commutation in the calculation of CETVs, in line with regulatory requirements. Other assumptions and allowances No allowance is made for any expenses associated with the transfer. No allowance is currently made for possible changes to benefits that may be required in future to ensure that the Scheme provisions in respect of Guaranteed Minimum Pensions do not unlawfully discriminate between male and female members. 2. Early Retirement Pensions Deferred members wishing to retire before their Normal Retirement Age ( NRA ) receive a lower pension than they would receive than if they retired at their NRA. This is to compensate for the fact that the pension is paid sooner and for a longer period of time. Early retirement pensions are determined on an individual basis and are calculated so that the expected cost of paying the early retirement pension for life is the same as the expected cost of paying the full pension from NRA. This calculation is undertaken by firstly calculating the member s CETV, and then converting this into an early retirement pension of equal value. The calculation uses the assumptions that underlie the CETV calculations, as set out in Section 1 of this note, except that no allowance is made for changes in market conditions since 31 March 2017. In order to provide an indication of the typical early retirement reductions that may apply, the following table sets out illustrative early retirement reductions across the different pension increase tranches for members with a Normal Retirement Age of 65. These indicative factors are relative to a member s pension revalued to their early retirement age. Please note that as the calculation is undertaken on an individual basis, in practice members may receive early retirement reductions that differ somewhat to those shown. In particular, these factors ignore the effect of any Guaranteed Minimum Pensions which can lead to quite different results (see below). These indicative factors should therefore be treated with caution. 1 The Continuous Mortality Investigation of the actuarial profession.
Age Early retirement reduction (% pension) Pre 1997 pension Post 1997/Pre 2005 pension Post 2005 pension 55 80 73 74 56 82 75 76 57 83 77 78 58 85 80 80 59 87 82 82 60 89 85 85 61 91 87 88 62 93 90 90 63 95 93 93 64 97 97 97 65 100 100 100 As a reminder, a member s early retirement pension is calculated by converting the value of the member s CETV into an early retirement pension, and the early retirement pension is therefore not calculated by revaluing the member s pension to early retirement date and applying the above early retirement factors. Restrictions due to Guaranteed Minimum Pensions A member s pre-1997 early retirement pension may be restricted if the early retirement pension isn t expected to be large enough to provide the amount of a member s Guaranteed Minimum Pension ( GMP ) when it comes into payment at GMP Age (60/65 for females/males respectively). In this scenario, the early retirement pension would be reduced, but then the member would receive an increase, or step up to their pension at GMP Age, so that the pension at GMP Age is equal to the member s GMP. 3. Late Retirement Pensions Deferred members may opt to retire after their Normal Retirement Age, in which case an uplift is applied to their pension to compensate for the fact that the pension is paid later and for a shorter period of time. The Scheme s late retirement factors have been set using the assumptions that underlie the CETV calculations, as set out in Section 1 of this note, except that no allowance is made for changes in market conditions since 31 March 2017. Different late retirement factors are applied to each pension tranche as outlined in the following table. Pension Tranche Late retirement uplift per quarter after NRA (simple) Pre 1997 pension 0.750% Post 1997 / Pre 2005 pension 1.000% Post 2005 pension 0.875% An additional uplift is then applied to allow for any pension increases that the member would have received had they retired at their NRA. 4. Commutation Factors Members are entitled to give up some of their pension on retirement in exchange for a tax-free cash lump sum. The maximum lump sum a member is entitled to is subject to limits set by HMRC.
The following table sets out the initial commutation factors that will be used to calculate the tax free cash lump sums and resulting residual pensions in the Scheme. Age Pre-6 April 1997 service Post-5 April 1997 / Pre-6 April 2005 service Post-5 April 2005 service 55 15.3 20.9 19.0 56 15.1 20.5 18.6 57 14.9 20.0 18.3 58 14.6 19.5 17.9 59 14.4 19.1 17.5 60 14.1 18.6 17.1 61 13.8 18.1 16.7 62 13.5 17.6 16.2 63 13.2 17.1 15.8 64 12.9 16.6 15.4 65 12.6 16.1 14.9 66 12.3 15.6 14.5 67 12.0 15.1 14.1 68 11.7 14.5 13.6 69 11.4 14.0 13.2 70 11.0 13.5 12.7 Note that these factors are fixed, in that they do not vary according to market conditions at the date of the member s retirement. In addition, any exchange of pension for cash will be taken from all tranches of pension in equal proportions (subject to any restraints caused by Guaranteed Minimum Pensions). Towers Watson Limited, a Willis Towers Watson Company 2 November 2017 Towers Watson Limited (Willis Towers Watson) has addressed this material to the Trustee of the New British Steel Pension Scheme ( you ) for the purpose of responding to member queries under the terms of our agreement with you. It may not be suitable for use in any other context, for any other purpose or by any other party; we accept no responsibility for any such use. Any reliance placed on this material for another purpose, or by other parties is entirely at their own risk. This material should not be shared with any third party unless we agree in writing. This material is based on information available to Willis Towers Watson at the date of this material, and takes no account of subsequent developments. In preparing this material we have relied upon data supplied to us by third parties. Whilst reasonable care has been taken to gauge the reliability of this data, we provide no guarantee as to the accuracy or completeness of this data and Willis Towers Watson accepts no responsibility and will not be liable for any errors or misrepresentations in the data made by any third party. The technical actuarial work involved in the preparation of this material complies with the Financial Reporting Council s Technical Actuarial Standards TAS 100 and TAS 300. For TAS purposes, the sole user of this material is the Trustee of the New British Steel Pension Scheme.