UK - The Northern Rock pension scheme has announced it has a deficit of £100m, but trustees said they would consider a buyout before letting the scheme go to the Pension Protection Fund (PPF).
The letter stated: "A deficit - although it may appear alarming - does not represent any immediate risk to the payment of benefits; these continue being paid as normal."
Trustees added: "I must stress that the trustees do not currently anticipate that the PPF's involvement will arise."
The scheme actuary advised that the level of funding currently available to the scheme was expected to be sufficient to cover benefits at a higher level than would be provided by the PPF.
"So the current worst case scenario would most likely be some form of insured buyout that would protect pensions at a higher level than the PPF," the letter warned.
The trustees said they were aware if an insurance company buyout should become necessary and the scheme was to be wound up, significant additional funds would need to be paid into the scheme and the buyout deficit would be around £150m to £200m.
The "early steps" mentioned in the letter include the appointment of Penfida Partners, specialist corporate finance advisers to pension trustees, to work alongside Mayer Brown International, its legal advisers, and Watson Wyatt, its actuary and investment consultants.
It also appointed The Law Debenture Pension Trust Corporation as an independent professional trustee.
In mid-October trustees transferred all of the final salary section investments in quoted shares into government gilts, because of the uncertainty affecting Northern Rock.
Following this action, over 93% of the fund was invested in gilts, bonds and cash deposits, with the remainder represented by small holdings in property and private equity investments.
Following the change in investment strategy, the overall value of assets held to cover future Final Salary section benefit payments was around £355m.
The valuations carried out in April 2006 and April 2007 indicated the fund had a surplus, on the basis of assumptions appropriate at the time, but the significant deterioration in the financial position of Northern Rock led trustees to commission an updated valuation.
On the basis of more conservative assumptions and assuming its current prudent approach to future investment strategy would not change, the draft valuation showed a deficit of £100m.
The trustees stated they had also met with senior representatives of HM Treasury, Bank of England and the Financial Services Authority (FSA) at the end of November 2007 and have also been in regular contact with the Pensions Regulator.
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