After a solution to save the Halcrow's DB scheme was ruled illegal by the High Court, the trustees are looking at an alternative option. Kristian Brunt-Seymour looks at the case.
At a glance
- Scheme has significant liabilities with £600m deficit
- Trustees had agreed on solution to create new scheme but High Court ruled it illegal
- Trustees are close to agreeing an alternative solution
Halcrow Pension Scheme is set to announce plans for a liability management exercise later this month after the High Court ruled a previous proposal was not legal.
The trustees and sponsor have been trying to find a solution for the sustainable funding of its defined benefit (DB) scheme, which has substantial liabilities.
Halcrow was acquired in 2011 by engineering company CH2M, which later discovered Halcrow was in a more distressed position than thought, with significant unrecognised pension liabilities alongside underfunded schemes.
A contribution schedule has not been agreed since 2011 and employer contributions are still being paid on the basis of the 2008 actuarial valuation.
Halcrow has not been self-sustaining since the acquisition, recording a profit of £5.9m in 2014 with net liabilities of £307m, according to the company's most recent figures. It has paid in excess of £50m into the scheme since the acquisition, but almost £500m will be required to secure benefits.
On 31 December 2015 one of the scheme's advisers, Towers Watson, calculated the deficit was £500m. However, the High Court said in its judgement that month the figure was £600m. The scheme also had a deficit on the Pension Protection Fund (PPF) basis of £226m.
The trustees and sponsor had agreed in 2015 on a proposed solution to support the company's growth and future investment, as well as avoiding the 3,300 members from entering the PPF.
This involved establishing a new scheme which would have the same trustees as the Halcrow Pension Scheme and provide identical benefits – with the exception that pensions in payment and deferment would increase at a lower level. Contributions would be £5.5m per annum, increasing in line with CPI and capped at 3%, plus expenses and PPF levy.
The new scheme was expected to provide members with better benefits than the PPF and would benefit from a guarantee from CH2M at a maximum of £120m. This would have involved winding down the Halcrow Pension Scheme and transferring the assets and liabilities to the new scheme.
The court's judgement said it had been suggested that unless this solution was implemented, this would likely result in Halcrow going into administration and the scheme would probably into the PPF.
However, in the Pollock vs. Reed case that started last August, the High Court said the proposed solution could not be approved. It ruled the wording of the pensions legislation meant members could not be transferred without giving their individual consent. However, Justice Sarah Asplin said had she taken a different view in relation to the legal issues, she would have approved the solution.
In a letter to its members last month, the trustee board said: "The key ongoing issue that Halcrow faces is the very substantial liabilities of the Halcrow Pension Scheme, which have been compounded by the issues that DB pension schemes are facing in the UK as a result of increasing longevity and low interest rates.
"After extensive confidential discussions – reflecting the sensitivity of the situation – and to protect the interests of the business and scheme members, both Halcrow and the trustees agreed that the only way forward was a restructuring of the Halcrow Pension Scheme liabilities to enable the Halcrow businesses to continue as going concerns.
"The parties are continuing since the court case to work together to find a different solution that still achieves the objectives of the original proposal.
"We hope soon to be able to communicate a positive outcome which will find a way through the funding difficulties the Halcrow Pension Scheme has faced over the years."
A CH2M spokesperson said: "Since acquisition, material contributions have been made to the Halcrow Pension Scheme to improve their funding levels and tackle the deficits in place at acquisition. CH2M and Halcrow continue to look for consensual ways to improve the funding position of the pension schemes."
Alternative rescue plan
The alternative proposed solution is expected to be announced in the coming few weeks. A spokesperson for Sackers which advised the trustees, said the trustees have worked hard in difficult circumstances to protect their members' interests.
"They took extensive advice and ultimately agreed to a proposal that they believed to be in the best interest of members. Part of the proposal involved seeking the court's ruling on the application of the Preservation Regulations – legislation that came into existence some 25 years ago, at a very different time for defined benefit pension schemes."
The spokesperson added though the court's ruling meant the proposal for Halcrow could not be implemented, it has given welcome clarity on the legal position.
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