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IPE special report May 2018

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BAE targets £200m at UK DB scheme

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  • BAE targets £200m at UK DB scheme

UK/GLOBAL - BAE Systems, the defence manufacturer, has confirmed it plans to make additional cash contributions of £372m (€421m) to its defined benefit (DB) pension schemes in the UK and US.

The company stated in its 2008 results it also expects to make a further contribution of  £132m to the pension funds belonging to companies it acquired in 2008, including Tenix Defence, Detica and MTC, bringing the value of additional contributions up to £504m.

BAE's balance sheet showed the total net IAS19 deficit for its DB schemes in the UK and US, including US healthcare plans, increased from £2bn at the end of 2007 to £4.2bn at 31 December 2008, with the UK plans deficit rising from £1.9bn to £3.1bn.

However, the figures claimed the group's net share of the overall IAS19 deficit in the UK was £2.2bn in 2008, up from £1.1bn the previous year.

The company admitted the "difficult economic environment, and in particular the falls in equity markets in 2008, has affected the group's pension schemes", but stated scheme funding is regularly reviewed with trustees and "the agreed funding plans have been considered over the longer-term and are deemed to continue to be reasonable".

In the results presentation, George Rose, group finance director at BAE, said the firm operates four DB schemes in the UK, and a number of US plans, although the largest fund is the BAE 'main scheme' which at its last valuation in April 2008 had £7.4bn in assets and a £2.4bn deficit.

He highlighted the prime driver of the increased accounting deficit in 2008 was a £2.6bn reduction in the market value of assets held in the DB plans, which equates to a £3.7bn reduction "when compared to the level of returns expected".

Although this fall was "partially offset" by a 90 basis point change in real discount rates, which reduced liabilities by £1.6bn, Rose said the "prudent adoption of a 1% underpin to the rate of mortality improvement assumptions" had increased pension liabilities by a further £200m.

That said, he pointed out without the "fundamental restructuring" of pension funding arrangements undertaken in 2006 - including benefit reductions for employees, one-off contributions from BAE and higher ongoing contributions from both the firm and members - "funding would be much more of a significant issue".

Instead, Rose confirmed that following the actuarial valuation in April 2008, BAE had agreed with the main scheme trustees to continue its existing 20-year recovery plan, which has been accepted by The Pensions Regulator (TPR), although he admitted the company would make an additional £200m cash contribution in 2009.

Figures presented by Rose showed although the other three UK schemes, the 2000 plan, ROPS and SIPS, are all funded to between 90-104%, the main scheme was only 76%-funded as of last year, and was 70% invested in equities.

The finance director said in his presentation "provided there are no material negative developments in the company's covenant" the main scheme deficit recovery plan would next be reviewed in 2011, while the other three UK scheme recovery plans are scheduled for review in 2010.

Rose sought to reassure investors and analysts that "these deficit recovery plans do not materially constrain the group's ability to execute its strategy".

The US pension funds, meanwhile, which have a total deficit of $400m and are reviewed annually, will receive an additional cash contribution of $250m, or £172m, in 2009.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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