Pension Playpen - The Honda Aga pension scheme comparison.pptx

Pension Playpen - The Honda Aga pension scheme comparison.pptx

• 1.
  Lessons of theAga Rangemaster, Honda and Rolls Royce Journeys to Full Funding and Beyond How to lose £500m in a few easy steps: Other strategies are available 2 September 2025 Actuaries: LDI: PRT: Discretion: Inflation: Member Outcomes
• 2.
  2 Well directed actuarialwork would bring about better member outcomes • Actuarial work and related investment consultancy lacking standards, disclosures and scrutiny has long been costly: stops lessons being learnt. • Ill-timed LDI investments were wasteful and are under analysed: The Honda strategy • “Get rid ASAP” is the all-pervasive culture for sponsor and trustees. Sector provides little analysis to support judgements: The Rolls Royce strategy • ABI’s continuing regulatory successes and promoting life insurers as “the quiet powerhouse” in enabled by the lack of actuarial analysis. What are members’ best interests? Scrutiny of the maths and disclosures for TAS300V2.1 could trigger reset. • Corrective available. Make “Run On 4 Goode” and maintaining the real inflation adjusted value of pensions a key purpose of exercising discretion. (PRT industry is based on avoiding the drop to PPF inflation caps and ignoring inflation above the scheme caps.)
• 3.
  Aga / HondaCase Study : Different Recipes 3 Aga £m Dec 2017 assets 934 contributions in 27 benefits out -338 Net 623 Dec 2023 assets 790 Investment gain/loss 167 Dec 2023 liabilities 760 • In 2018 Aga Rangemaster (Aga) and Honda Motor Europe (Honda) had DB pension schemes with assets of £930 million and accounts deficits of around £200 million. • Honda donated £500 million to the scheme in 2019. Honda’s fiduciary manager Mercer spent the money on LDI at the bottom of the interest rate cycle – LDI investments from 2018 to 2020 went from £140m to £730m. Aga kept to a funding and actuarial assumption run on plan, set when Middleby Corporation acquired the business. Nothing changed. • By 2024 Honda, after the £0.5 billion cash injection and having paid out £120m less that Aga to pensioners, the scheme should be much better off. • The Aga investment gain from 2018 to 2024 is £167 million; the Honda loss is £357 million. • Now Honda is giving the scheme to the LDI manager L&G in a buy-in for circa £800 million. A conclusion should be actuarial work and the Pension Risk Transfer market needs scrutiny and disclosures now so lessons are learnt. Penrose, Morris and Kingman. We hear you. Honda £m Mar 2018 assets 931 contributions in 571 benefits out -220 Net 1282 Mar 2024 assets 925 Investment gain/loss -357 Mar 2024 liabilities 836
• 4.
  4 The pension memberoutcome analysis : 2025 Sponsor with S75 contractual commitment and ring-fenced scheme in actuarial surplus and PPF stop loss and scope for discretionary payments to address high inflation reducing real value of pensions For new uncertainties Life insurer bulk annuity provided under looser solvency requirements and no stop loss FSCS with rising contingent commitments; no Government guarantee. PRA concerns re Bermuda funded re and Solvency Triggered Termination rights. No discretion. Think real not inflation capped nominal value of your pension Give up an excellent position and prospects
• 5.
  5 UK RPI %2019 onwards – Losses by inflation cap Inflation cap Total loss 2019-2024 0% -33.0% 2.5% -19.0% 3.6% -14.5% 5.0% -11.3% Pensioner perspective: • Risk of non-payment under 1% • Risk of real value decrease 100%
• 6.
  6 Life Insurer :Successful Streak : Selling “Absolute Confidence” Profits increased and Carats in Gold Standard reduced by Solvency UK • Matching adjustment reduces liabilities ( below Scheme's technical provisions) by including higher returning (self-certified) assets in discount rate calculation. • Risk margin sharply reduced under Solvency UK: 6% to 4% on unhedged assets. • Offshore longevity reinsurance and cash up front funded reinsurance allow life insurers “capital light” business models. Contractual Service Margin provides annual profit release. • ABI markets the “get rid ASAP mindset”. Lack of scrutiny of actuarial work means TAS300V2 comparison is deflected and “run-on” is run off the road. The 2025 pivot by ABI • Present life insurers as Quiet Powerhouse of economy. Provide own commissioned sector research. Surpluses returned to sponsor are a danger to members. Support for “run-on” and PPF insurer as an unnecessary cause of market disruption. Discretionary opportunity remains: Members’ upside and real pension value protection provided by Run On 4 Goode.
• 7.
  7 LDI: The Problem Leverage •The problem arose with leverage of the scheme assets. • This was illegal for the scheme fund, but not if the investment was in a fund using leverage. • For schemes using repo to fund LDI, the issue raised was collateral management – insufficient liquidity. • For schemes using LDI funds, the problem was not meeting a collateral call per se, but rather maintaining the level of the LDI hedge. • One effect of LDI funds, which were predominantly domiciled in Ireland and Luxembourg, is that they accounted for most of the increase in the ‘foreign’ ownership of gilts reported over the 2012 – 2022 period.
• 8.
  8 Some Issues withBulk Annuity Insurers • The capital committed by PRT insurers on new deals is extremely limited. The capital- light model of these insurers has recently been in the 1% - 3% of the buy-in premium. • Many schemes made deficit repair contributions larger than that. • The largest source of capital is the so-called matching adjustment. This takes as capital today, the margin over gilts of the asset held by the insurer bought with the premium paid by the scheme. Future profits are considered sources of capital today. • Solvency UK weakens the regulatory capital requirements place on bulk annuity insurers and encourages their use of longevity swaps and offshore funded reinsurance to further lower their solvency capital requirement. • One significant issue: STTR – Solvency-based (transaction) termination rights in bulk annuity transactions - £50 bn - £70 bn of the outstanding. – These clauses introduce a myriad of potential problems – such as return of assets or cash for the scheme – how calculated. Do I really want those assets the insurer bought from its private equity owner. – These introduce the possibility of self-fulfilling runs on bulk annuity insurers.
• 9.
  9 Rolls Royce: Thebuyout rationale and the alternative Chair Justification • “Much higher level of solvency than any UK company pension scheme” – better than sponsor backing for a scheme funded to gilts flat? • “Because insurance companies are required to invest in low-risk assets and hold high reserves, their funding test is higher” justifies premium – so no share of surplus for members? • Insurance sector unfunded scheme “designed to” provide back up for life insurers – will it? Sponsor Rationale • Costly distraction. Simplifies the business – no more for past and present employees. All winners. Large accounting loss accepted and cash from surpluses foregone. Scheme funding status Liabilities in scheme on AA corporate bond basis: £3.9 billion Assets in scheme on accounting basis: £4.7 billion Surplus to fund buyout: £0.8 billion Value Share alternative approach ensures upside for all Might have been: – 0.75% assets pa to fund discretionary DB pensions payment: £4.7 bn x 0.75% = £35.25 million. Current pensions £165m. Discretionary step up payment could cover recent value losses due to high inflation. – 0.75% assets pa to fund better DC pensions = £35.25 m (an extra 15% on DC payments of £228m.)
• 10.
  10 Standards and Scrutinyneeded now from ARGA (FRC) • Lack of scrutiny of actuarial work. Disclosures and analysis should be produced. Who lost how much in late cycle LDI? Longevity risk transfers have cost what? Comparison required under TAS300V2.1 P5 ignored. FRC to commission a Thematic Review. • TAS300V2.1 maths and governance to assess bulk transfers v run-on options provide new quality benchmark. Caps count: Calculate the gap to PPF and to actual inflation cover. • Protecting real, not nominal value of pensions should be trustee objective as part of a discretionary value sharing package. Provides rationale for scrutiny of actuarial work. • ABI and its members need more challenge by PRA and FCA on whether content of its presentations is verifiable. • FSCS reset needed by PRA given Solvency UK and changed life insurer systemic risks. Ensure Government, members and sponsors have the data to reset strategies. Do not allow the life insurers’ domination of the pension sector to be unquestioned. Government, sponsors and members showing sustained interest and much will self correct.
• 11.
  11 A Thematic Reviewwould have major impact • Government asks FRC, TPR and PRA to commission an exercise examining what information is used and is available to trustees when deciding on PRT deals. Comparing bulk transfers with “Credible Alternatives” is required of actuaries by TAS300V2.1 P5. Is it having an effect? • Exercise covers: – Information sources from transaction disclosures. – How value to stakeholders of bulk annuity proposals is reached set against status quo. – Quantification of actual value at risk to members and upside potential: fiduciary duties. – Weight given to discretion to use surplus / inflation losses. – Presentation of life insurer / FSCS risk. – Would a statutory Actuarial Standards Board be making a difference. • Findings to be factored into pension plans of PRA / FCA / CMA / TPR / PPF and into Pensions and ARGA Bills.
• 12.
  Aga / HondaCase Study 12 Aga £m Dec 2017 assets 934 contributions in 27 benefits out -338 Net 623 Dec 2023 assets 790 Investment gain/loss 167 Honda £m Mar 2018 assets 931 contributions in 571 benefits out -220 Net 1282 Mar 2024 assets 925 Investment gain/loss -357 Year Scheme Assets £m Liabilities £m Net Pension (deficit)/surplus £m Employer Contributions £m Benefits paid £m Aga-Dec / Honda-Mar Aga Honda Aga Honda Aga Honda Aga Honda Aga Honda Dec 2023 / Mar 2024 789.9 924.8 -760.1 -836.0 29.8 88.8 4.7 2.2 46.4 26.2 Dec 2022 / Mar 2023 766.6 996.0 -769.0 -810.0 -2.4 186.0 4.2 2.2 47.2 38.1 Dec 2021 / Mar 2022 969.1 1483.2 -1119.8 -1225.5 -150.7 257.7 3.4 2.1 46.1 47.7 Dec 2020 / Mar 2021 922.3 1515.8 -1248.3 -1353.1 -326.0 162.7 4.3 2.3 48.1 30.0 Dec 2019 / Mar 2020 914.3 1542.1 -1119.5 -1169.9 -205.2 372.2 4.5 247.9 47.8 29.1 Dec 2018 / Mar 2019 874.6 1189.3 -1059.9 -1236.00 -185.3 -46.7 3.5 257.0 53.0 26.2 Dec 2017 / Mar 2018 933.6 930.8 -1167.2 -1125.1 -233.6 -194.3 2.2 57.2 49.6 22.9 In 2018 Aga Rangemaster (Aga) and Honda Motor Europe (Honda) had DB pension schemes with asset of £930 million and accounts deficits of around £200 million. Honda donated £500 million to the scheme in 2019. Honda’s fiduciary manager Mercer spent the money on LDI at the bottom of the interest rate cycle. Aga kept to a run on plan. By 2024 Honda, after the £0.5 billion cash injection and having paid out £120m less that Aga to pensioners, the scheme should be much better off. The Aga investment gain from 2018 to 2024 is £167 million; the Honda loss is £357 million. Now Honda is giving the scheme to the LDI manager L&G in a buy-in for circa £800 million.
• 13.
  13 Aga / HondaScheme Asset Allocations March 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 Honda Scheme Assets £m £m £m £m £m £m £m £m £m £m UK Equities 56.5 54.9 55.8 44.3 47.3 Overseas equities 103.2 97.4 110.7 84.8 98.9 Liability driven investments 548.7 496.9 745.6 731.1 695.0 140.0 20.8 18.5 18.0 17.3 Non-government debt 57.1 157.9 110.0 105.5 161.9 147.9 242.2 226.7 187.7 161.7 Ground lease property fund 107.5 127.2 133.3 124.3 128.9 127.1 124.2 116.9 101.3 93.0 Infrastructure equity 168.7 164.4 158.5 147.2 Alternative alpha strategies 43.2 47.5 106.5 209.7 144.0 150.1 159.3 157.4 Alternative beta strategies 19.7 25.5 154.5 209.0 219.9 171.1 214.4 157.8 129.2 120.3 Distressed opportunities 12.3 19.3 14.2 8.8 Buy and maintain credit 0.27 0.285 68.9 69.2 69.8 Assets held by insurance company 25.1 23.2 23.8 22.6 20.3 18.3 Cash and net assets 10.5 4.5 55.0 73.1 133.4 210.5 6.1 5.9 3.8 2.2 Other 1.6 Total 924.8 996.0 1483.2 1515.7 1542.1 1189.2 927.8 865.0 748.7 716.4 Dec 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 Aga Scheme Assets £m £m £m £m £m £m £m £m £m £m UK Equities 2.6 2.5 2.9 4.6 76.1 118.3 126.8 69.4 56.6 Overseas Equities 83.8 70.0 105.2 100.6 129.8 81.4 108.3 111.7 96.0 497.7 Unquoted and Private equities 1.7 1.6 1.3 0.1 0.6 1.9 0.8 0.5 Other assets 36.9 154.4 142.1 140.8 206.6 73.9 107.2 86.9 172.2 Debt securities 543.2 422.1 538.9 528.5 344.7 454.3 450.8 506.7 366.0 257.5 Property 73.4 73.3 141.1 120.9 123.7 124.6 108.0 107.2 104.0 92.2 Cash & Equivalents 49.9 42.6 37.3 25.6 33.3 21.5 30.6 43.3 48.6 20.2 Total 789.8 766.6 969.1 922.3 914.3 874.6 933.6 926.0 843.9 867.6
• 14.
  14 Rolls Royce: PensionScheme History Dec 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 Total £m £m £m £m £m £m £m £m £m £m Assets 4737 5304 5215.0 9128.0 9762.0 9640.0 12773.0 13607.0 13350.0 11957.0 Liabilities -3958 -4537 -4621.0 -8010.0 -8879.0 -8499.0 -10847.0 -11499.0 -12014.0 -10914.0 Net Pension (deficit)/surplus 779.0 767.0 594.0 1118.0 883.0 1141.0 1926.0 2108.0 1336.0 1043.0 Employer Contributions 1 1.0 99.0 24.0 199.0 117.0 174.0 185.0 188.0 988.0 Benefits paid 165 142.0 329.0 768.0 816.0 571.0 585.0 533.0 430.0 417.0 4756.0 Admin costs 5 4 4.0 6.0 6.0 6.0 4.0 7.0 9.0 5.0 Current service cost 4 4 147 158 179 183 160 164 DC Contributions UK scheme only 228 195.0 154.0 146.0 80.0 66.0 41.0 33.0 29.0 33.0 1005.0 Discount rate 5.5 4.5 4.80 1.90 1.45 2.15 2.95 2.55 2.70 3.60 Inflation assumption RPI in payment 3.3 3.3 3.50 3.60 3.10 3.15 3.40 3.40 3.50 3.25 CPI in deferment 2.9 2.85 2.95 3.05 2.55 3.15 3.65 3.65 4.25 4.00 Mortality Male at 65 20.8 20.8 21.9 21.8 21.8 21.8 22.1 22.20 22.7 22.80 Female at 65 22.8 22.8 23.7 23.6 23.6 23.1 23.4 23.50 24.1 24.20 Male at 45 21.5 21.5 23.2 23.2 23.2 23.1 23.4 23.50 24.3 24.80 Female at 45 24.1 24.1 25.5 25.4 25.4 25.0 25.2 25.30 26.4 27.00
• 15.
  15 Rolls Royce: PensionScheme History Dec 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 Assets £m £m £m £m £m £m £m £m £m £m Sovereign debt 3335 3259 3574.0 5756.0 7220.0 5799.0 9388.0 9135.0 7574.0 7278.0 Corporate debt instruments 1860 1996 1492.0 3122.0 2878.0 3135.0 3447.0 3223.0 3061.0 1977.0 Interest rate swaps 197 170 196.0 54.0 52.0 14.0 1342.0 2266.0 2063.0 1868.0 Inflation swaps 92 86 212.0 106.0 -55.0 -18.0 -375.0 -480.0 -420.0 -477.0 Cash and similar instruments -1176 -892 -1066.0 -811.0 -1156.0 -784.0 -1991.0 -1761.0 -51.0 118.0 LDI 4308 4619 4408 8227 8939 8146 11811 12383 12227 10764 Longevity swap -292 -187 -175 -142 Listed equities 323.0 592.0 1141.0 969.0 810.0 Unlisted equities 25 32 40.0 54.0 64.0 95.0 128.0 162.0 214.0 232.0 Synthetic equities 20 -8.0 43.0 41.0 3.0 -13.0 Sovereign debt 110.0 Corporate debt instruments 379 630 772.0 802.0 709.0 662.0 548.0 100.0 24.0 Cash 25 8.0 25.0 68.0 Partial buy-in 408.0 Other 3 3.0 2.0 9.0 3.0 -1.0 90.0 91.0 Total 4737 5304 5215 9128 9762 9640 12773 13607 13350 11957 Asset Allocation