BBC News: BP freezes pension contributions

BP is one of the few companies still offering a final salary scheme

Tuesday, 22 January 2008, 17:27 GMT 

Oil giant BP is the latest major company to announce it will make no contributions to its pension fund during 2008.

BP said the move followed its most recent annual valuation, which revealed that its pension fund was funded to 135% of its current liabilities.

Under the scheme’s rules, the company can stop making payments if the funding level is above 115%.

The move follows a similar announcement from Royal Dutch Shell.

Surplus

BP is one of the few companies offering a final salary scheme which remains open to new members.

The vast majority of the scheme’s 12,000 active members do not pay towards their pension, although it is possible to contribute a percentage of salary in return for enhanced benefits.

The trustee, company and scheme actuary will continue to monitor the funding level on a monthly basis

BP statement

According to the scheme’s latest actuarial valuation, the fund’s assets were £14.7bn in September 2007, compared with liabilities of £10.8bn.

Given the degree of overfunding, as is permitted under the scheme rules, the company announced it would not make any payments into the pension fund during 2008.

In a statement, BP said the fund’s finances would be closely watched throughout the year.

“The trustee, company and scheme actuary will continue to monitor the funding level on a monthly basis.

“If it has fallen below 115% when the scheme actuary certifies the funding level in his next annual assessment, then the company will resume contributions in 2009.”

Volatility

So-called pension contribution “holidays” are controversial.

They were common during the 1980s and 1990s as rising stock markets helped produce fund surpluses.

However, falling stock market returns around the turn of the century, combined with the introduction of a new accounting standard to calculate pension fund liabilities, pushed many funds into deficit.

Better stock market returns in the last five years have taken many schemes back into surplus, but their funding position remains volatile.

According to the latest monthly snapshot of scheme finances from the Pension Protection Fund (PPF), the UK’s 7,800 defined benefit schemes had a total shortfall of almost £20bn in December.

The figure was more than triple that recorded in November.

Some estimates suggest the record stock market falls seen earlier this week may have increased that total deficit by a further £15bn to £20bn, although that may reduce if markets recover.

‘Hotly disputed’

Shell reawakened the debate about pension contributions last year.

In an announcement to scheme members, it said its latest actuarial valuation, completed last March, showed the £12.1bn scheme to be heavily in surplus.

It said it therefore had agreed to a “temporary reduction in company contributions to zero”.

Paul McGlone, principal and actuary at Aon Consulting acknowledged the issue was “hotly disputed”, but insisted there were benefits.

“Shell and now BP’s announcement may seem radical, however this is not the case – this is a strategy that a number of smaller companies are already pursuing.

“It might not suit all schemes, but nowadays schemes are better able to stand any shocks to the system, and as schemes become increasingly mature, contributions become financially less significant than other factors such as investment strategy,” he added.

He predicted that other firms would follow BP and Shell’s lead.

http://news.bbc.co.uk/1/hi/business/7202577.stm
 

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