Water companies have operated defined benefit (DB) pension schemes for their employees since privatisation. Within DB schemes, the benefits are defined, by means of a formula linked to service and salary with accrued benefits increasing over time in line with inflation or other measures as set out in the governing documentation (the Trust Deed). Whilst the benefits are defined, the cost to provide the benefits are not known in advance. The cost to deliver the benefits depends on how long members live and inflation, as well as the investment returns that can be earned on the assets held by the scheme.
At the price review in 2009, Ofwat set a pension deficit recovery period for each company. For some companies, the recovery period extends into 2020-25, Companies are generally allowed to recover 50% of the allowances established in 2009 from customers. However companies will not be allowed to recover remaining deficits from customers after this time and it will be wholly up to management and shareholders to find ways to deal with these amounts efficiently. This approach was followed for the price review in 2014 and will be followed for the 2019 review.
Although some companies’ schemes show a surplus, the majority do not and the management of these can impact the financial resilience of water companies.
In 2018, Ofwat commissioned a targeted review of company pension arrangements by Barnett Waddingham LLP, an independent UK consultancy, which we have published alongside the financial monitoring report. The review looked to better understand the key drivers for managing pension risk across the sector and to consider how approaches varied between companies.
The scope of the review considered both published information on all 17 English and Welsh water and waste water companies’ pension schemes together with data received from these companies in relation to scheme specific funding and pension risk mitigations taken (or considered) for the period from 2011 to end 2017. In addition the report considers comparator data obtained from the published accounts of FTSE350 companies with defined benefit pension schemes over the same period and the universe of defined benefit pension schemes as reported in the Purple Book published by The Pensions Regulator.