FirstGroup pension deficit rises by almost £7m to £313.4m

FirstGroup has reported a "broadly flat" pension deficit, after recording an increase of less than £7m to £313.4m in 2020 (£307.2m in 2019).

The group reported an operating loss before tax of £299.6m, acknowledging that there was "material uncertainty as to the continuation" of measures which have allowed the business to continue to operate throughout lockdown.

The group emphasised however, that its pension scheme deficit had remained "broadly flat", reflecting actions taken to de-risk the scheme and improve investment strategy.

Its company report for 2019/20, stated that assets had performed well over the period to 29 February, when a fall in global markets, occurring as a result of the coronavirus pandemic, reduced the value of some pension scheme assets.

It clarified however, that diversification and “timely de-risking actions” had mitigated the impact of falling equity prices.

Furthermore, the value on liabilities has also decreased due to “changes in financial conditions”, with the scheme highlighting lower levels of market implied inflation in particular.

It noted that this had been partially offset by changes in demographic assumptions and exchange rate movements, with a one year movement in life expectancy seeing a further £63m added to the scheme deficit.

A 0.1 per cent movement in discount rates and inflation also saw a reduction to the deficit of £28m, and an increase of £23m, respectively.

Over the past year, the trustee and the group also agreed the results of the 2019 funding valuation of the First UK Bus Pension Scheme, though documentation is still being finalised.

The funding deficit as at the valuation date (April 2019) had, however, reduced compared with the previous triennial valuation in April 2016.

The trustees and FirstGroup have therefore agreed a significantly shorter recovery period within which contributions will be paid to repair the deficit.

The group is also currently in the final stages of agreeing an updated long-term funding plan for the First UK Bus Pension Scheme, which will work towards a funding target that is “well aligned to the long-term targets articulated in The Pension Regulator’s (TPR’s) recently announced draft Funding Code”.

Reducing the level of asset risk will be central to this plan, and the group stated that it was “making good progress” in discussions around reducing the exposure to investment risk within the scheme “in a reasonably short time horizon”.

The completion of the 2019 funding valuation for the Greater Manchester Pension Fund also showed an improvement on the previous valuation.

This improved funding position will reportedly allow the group to stop paying additional secondary contributions to the scheme from the end of the 2020-21 financial year, as well as enabling the group to agree a “significant level of asset de-risking during the financial year”.

This de-risking saw the scheme reduce its exposure to assets that are primarily return-seeking), such as equities, from around 32 per cent to 19 per cent.

The group emphasised that the result of this funding valuation has “therefore been an immediate reduced cash requirement for the group, and reduced risk of continued cash requirements in the future”.

Over the past year, the group also took over the West Coast Partnership rail franchise, and in turn, its pension obligations.

However, it clarified that the risks associated with pension costs were “suitably reflected in the overall contract”, meaning that the group expects to be “sufficiently well protected against any adverse movements in scheme funding levels and cash contribution levels”.

It also explained that the low exposure to pensions risk across the rail franchises is reflected in the treatment on the group balance sheet, which reflects a zero surplus/deficit position for all franchises currently operated by the group.

The company also noted that TPR has been in discussion Railways Pension Scheme over the past year, regarding the long-term funding strategy of the scheme.

It emphasised that the scheme is an industry-wide arrangement, and that FirstGroup, together with other owning groups, has been participating in a review of the scheme funding, led by the Rail Delivery Group.

The report stated: "Whilst the review is still ongoing, changes to the current funding strategy are not expected in the short term.

"Whilst TPR believes that a higher level of funding is required in the long term, it is not possible at this stage to determine the impact to ongoing contribution requirements."

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