UK - Dairy Crest has revealed it is in consultation with staff regarding the future of its defined benefit (DB) scheme, after completing a second buy-in of pensioner liabilities.

The food company insured half of its liabilities In December for pensions in payment of those members who retired before August 2008 through a buy-in with Legal & General, but it has now completed a second bulk annuity policy with the insurer.

The new deal, valued at £160m (€189m), means the liability for members who retired before August 2008 are "now fully matched by an insurance policy" and both the pension fund and Dairy Crest are "protected against financial and demographic pension risk for these liabilities".

Dairy Crest said the buy-in had been split into two because the scheme is "locking into certain market conditions when you do a buy-in" so it made a decision to complete half of the buy-in and then re-examine the market conditions a few months later.

Following this course of action, the firm said the pricing of the buy-in of the second half of liabilities "was still attractive", which was strengthened by a feeling the process "might get more expensive going forward".

The company has meanwhile also admitted that it has "recently begun consultation with employees looking at various options for the future of its final salary scheme", which posted an aggregate deficit last month of £63.3m as its Irish and UK schemes lost a combined total of £171m. (See earlier IPE article: Dairy Crest schemes slip into deficit)

The company revealed the consultation process is likely to take two to three months as the review is "fairly wide ranging" with possible options "on the table" including changes to benefit structure such as accrual rates, or the closure of the scheme to future benefit accrual following the earlier closure to new members in 2006.

Alastair Murray, finance director at Dairy Crest Group, said: "Dairy Crest is committed to improving the fund's financial position, and we are making good progress in this respect," as the trustee had now insured all the liabilities prior to August 2008.

Murray also noted Dairy Crest had agreed to pay additional cash contributions to the fund of £20m a year, starting in October 2009, but he added "we will continue to work with the trustee to further reduce risk in the interest of all parties".

David Felder, chairman of the trustee, said: "The trustee sees the insurance of this further tranche of pensioner liabilities as another key step in reducing the fund's overall risk exposure. We will continue to work closely with the Company to enhance the security of members' benefits."

KPMG, Aon Consulting, Clifford Chance and Mercer advised the trustees on the buy-in, with Mercer - appointed as investment consultant - stating the deal "involved a lot of detailed work on the fund's investment strategy".

Kevin McLaughlin, principal in the financial strategy group at Mercer, noted many pension funds hold long dated inflation-linked bonds to provide protection for the longer-term deferred member liabilities, however this protection is lost if those assets are transferred.
 
"Companies in a pre or post pensions buy-in stage should therefore handle their investment strategy with care, particularly in the area of managing inflation risk," he said.
 
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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