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  • Chris Hawley

    Chris Hawley

    Partner

  • The results of the 2020 Valuation for the Growth Plan (GP) are now available and it is good news for most participating employers. 


    In this blog, we summarise the key results of the 2020 Valuation. If you are an employer with Series 1 or Series 2 liabilities, then the 2020 Valuation will determine the level of deficit reduction contributions (DRCs) and expenses you will be required to pay going forwards.

    Valuation results

    The results of the 2020 Valuation have calculated the ongoing funding position of the GP at 30 September 2020 and placed a value on the level of deficit in the GP.  The results of the 2014, 2017 and 2020 valuations are shown in the table below.

    Ongoing fundng valuation 30 September 2014 30 September 2017 30 September 2020
    Assets £793m £795m £799m
    Liabilities £970m £926m £832m
    Surplus / (Deficit) (£177m) (£131m) (£33m)*
    Funding Level 82% 86% 96%

    * The 2020 Valuation no longer builds in an allowance for future GP expenses in the deficit figure. Following consultation with the Employer Committee, these expenses will now be paid for in addition to the DRCs. Allowing for expenses (to compare with the 2014 and 2017 results) the deficit would have been £58m (93% funded).

    Even ignoring the change in approach for expenses, the GP has seen an improvement in funding position and this will likely be welcomed by many employers, especially given the recent volatility in economic conditions.

    The change in funding level since the 2017 valuation has been due to the following factors:

    Employer DRCs 

    Protection from investment hedging

    Orphan liabilities calculation change

    Expense allowance no longer included in deficit

    Reduced expected investment returns, in part from reduction in covenant rating

    RPI reform

    Source: TPT Retirement Solutions

    For the 2020 valuation, the orphan liabilities have been calculated using the ‘ongoing’ funding basis rather than a solvency basis which, all else being equal, will have reduced the value placed on these liabilities. This is a material change and has improved the funding position by tens of millions of pounds.

    Orphan liabilities are liabilities for members whose employer no longer participate in the GP. That employer may have paid their debt on leaving, but this could still lead to a cost for the remaining employers if market movements mean that the original debt payment was not sufficient. Alternatively if the employer became insolvent, then some or all of the debt may not have been recovered, increasing the burden or remaining employers. 

    What this means for employers’ DRCs and expense payments

    An improvement in funding level from 86% to 96% will clearly be positive news for employers and their contributions due to the GP. We’ve summarised below the contributions agreed as part of the 2017 and 2020 valuation for comparison. 

    2017 Valuation

    DRCs: £11.24m (includes £3.6m allowance for expenses)
    Increase rate: 3% pa
    End date: 31 January 2025

    2020 Valuation

    DRCs: £3.98m
    Expenses: £3.7m (in addition to DRCs)
    Increase rate: 3% pa (for expenses only)
    End date: 31 January 2025

    From 1 April 2022, the current recovery plan would have required £10.7m* pa (DRCs and expenses) from employers whereas now, that figure has reduced to £7.68m pa. This is a fall of around 28% for an average employer.

    It is very important to emphasise that the comments above relate to the GP as a whole. The position for each employer will differ (potentially materially) as each employer’s share of the DRCs are based on how the liabilities for their employees compare with the liabilities of the GP as a whole. This can change significantly over time. Employers should have received an update of their specific DRCs and expense contributions during August 2021.

    The change to meeting expenses directly combined with the number of withdrawing employers will be a worry for some employers who may be concerned about paying an escalating share of the expenses over time. This is something which employers might want to look into further to ensure they are meeting the appropriate share of expenses.

    *This figure is lower than the £11.24m DRCs at the 2017 valuation due to employers withdrawing from the GP.

    Employers’ debt on withdrawal position

    The 2020 valuation also determined the debt for each employer, i.e. the amount payable if an employer decided to exit the GP. This calculation includes Series 3 within the calculations.

    Solvency valuation 30 September 2014 30 September 2017 30 September 2020
    Assets £800m £798m £810m
    Liabilities £1,055m £985m £951m
    Surplus / (Deficit) (£255m) (£187m) (£141m)
    Funding level 76% 81% 85%

    An employer debt is the employer’s share of the overall GP liabilities plus its share of the orphan liabilities. The debt is payable when an employer terminates their participation and leaves the GP.

    This means an average employer should have seen a reduction in their withdrawal debt from the GP. Employers should have received an update of their specific withdrawal debt amount (as at 30 September 2020) during July 2021.

    You may also be interested in our previous GP blog, which considered how Employers could proactively manage their participation in the GP. Now the GP valuation results are available is a great time for employers to take a step back and consider their participation in the GP. The blog discusses the option of paying the withdrawal debt which could now be a more attractive option for some employers given the results.

    About us

    This blog is co-authored by Barnett Waddingham's Chris Hawley (biography below) and Stephen Kyte. If you would like to discuss any of the points raised in this blog please contact one of the authors.