Aberdeen enters new territory with takeover of Stagecoach DB scheme
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Aberdeen Group will take on the assets and liabilities of the £1.2bn Stagecoach Group Pension Scheme. The investment manager will share the majority of scheme surplus with members and has already agreed to better inflation protection and a 1.5% increase for all members, representing a combined £50m being allocated from surplus.
The deal follows Aberdeen’s earlier decision to run on its own £2.6bn defined benefit scheme and share some of the large surplus with members and for money purchase contributions, while keeping open the option of a buy-in.
Aberdeen is now the new principal employer of the otherwise unrelated Stagecoach scheme, a novel derisking approach. Stagecoach will continue to be linked to the pension scheme during a transitional period, after which it will cease to participate. Under the arrangement, Aberdeen will receive a minority share of any future distributed surplus with the majority earmarked for members, subject to unspecified guardrails that ensure the scheme's financial security.
Chair of the Stagecoach trustees, John Hamilton, said: "Our objective was to consider what would provide the best pension outcomes for the scheme members. With a significant starting surplus in the scheme built up over many years and prospects for further sustained growth in the fund, our goal was to run-on the pension scheme to provide better inflation protection and higher pensions for our members using the scheme assets under secure funding arrangements.”
He added: “The trustee had a natural meeting of minds with the team at Aberdeen. Their experience of achieving similar outcomes for their own scheme, a belief in the need for growth and productive assets, and the recognised strength of Aberdeen's pensions and investment teams, all meant we were able to develop an innovative solution to deliver improved pension outcomes for our members.”
The bus company’s chief financial officer, Bruce Dingwall, said: “We have been pleased to support the trustee in assessing the best option for the scheme, having reached a strong funding position. We are delighted that these arrangements allow members to benefit from a strong sponsor and an expectation of further benefit improvements over time. For Stagecoach, this transaction gives us a clean break from the large defined benefit pension scheme, which supports our objective of simplifying our business.”
mallowstreet understands the tie-up was first proposed by PwC, an adviser both parties have in common, and that Aberdeen liaised with stakeholders including the Pensions Regulator.
A TPR spokesperson said: “We expect the interests of members to be put first in any transaction to ensure they receive their promised benefits. With many defined benefit schemes having a healthy surplus, trustees have more options than ever including running on their schemes and using a share of the surplus generated to improve benefits for their members.”
The spokesperson explained that the transaction uses a Flexible Apportionment Arrangement, “a tried and tested regulatory mechanism to transfer the covenant to a new sponsor".
Under this approach, the new sponsor will become the statutory employer, while the scheme will run on with the existing trustee board and “be subject to all the regulations which govern the operation of defined benefit occupational pension schemes, including the DB funding regime”, they added.
“This is not a superfund where the key difference is an exchange of covenant for capital. In a superfund transaction there is no sponsor, and the standard employer covenant is replaced by the provision of the funds in the capital buffer which can be made available to the scheme if the funding triggers are hit,” the spokesperson said.
He added: “The trustee had a natural meeting of minds with the team at Aberdeen. Their experience of achieving similar outcomes for their own scheme, a belief in the need for growth and productive assets, and the recognised strength of Aberdeen's pensions and investment teams, all meant we were able to develop an innovative solution to deliver improved pension outcomes for our members.”
The bus company’s chief financial officer, Bruce Dingwall, said: “We have been pleased to support the trustee in assessing the best option for the scheme, having reached a strong funding position. We are delighted that these arrangements allow members to benefit from a strong sponsor and an expectation of further benefit improvements over time. For Stagecoach, this transaction gives us a clean break from the large defined benefit pension scheme, which supports our objective of simplifying our business.”
mallowstreet understands the tie-up was first proposed by PwC, an adviser both parties have in common, and that Aberdeen liaised with stakeholders including the Pensions Regulator.
A TPR spokesperson said: “We expect the interests of members to be put first in any transaction to ensure they receive their promised benefits. With many defined benefit schemes having a healthy surplus, trustees have more options than ever including running on their schemes and using a share of the surplus generated to improve benefits for their members.”
The spokesperson explained that the transaction uses a Flexible Apportionment Arrangement, “a tried and tested regulatory mechanism to transfer the covenant to a new sponsor".
Under this approach, the new sponsor will become the statutory employer, while the scheme will run on with the existing trustee board and “be subject to all the regulations which govern the operation of defined benefit occupational pension schemes, including the DB funding regime”, they added.
“This is not a superfund where the key difference is an exchange of covenant for capital. In a superfund transaction there is no sponsor, and the standard employer covenant is replaced by the provision of the funds in the capital buffer which can be made available to the scheme if the funding triggers are hit,” the spokesperson said.
It is unclear if Aberdeen’s own scheme has received any mitigation for the dilution of employer covenant, but covenant was discussed with the trustees of Aberdeen.
Christopher Wheeler, who chairs Aberdeen's own scheme, said: “The Aberdeen Group Pension Scheme enjoys a healthy surplus backed by a strong covenant and we were pleased when Aberdeen first discussed this innovative transaction with us. It shows our corporate sponsor is able to innovate in the UK pensions market, consistent with our own agreement with Aberdeen to run on our pension scheme."
He added: "Aberdeen have confirmed that this is not a superfund transaction and we have no concerns of the impact of this transaction on the Aberdeen Group Pension Scheme.”
Should trustees seek benefit improvements?
Pension lawyers typically argue that it is not the role of trustees to seek to improve pension benefits beyond what the rules specify, merely to ensure that promised benefits are secure. However, some trustees take a different view. There are six trustee directors on the main Stagecoach Group Pension Scheme, including two employee-nominated directors, who mallowstreet understands are backed by union Unite. One scheme trustee is from Pan Trustees, while the remaining ones, including the chair, are employer-nominated.
A Unite spokesperson said: “This is a positive development which will be good news for our members who remain in the scheme. Unite’s trustees have been fully involved and are fully supportive of this announcement.”
The debate about member uplifts has intensified as some DB schemes carry large surpluses. Some sponsors are willing to share surplus but would prefer this to be in the form of one-off payments, rather than baked into future increases through benefit uplifts. In last month’s Budget, the government paved the way for lump sum payments from surplus by promising changes to the tax regime.
Manager finds new way to acquire assets
Aberdeen said given the Stagecoach scheme's strong funding position, the takeover will have “no significant impact” on the firm's capital position.
The manager claimed the deal will allow for infrastructure, private credit and property investments to be made from scheme assets, without naming plans for any specific investment.
Aberdeen Group chief executive Jason Windsor said: “The agreement, which aligns with the UK's goal of making pension capital work harder for the economy, brings £1.2bn in new assets under management and opens up new investment opportunities. We believe in the run-on model for well funded schemes, having already taken this approach for our own scheme."
The deal transferring all of the scheme’s assets comes at a time when asset managers are faced with a shrinking DB market, characterised by schemes transferring to insurance companies in high numbers, along with Local Government Pension Scheme consolidation and in-house management. In response, some have started offering outsourced chief investment officer services, where the entire assets of a typically large scheme come under the control of one manager, who may choose to subcontract part of the asset management. In contrast with the Aberdeen deal, the employer link remains intact under OCIO.
