LONDON - The 9.5 billion ($15.1 billion) British Rail pension fund has been carved into equal pieces for retirees and active employees as part of the railway industry's upcoming privatization.
Meanwhile, the U.K. government will be able to defer half of its contributions during the next 30 years, worth a savings in present value terms of some 400 million. The agreement, reached in late August, resolves a longstanding dispute between the U.K. government and the rail industry over the government's pension contribution.
The fund - now known as the Railway Pension Scheme to display its independence from British Rail - has radically different asset mixes for the respective retiree and active employee pieces.
For the retirees' plan, the asset mix is 42% global equities, 20% hedged overseas bonds, 17.5% index-linked bonds, 12.5% short-term U.K. government bonds, 5% real estate and 3% venture capital.
For the active employees, the asset mix is 77% global equities, 4% for each of the three bond categories, 8% real estate and 3% venture capital.
Before the asset allocation shift, the fund had two-thirds of its assets invested in stocks, 19% in bonds, 6% in real estate, and 8% in cash and alternative assets.
"It's been a major, major project," said Peter Stanyer, investment director for Railway Pension Investment Ltd., London, which oversees the fund's investments.
Under the split, some 180,000 British rail pensioners and deferred vested participants have been placed into one plan, while existing railway workers will be covered by another. The active employees have the option of remaining with the Railway Pension Scheme, even when their employers split off from British Rail during upcoming privatizations. New employees will have the option to participate in the railway plan or that of their employer.
In preparation for the shifts, officials overseeing the fund's investments last year reinvested 900 million that was mostly in U.K. stocks. The fund hired three global bond managers to run 750 million, and invested the rest in U.K. bonds and index-linked bonds (Pensions & Investments, April 4). Fund officials shifted another 200 million into gilts from global equities this year.
Seven common investment funds for each asset class were created.
The key issue was ensuring a smooth transition in the fund's asset allocation shift a year ago, which it accomplished through a derivatives program run by Mercury Asset Management, London.
Meanwhile, rail pension officials resolved a lengthy dispute over the government's pension contributions. The British government had threatened to stop making its 40 million annual cash contribution to the retiree plan (P&I, Nov. 15, 1993). Those contributions are made to cover pre-1975 pension liabilities.
British Rail officials warned that replacing cash contributions with a non-marketable IOU could force pension officials to start selling off investments to meet benefit payments.
Under the deal that finally was approved by Parliament in late summer, the government will be able to defer half of the present value of its 400 million in contributions expected to be made over the next 30 years.
Contributions will be deferred on a rolling 10-year basis. The government will pay interest on the deferred contributions.
In three years, 60% of any surplus will be placed in a special reserve to protect the fund from potential deficiencies. Currently, an actuarial valuation is being performed; it is expected to show the plan is substantially overfunded.
The government will determine the investment of the assets in the special reserve; Railway Pension officials likely will recommend the assets be invested in index-linked bonds. The remaining 40% will be available for benefit increases to retirees, subject to the discretion of the trustees.
The government will be able to defer the part-contribution indefinitely, as long as surplus assets are available for benefit increases.
In exchange, retirees get a government guarantee that their benefits will be indexed for inflation.