British Broadcasting Corp. will consider closing its £8.2 billion ($12.4 billion) London-based defined benefit plan to new members and restricting benefits for existing members, the company announced Tuesday.
The BBC would create a defined contribution plan for employees hired after Dec. 1, 2010, under a proposal made to existing DB members, who have until Sept. 30 to give feedback to the company. Under the BBC proposal, existing DB members could move to the DC plan or stay in the DB plan. However, a member’s salary increase used to calculate DB pension benefits would be capped at 1% per year.
In a prepared statement on the proposal, Danny Wilding, partner at investment consultant Barnett Waddingham, said younger members of the DB plan would see the value of future benefits decrease “to such an extent that the alternative DC scheme may actually become more valuable. For example, over the next 25 years increases of only 1% a year could reduce the value of benefits by nearly half in real terms” if the Bank of England current inflation projection of 3.5% per annum proves accurate.
The move comes after the plan’s funding deficit grew to £2 billion in 2009, from £470 million a year earlier.
“The deficit has grown because the scheme’s assets, like those of many other pension schemes, have performed poorly due to the global economic downturn,” according to a letter to BBC pension plan participants from CFO Zarin Patel. “Although financial markets have improved … the investments in the scheme have not returned to previously expected levels and the outlook for the future remains uncertain.”
The letter added that a triennial actuarial valuation expected next year will likely show that longevity increases will further swell the pension deficit.
The deficit grew in 2009 despite returns on investments of 28.2% in the year ended March 31, according to the plan’s annual report, published today. Asset allocation as of March 31 was: 56% equities; 22% bonds; 10% real estate; 9% alternatives; and 3% cash.
In the year ended March 31, the plan hired global equity managers BlackRock, to run £500 million and Lazard Asset Management to handle about £300 million. Funding came from terminating global equity managers AllianceBernstein and Capital International, who ran about £500 million and £400 million, respectively, according to the report. Peter W. Dunscombe, head of pensions investments, was out of the office and unavailable for comment.
Also, M&G Investment Management was hired to run £150 million in a European loan fund.