Valuation results and Trustee appointments
31 December 2018 valuation outcome
As part of the process for agreeing the 2018 valuation, the Trustees of the Nestlé UK Pension Fund (the Fund) and Nestlé have been working on a valuable package of measures to significantly transform the long-term security of the Fund and to improve the overall funding position. While the process took longer than expected, we are pleased to say that the valuation is now complete. The Trustees have been in discussions with both Nestlé UK and Nestlé SA, the ultimate parent company. Nestlé SA has a significant part to play in providing valuable guarantees to the Fund that are backed by its considerable international resources.
Following the valuation, we have to issue all Fund members with a ‘summary funding statement’. This sets out the results of the valuation, together with other information required by law.
Read the full version of the Summary Funding Statement 2021.
Measures to improve long-term security of the Fund
The package of measures to improve the long-term security of the Fund includes:
Lower risk long-term investment strategy
Nestlé and the Trustees have agreed to put in place a lower risk long-term investment strategy for the Fund. The aim is to move towards a position of ‘low dependency’ on Nestlé in the future. The strategy includes triggers at certain points to reduce the investment risk further as the Fund’s funding level (that is the ratio of the Fund’s assets to liabilities) improves. Reaching a ‘low dependency’ position should be seen as good news.
From the Trustees’ perspective this reduces the likelihood that a new deficit will arise in the future thereby reducing the likelihood of calling on Nestlé to pay deficit contributions into the Fund over the long term. Overall, this improves security for pension fund members for the future.
From Nestlé’s perspective this reduces uncertainty about future investment returns – which means Nestlé can plan their short and long-term finances more effectively.
Agreement of a long-term funding target
Nestlé and the Trustees have agreed to adopt a new lower-risk long-term funding target and expect to be fully funded on this new basis by 31 December 2036 at the latest.
As part of agreeing the funding target, the Trustees and Nestlé agree a ‘discount rate’. The discount rate is the rate used to value the current cost of future pension obligations.
For example, if the Fund needs to pay a pension of £1,000 in ten years’ time, the discount rate determines how much money the Fund needs to invest today to provide that £1,000 in ten years. The higher the discount rate, the less money the Fund needs to have today; the lower the discount rate, the more money the Fund needs to have now.
The new lower-risk long-term funding target is based on what is considered to be a low discount rate and in broad terms the lower the discount rate the higher the level of security for pension fund members.
A ‘contingency mechanism’
Nestlé and the Trustees have also agreed a ‘contingency mechanism’. This is linked to the three-yearly Fund valuation and progress towards the long-term funding target.
In certain circumstances, Nestlé would be required to make additional support available to the Fund with the aim of keeping the Fund on-track to meet its funding target by 31 December 2036.
Payment of special dividends
Nestlé and the Trustees have agreed a protocol for Nestlé to make additional support available to the Fund should Nestlé UK make special dividends to Nestlé SA in certain circumstances.
Commitment from Nestlé SA
Nestlé and the Trustees have agreed an improvement in the support to the Fund provided by guarantees from Nestlé SA. Nestlé SA have agreed to extend the term of the guarantee to 31 December 2036, to increase the maximum payable under the guarantee to £1.9 billion and to change part of the guarantee to become conditional.
Part of the guarantee is conditional and can be withdrawn in certain circumstances that have been agreed by the Trustees and Nestlé. While it remains in place, it would provide an injection of cash into the Fund, for example, in the very unlikely event of Nestlé UK Ltd becoming insolvent and being unable to support the Fund.
In addition to the guarantee, Nestlé SA has also agreed to ensure that as part of future valuations Nestlé UK Ltd has sufficient finances to be able to:
- Make deficit payments to remove any future deficits that are identified within a period of no longer than five years, and
- Fund any payments due under the ‘contingency mechanism’ or special dividend protocol described above.
This is just a brief summary of the overall package agreed between the Trustees and Nestlé. There is a range of formal governing documents that set out the full details of the agreed outcomes of the valuation and the revised protocols that now exist between the Trustees and Nestlé.
The Fund Trust Deed and Rules have also been amended to reflect these changes where necessary.
In agreeing to the package, the Trustees considered a range of issues and took appropriate advice from their professional advisers. This included the Fund’s:
- Actuarial advisers,
- Legal advisers,
- Investment advisers, and
- Covenant advisers.
The Trustees believe that the overall package agreed with Nestlé provides better security of benefits for Fund members in the long term. Nestlé UK, Nestlé SA and the Trustees have all worked well together during this process and have ensured an excellent understanding of the issues, a clear plan for the future, and a strong and open ongoing working relationship.
The next Fund valuation date is 31 December 2021 and the process for that valuation will start towards the end of the year. We will update you on progress with that valuation late in 2022.
2019 and 2020 funding position summary
In between valuations, the Fund actuary also needs to provide a funding update to show how the Fund is doing.
In 2019 and 2020 the value of the Fund’s liabilities increased. This was mainly due to the continued fall in interest rates during the period which means more money needs to be set aside now to pay for future pensions.
The Fund’s assets also performed well over the same period. There are three main reasons for this:
- The Fund’s investments in stocks and shares (‘equities’) performed well during the period – despite the market reaction to the pandemic in March 2020.
- The Fund’s investment strategy looks to invest in assets whose value changes in line with movements in the value of the Fund’s liabilities – meaning that as the liabilities increase over 2019 and 2020, so do the value of the Fund’s assets.
- Nestlé paid £87.5 million a year in 2019 and 2020, and £86 million in January 2021, towards the deficit (agreed as part of the 31 December 2015 valuation).
The good news is that the value of the assets has increased faster than the value of the Fund’s liabilities during the period – so the funding level has increased. This will help the Fund reach a position of ‘low dependency’ on Nestlé.
Read the annual funding updates at 31 December 2019 and 31 December 2020 (as well as the summary funding statement for 31 December 2018) on the member communications page.
You may remember that in 2020, the Trustees ran the Make a Difference campaign to find suitable people to fill vacant positions on the Trustee Board.
We were delighted with the response and we’re pleased to announce the following appointments to the Board:
- Marcus Barry will be reappointed as a Trustee.
- Belinda Eddington and Richard Rowden were appointed as new Trustees on 10 June 2021.
Belinda and Richard will replace Barbara Firth and Steve Robinson.
Read more about your Trustee Board.