The engineering group Smiths has agreed a deal with its pension trustees to plug a combined £655m black hole in its two final salary pension schemes.
The move is set to disappoint the City's growing number of pension buyout and buy-in firms, which are keen to capitalise on the desire of companies to "de-risk" their pension funds, because it all but rules Smiths out of any further dealings with them.
Smiths has two final salary schemes. SIPS has about 27,000 members, including 14,000 deferred members and 13,000 pensioners, while TIGPS has about 36,000 members, including 16,500 deferred members and 19,500 pensioners. SIPS faces a £545m funding deficit and TIGPS is £110m short.
To deal with this, the company will make a cash contribution of £36m a year for the next decade to SIPS – a £3m rise on what it currently pays. It will also make an initial investment of £25m into index-linked gilts which will be held in an escrow account with a further ongoing monthly injection of £2m for nine years commencing July 2011. The cash can be called upon if SIPS needs further funds down the line but will be able to be repatriated to Smiths if the scheme's funding position improves.
A conditional cash contribution to TIGPS of up to £50m will be payable in May 2012, with further two yearly installments of £8m after that.
The payments may not be made, or paid only in part, if the funding of the scheme improves. Both of the schemes are closed to existing staff and to any further contributions from new members.
Several companies have acted to plug funding deficits in recent months amid further signs that the shortfalls in private final salary schemes – which guarantee a pension of up to two-thirds of a member's final salary – have been deteriorating in recent months.
Smiths has previously secured a deal with the pension company Paternoster covering £250m of assets in the TIGPS scheme in return for regular payments. It has also annuitised a further £250m with the life insurer Legal & General.