Management and the Trade Unions have today issued a joint statement about the proposed way forward on pensions.
Dear Colleague
In May 2007, the NATS Executive and NTUS agreed to take a joint approach to the pensions issue by commissioning an independent report to consider the impact of the pension scheme (the Scheme) on the business. Since that time, NATS and NTUS have been working together to understand fully the findings of the report and its implications for the business.
As a result of this study, NATS and NTUS have become increasingly concerned that NATS will be unable to afford the cost of the Scheme. This would clearly have serious consequences for both NATS and the Scheme and this has led us to agree that urgent action is necessary. Therefore, we have decided that the best solution to address this serious problem is a series of measures which include the capping of future pensionable pay increases of our existing employees and the introduction of a new pension scheme for future employees.
The increasing cost and risk of supporting the NATS Section of CAAPS
NATS offers its employees a defined benefit pension scheme which promises a pension linked to the employee’s earnings close to the time they leave or retire. In common with other companies across the UK, the cost to NATS of providing defined benefit pensions has risen dramatically for a number of reasons outside of our control and in ways that we cannot predict.
This is being evidenced through sharp increases in the underlying cost of our own Scheme. The latest Annual Actuarial Report as at 31 December 2007 showed that the cost to the employer had risen to an alarming 42.1% of pensionable payroll, compared with 26.8% as at 31 December 2003.
Previously, because of the Scheme surplus and in line with normal practice, the Trustees of the Scheme have not required NATS to pay the whole of this underlying cost. However, the surplus has reduced for a number of reasons, most of which have been beyond our control, and so the employer contribution rate has had to increase to compensate, rising from 12.2% of pensionable payroll in January 2005 to an effective rate of 20% from January 2008. In 08/09 this represents employer contributions of around £62m. Now that the surplus has almost gone (as shown in the last Annual Actuarial Report of December 2007), it is very likely that the Trustees will require NATS to pay at least the underlying cost of 42.1% of pensionable payroll in the near future. This would more than double the employer contribution rate of 20% currently agreed with the Trustees and would represent employer contributions of around £125m per year.
Incurring these kinds of costs could turn NATS into a loss-making company.
In addition, it could be even worse if the Scheme is in deficit, which given recent financial turbulence could be the case. The Trustees would not be able to wait to see if conditions improve but instead would have to seek increased employer contributions as soon as possible. This would immediately place an unsustainable financial burden on the company.
Unless action is taken, there is a real risk that ultimately NATS will be unable to pay pension contributions as they fall due. The Scheme relies on a financially healthy company. The NATS Executive has a responsibility to ensure that NATS can meet all its financial obligations which includes your pension. This is why, throughout our discussions, the priority of both NATS and NTUS has been to protect the pension benefits of existing employees and it is clear that action to protect the Scheme is required as soon as possible.
Some will say that the cost of our Scheme should be passed on to our customers. However, is it realistic to expect them to bear costs of this magnitude? In NSL where we operate in a competitive environment, our contracts cannot support the increasing cost of pension provision and our customers are already telling us that they are unwilling to pay for these costs. Indeed a number of them have already taken steps to control the cost and risk presented by their own pension schemes. Further, it is likely that the Economic Regulator will continue to require real reductions in the prices we will charge our NERL customers during Control Period 3 which runs from 2011 to 2015.
The options
As a result of this pensions review NATS and NTUS explored a range of options in order to resolve the problem. At times this has involved some very challenging conversations.
As you know, because of the protections offered by the Scheme’s Trust Deed & Rules, we are unable to propose many of the changes that other companies have typically made when addressing the challenges outlined above. For example, we cannot ask members to pay increased contributions, or change the benefits that members will earn in future as set out in the Trust Deed & Rules.
The options available to us are therefore extremely limited.
NATS and NTUS joint proposal
As a consequence, NATS will be formally inviting questions and feedback from employees on the proposal that NATS and NTUS believe best addresses the cost and risk presented by the existing Scheme, whilst also providing highly competitive pension benefits for new employees.
To be clear, your defined benefit pension will continue and no change is proposed to the benefits you have earned. However to keep these pension promises, we are proposing a package of measures, the headlines of which are below. We will provide you with more comprehensive information shortly (see the ‘More information and next steps’ section of this letter).
From 1 January 2009
Cap on future pensionable pay increases
Currently, pensionable earnings are linked to any agreed increase in pay and pensionable allowances. In future, your pay will continue to be reviewed each year in the same way as it is currently. However, it is proposed that your annual increase in pensionable earnings will be limited to a maximum of the Retail Prices Index (RPI) plus 0.5%, even if your actual pay review is higher.
Promotional pay increases and annual increments will still count in full for pensionable earnings. Any other increases above RPI plus 0.5% will be categorised as non-pensionable earnings.
This cap on future pensionable pay increases would apply only to existing members of the Scheme and for a period of 15 years, with a review thereafter. This agreement would be set out in a joint Memorandum of Understanding between NATS and NTUS.
To be clear, this is not about how much pay increase you get, but about how much counts for pensionable earnings. This change would provide an immediate improvement to the funding position of the Scheme which has been steadily worsening, whilst the underlying cost has been dramatically rising. It would also go some way to controlling costs over the longer term.
Memorandum of Understanding
NATS and NTUS are proposing to put in place a Memorandum of Understanding with effect from 1 January 2009 to last for a period of 15 years. This would incorporate the cap on future pensionable pay increases as mentioned above, as well as some specific protections for existing and future employees.
From 1 April 2009
SMART pensions
SMART pensions is a more cost effective way of paying pension contributions into the Scheme which reduces National Insurance contributions for both the employee and the employer. It would apply to all UK-based employees, both existing and future.
Under SMART pensionsyou don’t pay contributions directly into the Scheme as is currently the case. Instead your pay would be reduced by the same percentage of gross pay that you would otherwise have contributed to the Scheme. In turn, the employer increases its own contributions by the same amount of pay you have given up. In effect, you swap some of your pay for pension contributions.
As a result, the total contribution paid into the Scheme stays exactly the same, but your net take home pay is higher than it would be otherwise. This is because you will no longer pay National Insurance contributions on the part of your pay that funds the pension contributions that the employer now makes on your behalf. The employer also makes National Insurance contribution savings which will help it meet the cost of providing pension benefits.
New type of pension scheme for new employees
A new type of pension scheme is proposed for employees who join NATS on or after 1 April 2009. This new scheme will be on a defined contribution basis where the contributions, rather than the benefits, are fixed. The cost to the employer would be
up to a maximum of 18%, with a corresponding cost to new employees of
up to a maximum of 9% of earnings.
The default level of cost for new employees joining this scheme would be 6%. However, they would be able to a select a minimum cost of 4% up to a maximum of 9% to meet their own circumstances.
NATS as the employer, would match the cost that each employee selects on a 2:1 basis. NATS and NTUS believe the new defined benefit contribution scheme will be amongst the best in the country of its type and we are confident it will represent a highly competitive and attractive benefit in today’s workplace.
In summary
NATS and NTUS would not have embarked on putting this proposed package of measures to you if we did not think it absolutely necessary to protect your pension benefits. The risk involved in continuing with exactly the same arrangements as we have today threatens the financial stability of NATS and therefore the security of the existing Scheme for all of us.
More information and next steps
We recognise that this is a complex subject and that you may have questions that are not specifically addressed in this letter. NATS and NTUS are putting in place a number of steps to explain the proposals in more detail and you will receive a comprehensive booklet no later than 8 October about the proposal and why we want to take this course of action. Amongst other things, there will also be a series of briefings, a dedicated intranet site which will include a modelling tool to help you assess the potential impact of the proposals on you, and a Helpline to assist you in further understanding the proposal and what it means. We would strongly encourage you to take advantage of these arrangements.
From 8 October to 10 December, NATS will be inviting your questions and comments about the proposed changes. This is formally known as a ‘consultation’ and is legally required before NATS can implement some of the changes. NATS is choosing to consult on all the changes to ensure that employees have a complete picture of the proposals. During this time, we will seek to answer your queries and the NATS Executive will closely monitor your feedback on the proposals. NATS will also continue to meet with NTUS representatives. The outcome of the consultation will be communicated to employees in January 2009. In addition, both Prospect and PCS will hold a full consultation with members culminating in a ballot of all Trade Union members. The results of the ballot will be announced at the end of December.
Finally, if as a result of reading about these proposed changes anyone should be contemplating taking immediate action such as retiring early or taking your pension immediately, we strongly recommend that you take independent financial advice and carefully consider the package of measures we are proposing to put in place to safeguard your pension. NATS and NTUS believe that this proposed package of measures offers the best solution to protect your pension benefits.
Regards
Philip James / Sarah Stacey
Director HR&S / HR Director
Suresh Tewari
NTUS Chair
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