Government Actuary's Department (GAD) supported Ofgem through a
reasonableness review of pension scheme costs of the gas and
electricity network operators’ defined benefit pension schemes.
We have supported the Office of Gas and Electricity Markets
(Ofgem) by undertaking a reasonableness review of
pension schemes run by various power companies.
The Government Actuary’s Department (GAD) completed the
high-level review of network operators’ (NWOs) defined-benefit
pension costs. The findings assist Ofgem in its consideration of
price control allowances in relation to the pension scheme
established deficits.
GAD also considered responses provided in the NWO questionnaires
provided by Ofgem on how schemes have considered the interests of
consumers.
Pension costs
NWOs provide their employees with access to occupational pension
schemes and make contributions to help fund their retirement
income.
Ofgem regularly reviews the pension allowances that the NWOs can
recover from charges to consumers as part of their regulated
revenue.
GAD last supported Ofgem in reviewing the reasonableness of
pension costs in 2020. At the 2023 review, GAD considered how the
following aspects had changed since the previous review:
- benefit design
- investment strategy
- methods and assumptions adopted at 2021 or 2022 actuarial
valuations
Key findings
While GAD did not identify any major concerns relating to benefit
design, investment strategy and funding approaches, there were
several notable developments, including:
- a general improvement in funding positions, with 5 schemes
now in surplus
- increased levels of de-risking in the investment strategy
- high inflation and the extent to which the increase applied
to pension increases, noting that some pension scheme rules
include provisions to cap inflation-linked increases (for
example, if inflation exceeds 5% in a year)
All companies have been able to describe some examples of actions
which they consider to be evidence of them acting in the consumer
interest, including:
- commissioning analysis which considered consumer interests
- negotiating with trustees on valuation concessions
- engaging with trustees on investment strategy
- managing the liabilities so that consumers are not unduly
exposed to higher costs
In response Ofgem published its decision
letter following consideration of the GAD report and wider
regulatory policy.
GAD review
One of the report’s authors, GAD actuary Scott Madden, said: “The
review highlighted to Ofgem that there has been a general
improvement in the funding positions of the network operators’
pension schemes.
“It was interesting to see the changing defined benefit landscape
– a recent environment of higher inflation and interest rates,
with development of longer-term objectives – reflected in the
network operators’ pension schemes.
“These stakeholders have a particular challenge in ensuring that
the consumer interest is appropriately taken into account, and we
were happy to support Ofgem in forming its view.”
Contributions required to fund these (defined benefit) pension
schemes are assessed periodically through actuarial valuations.
The areas highlighted above are key factors in determining the
NWOs defined benefit pension costs. GAD did not identify any
major concerns with these aspects at this review.
