Long-term inflation and interest rate assumptions were a decisive factor in UK Coal planning to close its DB scheme despite shedding £50.8 million from its deficit over the past 12 months

A £124.6 million annual corporate loss (pre-tax) recently revealed to the stock exchange was the main trigger for the decision though, the group's finance director David Bocksam told Pension Funds Insider.

Bocksam said that the primary driver for the closure of the fund was the company's financial history and the amount of debt it has carried, leaving it unable to pay the pensions deficit off.
Bocksam admitted that UK Coal's pension woes were the result of being "a company that has a bigger past than it does a present" with the privatised company once operating 14 collieries and now running just three.

He added: "We have a large number of deferred pensioners and a much smaller group of active savers, and with a deficit of £300 million compared to a market capitalisation of just over £100 million, it's a major lever."

The £300 million deficit figure comes from a trustee estimate in December 2009, which is not officially accepted by the company. The firm estimates the shortfall (under IAS 19 rules) to stand at £170 million at the end of 2010, down from £220 million in 2009.

UK Coal's annual report reveals that this £50.8 million deficit reduction was largely funded by a one-off switch to the lower Consumer Price Index of inflation (CPI) for liabilities (saving £32.6 million). The report also noted "a gain in the year of £11.3 million due to returns on the funds' assets being higher than expected."

Nonetheless the company are unwilling to try to close the deficit with future gains and stated that due to their poor overall financial health, "the current level of deficit contributions would be inadequate to meet such a large deficit".

The group are to start a consultation with unions shortly on its proposals to shut off the defined benefit scheme for future accruals. Bocksam added that "the consultation will finish when it needs to finish."

dbillingham@wilmington.co.uk 

First published 04.05.11