|
|
Case studiesNorsk Hydro ASABackground Details of the scheme Pension philosophy Reviewing the scheme BackgroundNorsk Hydro is a global company, based in Norway. The parent company’s primary listing is in Norway with a market capitalisation of some £10 billion. The group has about 35,000 employees worldwide. In the UK, the corporate head office is in London and there are operations at its 16 sites around the country. The UK operations are mostly in aluminium and petrochemicals. Norsk Hydro currently employs around 2,000 people in the UK. Details of the schemeThe UK operations are mainly acquired businesses, one of which has continued with its own defined benefit pension scheme. The Norsk Hydro UK Pension Scheme is the main scheme (‘the Scheme’) and covers most of the remaining businesses. It is a defined benefit scheme providing pension and lump sum death benefits. All permanent and temporary employees, aged between 18 and 64 years old and working full time or part-time are eligible for membership of the Scheme from their first day of employment, subject to a receipt of a written application for membership. The take-up rate of the Scheme is currently around 93%. Until recently, employee contributions were 5% of pensionable pay. The Company’s normal rate of contributions is more than twice members’ contributions. However, the results of the March 2003 actuarial valuation showed that the fund was in deficit by around £12m. Norsk Hydro decided that special action should be taken and immediately increased employer’s contributions by 50% to 16.3% per annum, which is proposed to continue until at least 2005. Employee contributions were also increased from 5% to 6% from 1 April 2003. Also, pensions in payment accrued after 1 April 2003 are now guaranteed to increase each year in line with price inflation subject to a maximum of 5% but with no minimum of 3%. These measures have gone some way to reducing the deficit and enabling the final salary scheme to continue. Pension philosophy"The Defined Benefit pension scheme is simply the best financial instrument ever devised to enable people to retire in reasonable comfort at the end of a working lifetime. Nothing has or, I believe, ever will match it. That is why we have continued with our DB scheme despite increased costs." Peter Fergusson, MD, UK The company firmly believes that a defined benefit provision is the right one for its employees and whilst recent developments such as demographics, legislative changes and investment performance have not helped, its present view is that companies should not abandon their DB schemes for any other. Instead, they should look to contain risk and reduce costs by reviewing some of their benefits and recent market practice to ensure that they are still providing a good DB pension. A cultural change is also required by both employers and employees to get people to work longer to deal with the demographic issue. "The main problems are the flow of negative legislation (in that the overall impact is to increase the cost of maintaining DB schemes), and (for us) the constant movement of businesses into and out of the UK group.It is undeniable that, to function effectively, defined benefit pension schemes do require a degree of stability." Peter Fergusson Reviewing the scheme"When companies realised the extent of their funds’ liabilities, many decided to close their Schemes. As a result, employees face the prospect of total uncertainty as to the amount of pension payable on retirement, and the probability that it will be significantly less than under the DB scheme. This is a tragedy and could have been avoided in most cases by a critical review of the benefit structure and a frank discourse with members." Peter Fergusson, MD, UK Since Norsk Hydro became aware of the severity of their funding position, they have carried out a critical review of their Scheme on a regular basis. The main change was to the amount of pension that employees could get on early retirement. The Scheme provides for early retirement from the age of 50. However, there is no reduction in benefits for early retirement from age 62. For those retiring before age 62, a discount of 3% per annum is applied to their pension. The actuaries suggested making changes to the discount levels for these to bring them in line with the normal practice and to encourage people to work longer. Therefore, discounts were increased to 5% per annum for those retiring between 57 and 62. Also, for new joiners, a discount of 5% would also apply between ages 62 to 65. In addition, the provisions in the Scheme for incapacity benefit, which were extremely generous, have been reduced. These changes have not resulted in any adverse reaction from members. This is largely a result of the Company’s frank communication on the issue and the fact that members are fully aware that the Company is doing everything it possibly can to retain its final salary scheme. The Company hopes that these reductions in cost will enable the funding position of the Defined Benefit Scheme to improve. Click on this link to go to the case studies homepage. Order the full report from the CBI bookshop. Click on this link to go to the Policy Work page. |
|
  |
The CBI is the UK's top business lobbying organisation. Our unmatched influence with government, policymakers and legislators means we can get the best deal for business – at home and abroad.
Join us
CBI members enjoy specialist advice and influence which can give real business advantage. Find out what membership can do for you.
Campaigning to ensure that the economic and cultural importance of the creative industries, is recognised by the government.
