17 November 2015

Smiths announces material change in pension funding structure

Agreement increases company’s free cash flow by £36 million per year

Smiths Group plc is pleased to announce the finalisation of the triennial valuation of the Smiths Industries Pension Scheme (SIPS) at 31 March 2015, under which the actuarial deficit for the scheme is £285 million, £250 million lower than the previous triennial valuation in 2012.

The Company has agreed with the Trustee a material reduction in the level of annual cash contributions into the scheme. The Company will also formally contribute the pension escrow account1 to SIPS, resulting in a net effective actuarial deficit at 31 March 2015 of £145 million. As a result, the SIPS scheme would have shown a surplus on an accounting basis of £117 million at 31 July 2015.

As a result of this agreement, which takes effect in December 2015, the total annual contribution to SIPS will fall from £60 million to £24 million, resulting in a £36 million increase in free cash flow. The contributions under the recovery plan, which is expected to result in SIPS being fully funded in June 2020, are shown below:

SIPS contributions (£m)
Year to 31 July
2015 2016 2017 2018 2019 2020
Annual cash contributions 36 29 24 24 24 22
Escrow 24 10 0 0 0 0
Total 60 39 24 24 24 22

The improved funding position has allowed the SIPS Trustee to reduce risk in its investment strategy, which should result in lower volatility in the plan.

This agreement with SIPS follows the partial buy-out of the US pension scheme in August 2015 under which $527 million of liabilities, representing all 5,500 current pensioners, were transferred to Voya Retirement Insurance and Annuity Company. This transaction has resulted in around 60% of the gross liabilities of the US scheme being insured.

As previously disclosed, contributions to non UK schemes in the year to 31 July 2016 will total approximately £74 million, including a large one off contribution to help fund the US buyout. Ongoing contributions to non-UK plans, primarily in the USA, are shown below. The US scheme is expected to be fully funded in 2020.

US contributions (£m) 2015 2016 2017 2018 2019 2020
Annual cash contributions 27 74 23 23 23 23

As a result of these actions, the combined funding status of the SIPS and US schemes are summarised as follows:

Surplus / (Deficit) (£m)   Actuarial Basis   Accounting Basis
    31 July 2015 31 October 2015   31 July 2015 31 October 2015
SIPS   (279) (104)   (30) 143
US Scheme   (123) (85)   (123) (85)
Total   (402) (189)   (153) 58

Chris O’Shea, Chief Financial Officer, said:

“I am pleased that we have reached agreement with the SIPS Trustee on both the level of the deficit and contributions. Increasing free cash flow by £36 million per annum will underpin the Group’s ability to invest in attractive opportunities and to continue to grow dividends in line with the long term growth in underlying earnings. Both the SIPS derisking initiative, which will reduce substantially future volatility and value at risk in the scheme, and the US buy-out, are significant steps in our journey to minimise the impact of legacy pension liabilities on the Group.”

In addition to SIPS, Smiths Group also operates the TI Group Pension Scheme (TIGPS) in the UK, a defined benefit pension plan in the US and other small schemes elsewhere. These plans are all closed to both new entrants and further benefit accrual. Current contributions to the TIGPS are £16 million per annum; this is subject to ongoing discussion with the TIGPS Trustee as part of agreeing the triennial valuation as at 5 April 2015.

1 In 2009, the Company established an escrow account into which it made annual contributions of £24 million. The balance in this escrow account at 31 March 2015 was c.£140 million.