01 March 2016

Smiths concludes pension funding exercise

Agreements to boost free cash flow by £50 million in FY17 onwards

Following the announcement on 17 November 2015 relating to the Smiths Industries Pension Scheme (SIPS), Smiths Group plc is pleased to announce the finalisation of the triennial valuation of the TI Group Pension Scheme (TIGPS) at 5 April 2015. The agreement with the TIGPS Trustee now provides certainty of funding over the next 3 years for all Smiths Group’s pension schemes, results in significantly lower deficits and delivers a substantial boost to free cash flow. As a result, the Group’s on-going pension contributions will be materially lower than before.

Year to 31 July
Annual contributions (£m)
2015 2016 2017 2018 2019 2020
SIPS 60 39 24 24 24 22
TIGPS 16 11 3 3 - -
US 27 74 23 23 23 23
Total 103 124 50 50 47 45

TIGPS

Under the triennial valuation for TIGPS the actuarial deficit at 5 April 2015 for the scheme is £16 million, £101 million lower than the previous triennial valuation in 2012. The Company has agreed with the TIGPS Trustee to pay off the remaining deficit over the next three financial years, reducing the FY16 cash cost to the Company. The total annual contribution to TIGPS will fall from £16 million in FY15 to £3 million in FY17 and FY18.

Pension risk profile update

As part of the ongoing management of Smiths Group’s pension commitments, the assets relating to the defined benefit pension schemes have been substantially de-risked as follows:

TIGPS (expected to be fully funded in June 2018)

50% of liabilities are covered by matching annuities, eliminating investment return, longevity, inflation and funding risks. The remaining assets are invested 26% in gilts and 24% in equities.

SIPS (expected to be fully funded in June 2020)

The assets of SIPS are now invested 44% in gilts, 10% in property, 19% in diversified growth funds, 16% in credit and 11% in cash (this cash supports an equities exposure of 11% of plan assets held through exchange-traded futures).

US scheme (expected to be fully funded in July 2020)

Following the transfer of all current pensioners to Voya Retirement Insurance and Annuity Company in August 2015, around 60% of the gross liabilities of the US scheme are now insured through a buy-out contract. All remaining assets are invested in a LDI (Liability Driven Investment) strategy under which credit investments are held to match the anticipated payout of plan liabilities.

Chris O’Shea, Chief Financial Officer, said:

“I am pleased to have concluded the discussions with both UK pension schemes. We now have certainty on our pension funding requirements for the next three years, which will lead to additional free cash flow of around £50 million per annum.

“The Group’s pension liabilities have been de-risked significantly, and we will continue to work with the various Trustees on opportunities to further de-risk our schemes in a cost effective manner. The additional free cash flow will underpin our ability to invest in attractive growth opportunities and to support dividend growth in line with the long-term growth in underlying earnings.”

Notes

In addition to TIGPS, SIPS and the US scheme, the Company’s 2015 Annual Report sets out unfunded pension plan and post-retirement benefit obligations with a present value of £115m at 31 July 2015.