National Grid sponsors two significant defined benefit pension schemes, the UK Gas scheme and an Electricity Supply Pension Scheme (ESPS) section with a total membership of approximately 110,000. Total UK pension assets and liabilities are in excess of £16bn.
Like all organisations with significant pension liabilities, budgeting for pension costs is important for National Grid and when markets became volatile running up to the March 2009 year end, the corporate sponsor was particularly focused on trying to estimate the year end accounting position and the potential scenario that might emerge from the then forthcoming 2010 valuations. At the time, National Grid had only a highlevel understanding of the sensitivities and carrying out ‘what-if’ scenarios required significant work and adviser costs.
Tilly Ross, Global Head of Pensions at National Grid comments:
“As markets became more volatile following the crisis in 2008 it became increasingly difficult to make projections around our overall year-end accounting. It was also difficult to have a corporate understanding and prediction of what the funding position might be”.
“It was about this time we became aware of RiskFirst which had an analytics platform that we felt might be useful. So, we met with RiskFirst to see their PFaroe platform and it became clear right from the start that they had something very interesting. We had a look as to what other options might be available to us and came to the conclusion that PFaroe was the most powerful and appropriate tool for our needs. We also felt that the idea of a system which was independent of our advisers provided added objectivity”.
Building a business case
From that point, much consideration was given as to where the value of PFaroe could be realised. It boiled down to several key areas:
Group planning and oversight
Better management information for a significant element of the corporate balance sheet.
Accounting and budgeting
Facilitating a more robust approach to budgeting and allowing monitoring of changes to forecasts
OFGEM’s revised requirements were placing more demands on National Grid’s pension reporting and analysis.
Understanding the sensitivities of the schemes without having to turn to the advisers.
Overall efficiencies in the management and control of the schemes and helping to improve conversations between the corporate sponsor and the trustees.
“There were other benefits but these were the main ones that contributed to the business case. The combination of both tangible and intangible savings, including a significant reduction in the cost of our accounting process, improved management and control efficiencies, and the ability to run scenario analysis more accurately in a more timely fashion, all helped to create a compelling business case for PFaroe.”
Ross engaged National Grid’s advisers and auditors as well as the trustee boards. “The feedback was positive and others involved in running the schemes could see the benefits of having better information available to them.”
Implementation and impact
Once contractual negotiations had been completed, the project team went through a set-up phase where the member data, scheme rules and assets were loaded into PFaroe. Ross states:
“We thought that this period was going to be quite onerous for us but in fact it was easier than anticipated! RiskFirst ran the process and did most of the work and when the system went live our real work started. We had to start building operational plans and introducing PFaroe in detail to a broad range of stakeholders. This did require a change in some old established processes but the work is progressing, moving in the right direction and we’re confident of the outcome.”
Any technology solution should provide efficiencies over more onerous manual tasks and PFaroe is no different. From a personal perspective Ross comments on how PFaroe has improved the team’s day to day work life. “PFaroe speeds up the job and allows us to focus proactively on other tasks. It makes us more efficient. We don’t have to rely on the actuary as much; that in itself saves costs, but it’s the speed with which we can get answers that is most helpful. We are also more confident in the quality of the information we can communicate to other stakeholders within the senior management team and the schemes.
PFaroe has been live for over 12 months within National Grid and it’s always interesting to compare the difference between the expected areas of benefit pre-contract to the actual experience. Ross sums up:
“We think we foresaw a lot of what PFaroe could do for National Grid but with new functionality and modules being added all the time, our use of PFaroe will increase significantly going forward”.