Changes from previous issue:
Q4 completely revised
Q13 through Q24 added
The Trustee Board have put together this Q&A for all members of the Nortel Networks UK Pension Plan (the “Plan”). Most of you will have received the Summer 2008 issue of Newslink which contained a lot of information but we are aware that in the current climate many of you may have additional questions about the Plan. We hope that this Q&A will address most of those questions but please do not hesitate to contact us if further information is required – firstname.lastname@example.org
A number of questions have been asked about the Pension Protection Fund which was set up in 2005. Some of the answers below deal with the operation and level of benefits of the PPF – particularly Q9. These answers are given in good faith and result from interpretation of information published on the Pensions Regulator and Pension Protection Fund websites. Whilst every effort has been taken to ensure accurate information is given it must be assumed to be for guidance only and not a definitive statement of entitlement or the law.
Any member who is considering making changes to his/her pension arrangements is strongly advised to seek professional guidance and is reminded that neither the Trustee nor NNUK can provide advice on your personal or financial circumstances. To find an independent financial adviser go to www.unbiased.co.uk and type in your post code. This will give you a list of IFAs in your area.
# These questions are only relevant to employees of NNUK
* These questions are only relevant to active or deferred members of the Plan
Q1. Is Nortel Networks UK Limited (“NNUK”) still contributing to the Plan ?
Q2. How safe are the Plan assets?
Q3. What responsibility, if any, does NNL have for the Plan?
Q4. How does the valuation process work and why does it take so long to agree a deficit figure ?
Q5. Share prices have fallen heavily in 2008 – will this directly impact the value of the Plan assets ?
Q6 If the Plan is in deficit can the Trustee force NNUK to make up the deficit immediately ?
Q7. What rights do the Trustee and Plan members have in the event of a serious change in circumstances of NNL or NNUK ?
Q8 How is the PPF funded and does it cover the Nortel Plan ?
Q9 What level of benefits does the PPF provide ?
Q10. I am not yet in receipt of my pension, should I transfer my benefits out of the Plan now ? *
Q11. In the event that the company gets broken up and effectively ceases to trade is it better to be an existing pensioner ? *
Q12. Does the Nortel Pension Fund loan shares to third parties ?
Q13. How much notice do I need to give to put my Nortel (final salary scheme) pension into payment ? *
Q14. How will my AVCs affect the cash withdrawal option from the plan ? *
Q15. Will my AVCs be included in the size of my pension pot in PPF compensation calculations ? *
Q16. Can I leave my current AVCs invested and just draw my Nortel pension ? *
Q17. Is it possible to do an exception and swap to the GPPP now rather than wait until July under flex ? #
Q18. If I am made redundant, can my redundancy payment be passed through the GPPP in the same way as the final salary scheme allows ? #
Q19. If I am made redundant, can my redundancy payment be passed through any other pension provider I may have if I am not in either the Nortel Schemes (final salary or GPPP) ? #
Q20. What is the limit on drawdown in the GPPP ? *
Q21. In the event of a "Type A" event, will I be able to start drawing pension/ take lump sum during the "Assessment Period" ? *
Q22. What are the options for transferring my benefits out of the plan, as referred to in Q10 of the December 2008 Nortel Pension Plan Q&A ? *
Q23. What is the impact of Nortel (US) filing for Chapter 11 on Nortel UK and the UK pension plan, is it an automatically a "Type A" event ?
Q24. If you have multiple pensions, does the PPF compensation cap consider assets in all pensions or just the one that has gone into administration ?
A. Yes. NNUK has maintained its annual contributions of £85m into the Plan since April 2005. This is made up of ongoing accrual for active members and deficit contributions. The Trustee is currently engaged in negotiations with NNUK regarding funding as part of the triennial actuarial valuation process as at 31 March 2008. This process should be concluded by the end of June 2009.
A. The assets of the Plan are held completely separately from those of NNUK and its overseas parent Nortel Networks Limited (“NNL”). These assets are ring fenced to provide pension benefits to the members of the Plan. They cannot be called upon by any creditors of NNL or its subsidiaries under any circumstances.
A. The day to day running of the Plan is the responsibility of the Trustee. NNUK is the Principal Company named in the Trust Deed and Rules and therefore also has responsibilities under the Trust Deed and Rules. Under the terms of the Funding Agreement with NNUK dated 21 November 2006, NNL guarantees the payment of the £85m annual contributions to the Plan mentioned in Q1 above.
A. The current Plan valuation process is described in some detail in the Summer 2008 edition of Newslink on pages 6 and 7. It is based on the situation as at 31 March 2008. Newslink also identified that the value of our assets at that time was £1,658M.
In order to determine the deficit we also have to calculate the present day value of liabilities at the same date. Unfortunately, liabilities are heavily dependent on assumptions about the future which are a matter of opinion (albeit ‘informed’ opinion) and not a matter of fact. Mortality is perhaps the obvious one but inflation and future investment returns have a very large impact. When you remember we are trying to look over 50 years ahead you will appreciate that this is an extremely daunting and imprecise exercise. The whole process is essentially a budgeting activity to set the NNUK contribution rate.
We employ the services of an actuary to help us to make prudent and supportable assumptions to arrive at the liabilities but at the end of the day they are just that – assumptions! NNUK, who also employ an actuary, will inevitably have a different view on many of the assumptions and we can expect that their view on liabilities will be less than our own. Negotiations with NNUK, which are already underway, will eventually result in agreement on the many assumptions which in turn will lead to agreement on the liabilities and hence the deficit. Once the deficit is agreed then funding discussions can progress leading to a recovery plan over perhaps many years. Whilst the desire to clear any deficit as quickly as possible is paramount for the Trustee this must be tempered by the ability of NNUK to pay. The Pensions Regulator currently seems to accept that extended recovery periods may be entirely justifiable in the current economic climate.
Of course, the Trustee has a view on the likely liabilities figure and hence the deficit but it would be quite wrong to mislead members by speculating on the final deficit figure which is highly geared to liabilities. For example, if our assets were fixed at 85 and liabilities were estimated to be 100 +/- 10% then the deficit will vary from 5 to 25 !
All of the foregoing is based on a snapshot in time – 31 March 2008 – we all know what has happened to stock markets since then but can only guess what will happen in the future and when. We are bearing this in mind as we negotiate an appropriate deficit and contribution rate with NNUK.
It is hoped that the foregoing gives some insight into why the whole process has an allowed timescale of 15 months – we are just over half way through so please bear with us.
A. The deficit in the Plan will usually worsen if share prices fall, but because the Plan’s assets are split mainly between equities (shares) and bonds (which are usually less volatile) this means that the total asset value is generally less volatile than headline market indices. Another consideration is that the Plan’s investments are long term in nature to provide benefits over many decades so variations in timescales of a year or two are of less significance provided that share prices revert to more normal levels over a longer timeframe.
A. There is no provision in the Trust Deed and Rules that allows the Trustee to demand an immediate payment from NNUK to correct the deficit. Even if there were, exercising such a provision would probably damage NNUK and in so doing, the interests of all Plan members. Both the Trustee and NNUK have to work within the framework set out by the Pensions Regulator which expects the two parties to agree a funding plan that will be executed over a period of several years. In our case the current funding negotiations must be completed by the end of June 2009 and the Pensions Regulator would only become involved if this timescale was not met or it was not considered that an appropriate funding arrangement had been agreed.
A. The Pensions Act 2004 established the Pensions Regulator as the regulatory body for work based pension schemes in the UK. The key objectives of the Pensions Regulator are 1) to protect the security of members’ benefits, 2) to promote effective administration of the schemes and 3) to reduce the risk of situations arising that may lead to claims for compensation from the Pension Protection Fund (the “PPF”).
An event which is, or could be, materially detrimental to the ongoing viability of a defined benefit pension scheme is referred to as a “Type A event”. Type A events could include corporate events such as takeovers, mergers, acquisitions, disposals, restructuring or an employer ceasing to trade or becoming insolvent.
As soon as NNUK becomes aware of the expected occurrence of a Type A event then it has agreed to notify the Trustee. The Pensions Regulator also expects the Trustee to be involved in any negotiations to the extent that the operation of the Plan is adversely affected. NNUK and the Trustee would have to share information and take steps wherever possible to protect the Plan. The Trustee is obligated to protect members’ interests in the Plan in accordance with the law and the Trust Deed and Rules and will take appropriate professional advice in this regard.
Clearance for a Type A event may be sought by either NNUK or NNL from the Pensions Regulator who will look for evidence that NNUK has involved the Trustee and, where appropriate and necessary, action has been taken to mitigate any adverse effect on the Plan.
If NNUK becomes insolvent then members of the Plan would be eligible for compensation from the PPF subject to their rules and the Trustee would commence the process by entering the ‘Assessment Period’. This will normally be completed within two years during which time normal pension benefits would continue to be paid – but note comments in respect of members under normal pension age in Q21. Note that it is possible the Plan will be allowed to wind up outside the PPF which would mean the Plan has been judged capable of continuing to provide its usual benefits. Further details of this process and possible outcomes can be found at:
A. The PPF is funded by annual levies paid by eligible final salary pension plans and assets of other schemes already under PPF control as a result of employer insolvency. The Plan is an eligible plan and NNUK has been paying the required annual levy since April 2005.
This reply assumes that the Plan has been accepted into the PPF following the Assessment Period and hence the Plan has not been allowed to wind up outside the PPF- refer to the link at the end of Q7.
A. The PPF provides different levels of compensation depending on whether you are in receipt of your pension and over normal pension age for the scheme being considered. Normal Pension Age (“NPA”) is defined as the minimum age at which a member can start to receive pension benefits without incurring a reduction for early retirement - this is 60 in the case of the vast majority of members of the Plan. Note that the term NPA is purely a PPF concept which is used to determine this significant age threshold. Despite the similarity of terms it is quite different to the term 'Normal Pension Date' used within the Plan documentation - hence the different ages.
For Members OVER NPA at the Assessment Date: PPF compensation will be 100% for all members whether or not they are actually in receipt of a pension at that time.
Ill Health and Spouse/Partner Pensions: 100% compensation will be paid if you are receiving a legitimate ill health pension or you are a spouse/partner etc who was already receiving a pension as a result of the death of a member. Note that ill health pensions may still be subject to future health reviews
For Members UNDER NPA at the Assessment Date: PPF compensation for members below the Plan’s NPA (whether or not you are actually in receipt of a pension) will be up to 90% on reaching NPA based on your accrued pension at the start of the ‘Assessment Period’ (see Q7 above). Note that further reductions apply for early retirement and in addition compensation is subject to a cap which is recalculated annually.
By way of example, between April 2008 and March 2009 this cap at age 60 is £27,945 representing compensation of £25,151 at the 90% level.
Upon the Death of a Member: Surviving spouses/partners will normally receive 50% of the compensation being paid to a member. If a member was not yet in receipt of compensation then the member will be treated as having reached NPA the day before his/her death and spouse/partner compensation will be 50% of what the member would have been entitled to.
Treatment of AVC’s: The fact that a pension in payment may include an element relating to a member’s AVC fund is largely irrelevant in terms of current or future payments although the manner of payment of this element may change. If a pension has not yet been taken then a member’s AVC fund will not be taken into the PPF and the member will be able to use that fund to purchase further pension benefits on the open market.
Future Increases: Note that there will be no increases to pensions in payment except in respect of Retail Price Index (“RPI”) inflation for that part of pensionable service from April 1997 onwards and even this element will be subject to a maximum increase of 2.5% per annum. For pensions in deferment compensation will increase by RPI but subject to a maximum increase of 5% per annum (this is expected to be reduced to 2.5% per annum in relation to service accrued from April 2009). However, the compensation then paid at NPA is still subject to the 90% figure and the overall cap at that time.
The following is a link to a leaflet from the PPF website on this topic which describes the different levels of compensation and gives more examples which may better reflect your own personal circumstances.
We suggest you check out other parts of this site for more detailed information.
In addition, the Pensions Regulator website contains lots of information about the work of the Regulator and detailed information for pension plan members.
A. This will depend on your own individual circumstances and you should always take independent financial advice before making any decision on such action. Please refer to the guidance note at the beginning of this document
A. The key driver for the level of PPF compensation is whether or not you have reached NPA for the Plan – please refer to the full text of the answer to Q9 above
A. This activity is known as ‘securities lending’ and the Trustee does not currently lend securities to any third party. However, the use of securities lending and a whole host of other financial instruments may be utilised by the Trustee at some point in the future as part of an overall investment strategy. Investment strategy is the sole responsibility of the Trustee and decisions are only taken after receiving the appropriate level of professional advice.
A. You are advised to give two months notice of your retirement date to both HRSS and Watson Wyatt Ltd, the Plan administrators.
HRSS need to know by the 8th of the month in which you wish to retire so that they can advise Ceridian to stop the 5% contribution being taken from your salary. To do this you need to complete the Lifestyle Change Form on S@W and read the Q & A on opting out of the Plan. These can be found at http://services.europe.nortel.com/Livelink/livelink.exe?func=ll&objId=26941&objAction=sawbrowse
Watsons need two months notice so that they can prepare the necessary paperwork with your retirement options at your chosen retirement date. You will need to complete this paperwork and return it to Watsons so that they can set up the pension. It will then be backdated to your chosen retirement date. You can contact Watsons through ePA on the pensions website at www.nortelpensions.com.
Please be aware of the consequences of taking early retirement from the Plan which include loss of 3x salary Death in Service life cover, loss of future accrual under the Plan and a lower pension that you would get if you stayed until Normal Retirement date. Please also check Q9 for further comments about early retirement.
A. Your AVCs with Winterthur Life or Equitable Life will be taken into account when calculating your tax free lump sum, now known as a Pension Commencement Lump Sum (PCLS) from the Plan. If you could take a PCLS of e.g., £50,000 at retirement and you had e.g. £10,000 in AVCs then the Plan would only need to fund the remaining £40,000 PCLS. Your Plan pension would then be slightly higher as you would only have given up £40,000 to fund the PCLS not the full £50,000.
A. Please see Q9 above for details of the Treatment of AVC’s in the PPF.
A. No. You must take your AVCs at the same time as you draw your NNUK pension. If the Plan enters the PPF then please refer to the Treatment of AVC’s section of Q9.
A. Yes. As this would be classed as a Lifestyle Change you would be able to join the GPPP outside the flex renewal.
A. Redundancy payments can be paid into the GPPP by NNUK but the benefits available from the GPPP are different from those under the Plan (final salary). Under the GPPP you may take retirement benefits from age 50 (rising to age 55 in 2010). At retirement you can elect to take up to 25% of your total pension fund as tax free cash (irrespective of the any redundancy payment from NNUK) and then you would need to buy a pension with the remaining fund.
A. Yes so long as it is a registered Pension Plan and the provider can confirm that it is able to accept the payment from NNUK.
A. Currently the Prudential do not offer a draw down facility under the GPPP. The option you would have at retirement is to transfer your fund from the Prudential to another provider who offers drawdown. The relevant limits would then be dependent on the provider you have chosen.
A. Please see Q7 above for a description of "Type A" events. A "Type A" event would not necessarily lead to the Plan entering the Assessment Period of the PPF. If it does, then during the Assessment Period, the Trustees would retain responsibility for the administration of the Plan and for communicating with and making pension payments to Plan members. However, during the Assessment Period, various restrictions and controls will apply in relation to the Plan. In particular, pensions will be paid in accordance with Pension Protection Fund compensation levels which may impact members who are UNDER NPA. Please see Q9 above for full details of the levels of compensation paid from the PPF.
A. You can take a Cash Equivalent Transfer Value (“CETV”) at any time from the Plan but you must transfer it to another registered pension plan and you are advised to take Independent Financial Advice. In most cases the provider of a registered pension plan would require you to have a Financial Adviser involved before they would accept payment of the CETV. You can run your own CETV calculations from ePA on the pension website at any time. To transfer the money out of the Plan your Financial Adviser would need to contact Watson Wyatt with the relevant paperwork completed and signed by you.
A. A Chapter 11 filing by Nortel (US) would not, of itself, automatically and immediately be a Type A event and would not automatically put NNUK into insolvency or trigger the winding up of the Plan. However, it is clearly likely that the consequences of the Chapter 11 event could weaken the ability of NNUK to fulfil its obligations to the Plan and hence be materially detrimental to the Plan’s ability to meet its liabilities – which would be a Type A event. Please refer to Q7 above for further information on Type A events.
A. The PPF is only concerned with the pension plans it is administering so if you have other pensions outside the PPF they would not be taken into consideration when the PPF cap is applied.