The Trustee Board
Nortel Networks
Issue 5A dated
January 18 2010
Changes from issue 5:
Updated: Q1-3 Item 3
all references to Watson Wyatt
changed to Towers Watson
Changes from Issue 4 to Issue 5
Renumbered: Q1-7 as Q7-9
Updated: Q1-1, Q1-3, Q1-5,
Q2-1, Q2-2, Q2-3, Q3-5, Q3-6, Q3-8, Q3-10, Q4-3, Q4-4, Q7-2, Q7-7
Added: Q1-7, Q2-4, Q3-11,
Q4-6, Q4-7, Q7-8, Q7-10, Q7-11
The Trustee Board have put together this
Q&A for all members of the Nortel Networks
You
can contact us in any of the following ways:
Email: nortel.networks@eu.watsonwyatt.com
Post: Nortel Networks
Fax: 01707 607563
Telephone: 01707 607601
Please note that the Pension Protection Fund (“PPF”) does not hold
details about Plan members and cannot comment on your individual case. They
will be unable to help you if you contact them directly to ask about your
personal circumstances, however, they will be able to assist you if you have
general queries about the PPF.
In addition to the information in this Q&A, the PPF’s own website has a great deal of further information for members and can be accessed by following this link.
Some
of the questions and answers below deal with the operation and level of
benefits of the PPF. These answers are given in good faith and
result from interpretation of information published on the Pensions Regulator
and PPF 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
drawing pension benefits from the Plan 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 http://www.unbiased.co.uk/
and type in your post code. This will give you a list of IFAs
in your area.
This Q&A contains a lot of detailed information but
in terms of answering the question “is my pension safe ?” it may be worth
repeating some simple statements contained in the March 2009 Member
Announcement. If, on January 13, 2009,
you were:
1.
A male aged 65 or over; or
2.
A female aged 60 or over; or
3.
In receipt of a survivor’s
pension (e.g. as a spouse of a former member of the Plan); or
4.
In receipt of an ill health pension which you
had been receiving for at least three years
then your pension will not be reduced and payment will continue unchanged at the same level. However, for most members, there will be only be limited or no increases to reflect future inflation.
The
Plan is formally in the PPF assessment process (“Assessment”) with an effective
start date of January 14, 2009. The PPF (rather than the Trustee) is the formal
NNUK creditor for our Plan and is liaising directly with Administrators. The Trustee continues to be obliged to
consult the PPF on many issues and will continue to work closely with the PPF
for the benefit of all Plan members.
Section 1 - Nortel and Administration
Section 4 - Normal Pension Age (“NPA”), PPF Compensation Cap (“Cap”) and Treatment of AVCs
Section 5 - Dependants and Ill-Health Pensions
Section 6 - Existing Pensioners
Section 7 - Deferred Pensioners
Q1-1. What is Administration ?
Q1-2. How safe are the Plan assets now that Nortel has filed for Administration ?
Q1-6. What happens to my life assurance or death benefits during Assessment ?
Q1-1. What
is Administration ?
A. This is a formal insolvency
procedure in which qualified insolvency practitioners (called “Administrators”)
are appointed to take control of a company and run it in accordance with
certain statutory objectives.
A company is "insolvent" if it is
unable to pay its debts. A company will
be deemed unable to pays its debts if:
(1) it fails
(without any legal excuse) to pay its debts as they fall due ; and/or
(2) its
liabilities exceed its assets.
The primary objective of an Administration is
to rescue the company as a going concern.
If this cannot be achieved, then the objective is to achieve a better
result for the company's creditors as a whole than would be likely if the
company were wound up.
The Administration procedure confers upon the
company a statutory moratorium under which creditors may not commence or
continue any enforcement action or other proceedings against the company or its
property without the consent of the Administrators or the permission of the
court. This effectively means that the company is protected from its creditors
for the duration of the Administration so that the statutory objectives may be
achieved.
NNUK Administrators currently believe that
the interests of all creditors are best served by allowing the company to
continue to trade while restructuring and/or disposal of parts of the business
is carried out. Approximately 370 redundancies have been announced in the
Similar insolvency proceedings are also
taking place in
In respect of certain guarantees in place
between the Trustee and NNUK's overseas parent company Nortel
Networks Limited (“NNL”), the Trustee is taking the necessary legal steps to
establish the Trustee as a creditor of NNL in
Q1-2. How
safe are the Plan assets now that Nortel has filed for Administration
?
A. The
assets of the Plan are held completely separately from those of NNUK and 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.
Q1-3. I
have seen wildly differing estimates for the deficit of the Plan. What is the correct figure and what are the
chances of getting the full sum from Nortel so that the Plan can continue with
full benefits for all members ?
A. Both the Administrator and the PPF
require an early indication of the ‘best guess’ deficit of the Plan but their
respective requirements of the calculation of liabilities differ
considerably. The Administrator needs a
figure which represents the cost of buying the full Plan benefits for all
members from an insurance company whereas the PPF requires a figure which
represents the cost of buying the lower PPF level of benefits. Both of these figures must represent the
situation at the close of business on January 13, 2009.
The current unaudited estimate of the value
of all the Plan assets on this date is £1.5B and the initial ‘best guess’ cost
of buying out full Plan benefits from an insurance company is estimated to be
£3.6B which leads to a deficit of £2.1B.
This figure represents the Plan’s claim against NNUK. The chance of obtaining this sum in full is
considered to be extremely unlikely.
Similarly, the initial ‘best guess’ cost of
buying out PPF level benefits is estimated to be £2.2B which leads to a deficit
of £700M. This figure represents the
minimum amount of money the Plan would have to recover from NNUK or other
Nortel companies to avoid the PPF taking over responsibility for the Plan at
the end of the Assessment. For the
purposes of the remainder of this answer we have referred to this figure as the
‘PPF Deficit’. It is too early to
comment on the likelihood of achieving this sum.
The above figures are estimates only so please treat
them with considerable caution. Please
note that we do not expect to have firm figures until later in the Assessment.
The primary aim of the Trustee/PPF is to
recover as much cash as possible from the UK/North America insolvency processes
– preferably more than the PPF Deficit.
This will be a significant challenge but one which the Trustee/PPF has
already embarked on. The possible
sources already identified as being available include:
1. From NNUK (in Administration). The amount of money available to meet our claim within NNUK is not known since it will depend on (a) if and how Nortel is restructured globally, (b) the possible sale of parts of the business to third parties and (c) how ‘value’ is attributed throughout the global Nortel companies. The Plan’s claim represents over 90% of the total creditor claims on NNUK and whatever happens, the Trustee, the PPF and the Pensions Regulator will have to be convinced that the Plan will receive its ‘fair share’ of any sale or restructuring of Nortel’s global business.
2. From NNUK’s parent Nortel Networks Limited in
Again, it is not known how much money will be available to meet these claims or
indeed how our claim will be treated alongside all other claims against NNL but the Plan is certainly not the only creditor of NNL – there are
others that may give rise to some significant claims.
3. Arising from the application of a Financial Support Direction
(“FSD”). On September 30, 2009 we advised members
that claims
had been filed against Nortel in the
The primary objective of the FSD legislation is to prevent the Plan's
liabilities from falling into the PPF.
In the case of one such FSD - in respect of Sea Containers Limited – the
issue of the FSD was recognised in the North American
proceedings.
Preparation for the issuance of a FSD is complex and required considerable
analysis of the involvement of Nortel entities in the Plan and the location of
funds that might be available to the Plan.
The Pensions Regulator must also behave reasonably having due regard to
all the circumstances applicable to a claim.
We can now inform you that this preparation has resulted in the Pensions
Regulator, supported by the Trustee, deciding to proceed with the FSD process
against certain Nortel entities in the
If the FSD is issued, the target entities will be required to propose a level
of financial support to the satisfaction of the Pensions Regulator (in
conjunction with the Trustee). This
process is likely to take a considerable period of time and the likely level of
recoveries will be kept under continuous review. We will continue to keep
members advised of ongoing activities by regularly updating this Q&A.
In respect of all of the above activities, the Trustee is supported by its team of professionals as detailed in Q2-1.
Deficit recovery will involve all of the above activities (and possibly other activities if more are identified) and a final conclusion may be some time away. If it is not possible for the Trustee to recover at least the PPF Deficit then the Plan will become the responsibility of the PPF at the end of Assessment.
It is worth noting that if the recovery of equity and bond markets result in an increase to Plan assets during Assessment then this will not reduce the deficit which must be achieved by the Trustee to avoid entry into the PPF. The PPF assumes the risk of movement of Plan investments (up or down) with effect from January 14, 2009.
Q1-4. If
there is a restructuring or break up of Nortel doesn’t the ‘full buyout
deficit’ of the Plan transfer to the ‘restructured, associated or connected’ company ?
A. The funding deficit does not automatically transfer to associated or connected companies. The Pensions Regulator can impose a sanction on associated or connected companies in certain circumstances. The Plan is a creditor of NNUK under section 75 Pensions Act 1995 and a creditor of NNL under certain pension guarantee arrangements. The amounts which can be paid to each creditor will be calculated as part of the restructuring. Those amounts will include the proceeds of any sales or restructuring exercises involving the assets or business of NNUK and NNL. Those assets include the associated and connected companies. The important consideration here is that the Plan receives its ‘fair share’ of any ongoing business derived from the Nortel group. Further information is given in Q1-3
Q1-5. I
understand the first creditors’ meeting was held by the Administrators on March
11, 2009 – what happened ?
A. The main purpose of this meeting
was for the Administrators to present their ‘Statement of Proposals’
(“Proposals”) to the meeting and ask the creditors to vote for their approval
or otherwise. The Proposals envisaged that NNUK would continue to trade for now
since the current view is that this will give the best chance of maximising the outcome for creditors
(including the Plan) while restructuring options are fully explored. The Proposals dealt with the background and
circumstances leading up to the Administration and included an analysis of
Nortel’s business by product and geographic region. NNUK has no ‘secured’ creditors and employees
are the main ‘preferential’ creditors in respect of certain limited
amounts. The Plan is by far the largest
unsecured creditor with a reported claim of £2Bn which represents the buyout
cost of full Plan benefits with an insurance company. This is about 90% of the total creditors’
claims.
The Proposals were approved by the creditors.
Full details of the published Proposals and other material relating to the
Administration can be found by following this link.
During the
meeting the creditors opted to form a creditors' committee (“Committee”) which
must consist of between three and five creditors. The purpose of the
Committee is to act as a consultative body and to assist the Administrators in
the discharge of their functions. To fulfil its functions, the Committee may receive
regular reports from the Administrators (under obligations of confidentiality)
and is also responsible for determining the Administrators’ remuneration.
The first formal meeting of the Committee was held on April 3, 2009 and further
meetings have been/will be held as required in accordance with the relevant
legislation. Committee decisions are made by a simple majority vote on
the basis of one member one vote. It should be noted that any substantial
matter or amendment to the Proposals will require the approval of the full body
of creditors. Committee members are not paid, but will receive their
reasonable travelling expenses as a cost of the Administration. The
Committee consists of the Plan (represented by the PPF), Flextronics (major
supplier), JDSU (major supplier), Invest NI (manufacturing development agency
grants) and Kuehne & Nagel (logistics).
The first report published by the Administrator
in August can be found be following this
link. Actions being taken by Nortel globally (e.g. disposals of various
parts of the business) can be seen by following this link for current and
past Nortel news releases.
Q1-6. What happens to my life assurance or death benefits during Assessment ?
A. From the start of Assessment (January 14, 2009), any life
assurance or other discretionary lump sum benefit provision on death payable
under the Plan ceased. For employees who were active members of the Plan prior
to January 14, 2009, NNUK has made alternative arrangements which
have been separately communicated to those affected employees.
Q1-7. It seems clear that all Nortel businesses and assets are now being
sold off for the benefit of the various creditors worldwide. How much cash has
this generated so far and what is the pension fund’s share ?
A. The following table is a summary of all the major business/asset sales which have been announced by Nortel so far.
|
Major
business / asset sales |
Amount in US$m |
Comments |
|
CDMA and LTE access assets |
1,130 |
|
|
|
900 |
|
|
Metro Ethernet Networks |
769 |
Note: proceeds consist of US$530m in cash plus US$239m principal amount of convertible notes due June 2017. |
|
GSM/GSM-R Business |
103 |
|
|
TOTAL |
2,902 |
|
Note: the above table excludes some minor asset and property sales.
It is not
possible to comment on the Plan’s likely share of these sums until such time
as: (a) agreement is reached on how these sums are to
be allocated between the estates of the various Nortel entities
worldwide (the sums will be held in ‘escrow’ until such
agreement); and (b) the Plan's claims in the insolvencies of the relevant
Nortel entities are determined. This
process may not be concluded for a considerable period of time. We will update
the above table whenever this Q&A is updated.
Q2-1.
During PPF Assessment do the members of the Trustee Board have the experience
and knowledge to make sure that the Plan gets the largest possible settlement
from Nortel ?
Do any of the Trustees have a conflict of interest with Nortel and what
happens if a Trustee’s term of appointment expires or he/she resigns
?
A. The Trustee Board consists of
eight Trustees – an independent chairman, three elected by members of the Plan
(two are pensioners, one is now a former employee), three nominated by NNUK and
one representing an independent professional Trustee company (BESTrustees). Once
appointed, all Trustees are under a legal obligation to promote and protect the
interests of all members regardless of status.
More information about the Trustees can be
found by following this link. Two of our Trustees have experience of working with the
PPF for other schemes going through Assessment and the Trustee Board
also has access to a team of professionals to assist us going forward – Pinsent Masons (Legal – UK), Cassels
Brock (Legal – Canada), Willkie Farr & Gallagher
(Legal – USA and France), PricewaterhouseCoopers
(Financial), Mercer (Investment), Towers Watson (Actuarial). The Trustees are working closely with the PPF
whose objectives going forward are very similar to those of the Trustee Board.
In respect of any new appointments that may
become necessary it would seem sensible to seek individuals who have knowledge
and experience of the Assessment and/or previous involvement with the operation
of the Plan. It is also likely that we
would have to consult the Pensions Regulator and/or the PPF before decisions
are taken.
Q2-2. I understand that the official ‘year end’
for Plan accounts is to be changed to January 13, 2009 – why is this and how
does it affect members ?
A. The Trustee Board have
changed the Plan year end for 2009 only from March 31 to January 13. The Plan
actuary needs a special set of accounts to reflect the situation at January 13,
2009 for the purpose of calculating Plan assets and liabilities for PPF
purposes. Moving the statutory ‘end
year’ to the same date will avoid the cost of having two sets of accounts
prepared during 2009. These are the
reasons for changing the ‘year end’ and the change will not affect your pension
from the Plan.
Q2-3. I
understand that the Consultative Committee (“CC”) has been disbanded because it
was an NNUK sponsored body – are there any plans to reinstate it as a Trustee
sponsored body during the PPF Assessment process ?
A. The Trustee met with a number of former members of the Consultative Committee on
June 18, 2009 to discuss how they could assist with communication to Plan
Members during Assessment. They agreed to create the Pensions Communication
Group (“PCG”), which would meet with the Trustee on a roughly quarterly basis
and which would provide feedback to the Trustee on the communications being
published by it. The PCG would also seek to ensure that the communication
reached as many members as possible, using their extensive networks amongst
Plan Members. The first meeting with the
PCG was held on August 21, 2009. Members
can contact the PCG at glawrence@iee.org
Q2-4. The
Trustees normally publish a Summary Funding Statement each year – will this
continue during PPF assessment ?
A. No. The issue of a summary funding statement is normally required
under the terms of the Pensions Act 2004 but these terms do not apply, in
certain circumstances, to schemes, such as the Plan, which is are in
Assessment.
Q3-1. What is the Pension Protection Fund ?
Q3-9. Can I go online and access PPF documents and information directly ?
Q3-1. What is the Pension Protection Fund ?
A. The Pension Protection Fund was set up in April 2005 under the Pensions
Act 2004 to protect employees in a final salary pension scheme if their
employer becomes insolvent and enters Administration. Entering Administration automatically triggers the beginning of Assessment.
Q3-2. I
understand that the PPF have now formally accepted Nortel into the Assessment
period –why did it take so long and what effect does this have going forward ? More
importantly, why does the Trustee think the PPF represents the best deal for members ?
A. The PPF have to follow certain
validation procedures before formal acceptance of NNUK into the process. One of
the procedures is to establish who the current employers in the Plan are. This is particularly complex in the case of
the Plan since there were some 80 historical employers which used to
participate in the Plan over the past 20 years.
The PPF needed to see full evidence of all these so they can be
satisfied that there are no employers other than NNUK who may still continue to
participate in the Plan. Confirmation of
NNUK’s entry into Assessment was made at the beginning of April 2009 but the
effective start date for Assessment is unchanged and will remain as January 14,
2009. The major difference going forward
is that the PPF now becomes the formal creditor of NNUK in place of the Plan
and will be primarily responsible for the recovery of the sums from NNUK
detailed in Q1-3. However, the Trustee and the PPF will be
working closely together to maximise the sums recovered.
Going forward, the Trustee is now obliged to
operate in accordance with PPF procedures and will have to seek approval on
many issues which were previously a matter solely for the discretion of the
Trustee.
With regard to the issue of the
PPF representing the ‘best deal for members’ it is important to understand that
the Trustee has absolutely no discretion in this respect.
As soon as NNUK filed for Administration on January 14, 2009 the
Administrators were obliged to notify the PPF, Assessment automatically started
and the Trustee was obliged to start following PPF procedures – e.g. service
accruals for active members ceased, restrictions on discretionary benefits
commenced, pension entitlement became restricted to PPF compensation levels.
The process of validation by the PPF has been lengthy for the reasons outlined
above and could be compared to waiting for an insurer to check details of your
policy before processing your claim.
There is a possibility that the Plan may not
transfer to the PPF
– see the possible outcomes detailed in Q3-3.
Q3-3. What
triggers the end of the PPF Assessment and what are the possible outcomes for
Plan members ?
A. This issue is covered in letters sent to every member but is worth repeating here:
There are three possible outcomes to Assessment:-
1. The Plan can be ‘rescued’ either as a result of NNUK coming out of Administration and continuing to run the Plan or a new employer being found who is willing to take responsibility for the Plan, or
2. The cash that the Plan receives during the Administration process is sufficient to ‘buy out’ PPF pension benefit levels (or better) with an insurance company, or
3. If neither of the above are achieved then at the end of Assessment the Plan will become the responsibility of the PPF who will continue to pay pensions ( which will then be referred to as ‘Compensation’) to members in accordance with the benefit levels described in this Q&A.
Q3-4. If
the Plan manages to recover more than the ‘PPF deficit’ level from the
processes described in Q4-8 and we end up buying member benefits from an
insurance company then how will the excess funds be allocated across the Plan
membership ?
A. If the
Plan does not enter the PPF at the end of the Assessment because it recovers
more than the PPF Deficit (see full explanation in Q1-3),
benefits for Plan members will be paid out in accordance with the statutory
priority order. This order broadly applies the total amount of the Plan assets
to pay out PPF level of benefits to all members first followed by benefits
derived from AVCs and then all other benefits, as much as can be
afforded, on a proportionate basis between members.
Q3-5. What
effect is NNUK being in Administration and the involvement of the PPF having on
the investment strategy for Plan assets ?
A. At the end of 2008 the allocation
of Plan assets was approximately 53% in equities, 26% in Fixed Interest Gilts
and 21% in Bonds. Now that the Plan is formally in Assessment, the Trustee has
almost completed putting into effect a revised investment strategy which
reflects PPF requirements. This strategy includes 25% in equities with the
remainder invested in securities designed to match the impact of inflation and
interest rate fluctuations on the cost of benefits. Accordingly, a new
Statement of Investment Principles (SIP) for the Plan has been approved by the
Trustee and is available on our website – click
here to access it. The PPF’s own SIP can be found by clicking
here
Q3-6. What are the options for transferring my benefits
out of the Plan now that NNUK has filed for Administration ?
A. The Trustee is not permitted to make any
transfers during Assessment and all proposed transfers not fully completed by
the start of Assessment (January 14, 2009) have been stopped. It is possible that the PPF might agree to a
transfer in certain circumstances but this would be at a level which reflects
only the level of benefit that would have been available under PPF rules. If you have an AVC fund then please refer to Q4-3
for options available to you
Q3-7. Do I have to declare the compensation I
receive from the Pension Protection Fund to the Department for Work and Pensions ?
A. If you are in receipt of means tested social
security benefits you are required to declare any compensation payment(s) you
have received from the PPF to your local Jobcentre, Jobcentre Plus Office, the Pension Service or local authority. PPF compensation must also be declared to HMRC.
Q3-8.
Under Plan rules all pension increases occurred on April 1st – is the
amount and timing still the same under PPF rules ?
A. This answer and the table below
deals with increases to pensions in payment. Please refer to Q7-10
for details of increases to pensions in deferment.
Future increases to pensions in payment will be in accordance with the table below – in all cases these will be lower than under the Plan. Only that part of your pension that you earned whilst working for NNUK on or after April 6, 1997 will increase. However, if your pension includes any amounts resulting from externally invested AVCs or redundancy payments taken into the Plan at the time of retirement then these amounts will continue to increase as before – see Q4-3 for more AVC details.
Element Increase
Date Increase Rate
RPI
Capped at
Pensions in
Payment
AVC/Redundancy amount April 1st 3% pa
Pension earned pre April 1997 No Increase N/A
Pension earned April 1997 onwards* January 1st 2.5% pa
*The amount of increase is determined by the increase in Retail Price Index (RPI)
in the 12 months up to the previous May 31st (capped at 2.5%). In
cases where the RPI is negative then no increase (or decrease) applies. In the
12 months ending May 31, 2009 RPI was minus
1.1% so there will be no change in pension on January 1, 2010
By way of example, if a member had no pension
resulting from AVC’s and retired in April 2006 with exactly 15 years continuous
service then he/she would have 6 years service prior to April 1997 and 9 years
service from April 1997 onwards. This means that only 9/15 (or 60%) of his/her
pension would be eligible for RPI increases capped at 2.5% per annum.
If your pension includes any Defined Benefit (DB) AVCs then it may not be obvious whether they
are classed as being ‘pre April 1997’ or ‘April 1997 onwards’ for the
calculation of any ongoing increases. In the rules below the references to
start and end dates refer to the dates when contributions were actually made by members – note that all
contributions ceased at the start of Assessment on January 14, 2009:
·
Contracts with a start and end date before April 6, 1997 will not
qualify for increases;
·
Contracts with a start date on/after April 6, 1997 will qualify for
increases;
· Contracts with a start date before April 6, 1997 and an end date on/after April 6, 1997 will be split pro rata and only the period on/after April 6, 1997 will qualify for increases. For example, a contract which started contributions in April 1996 and ended in April 2000 will qualify for ongoing increases on ¾ (75%) of its value.
Q3-9. Can I go online and access PPF documents
and information directly ?
A. Yes. The main link to the PPF website is: http://www.pensionprotectionfund.org.uk/
and there is also a ‘members’ website: http://www.ppfonline.org.uk/
The Pensions Regulator website contains information about the work of
the Regulator and detailed information for pension plan members: http://www.thepensionsregulator.gov.uk/
The following leaflets may also be useful – if any of the links do not
work then please let us know:
General description and levels of compensation.
http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/ppp_leaflet_blue.pdf
How is Compensation Calculated
http://www.ppfonline.org.uk/ppf/pdf/PPF_factsheet_compensation%20calculated.pdf
Early Payment of Compensation
http://www.ppfonline.org.uk/ppf/pdf/PPF_factsheet_early_payment.pdf
Compensation for Survivors and Children
http://www.ppfonline.org.uk/ppf/pdf/PPF_factsheet_survivors.pdf
Compensation and Divorce
http://www.ppfonline.org.uk/ppf/pdf/PPF_factsheet_divorce.pdf
Q3-10. I
read reports in the press that the Nortel scheme will
double the number of pensioners the PPF is responsible for and they may be
forced to cut back benefits. Surely the
PPF is guaranteed by the government so that couldn’t happen ?
A. The PPF is prepared for the increase in insolvencies during this recession, and understands that some claims, such as Nortel, will be large. The framework within which it works is resilient and it has a commitment to paying compensation to people who may have lost their pension through their employer becoming insolvent. This remains its priority.
The PPF is confident that it has enough cash to pay current levels of compensation for years ahead. Currently, it has assets worth £3 billion and is paying out an average of £4 million a month.
Unlike insurance companies, the PPF can run at a deficit over a long period of time. Depending on the size of that deficit, it will decide if and when it needs to take any action to manage the deficit. There are various ways in which it may seek to do this and, currently, the PPF does not envisage one of those ways being the reduction in levels of PPF compensation.
An alternative way to manage the deficit would be to raise PPF levies. The PPF continues to receive income from the levy. It intends to collect £720 million during the next financial year (2010/11). It has already said that it would raise the levy before considering reducing compensation.
The PPF is also now a significant investor with a £2.9 billion portfolio which will increase in time as more schemes become the responsibility of the PPF. Due to this growing investment portfolio there is a possibility that, in future, the PPF will be able to rely less on the income it receives from the PPF levy to fund the compensation it needs to pay its members.
Q3-11. I read stories in the press about a £1.23Bn
PPF deficit – do these figures recognise that Nortel may end up in the PPF ?
A. Yes. We
assume you are referring to the PPF Annual Report for 2008/09. The PPF press
release can be accessed by following this
link. You can also look at the
full report by following this
link and in particular Section 3.3 – Financial Review pages 27 through 29.
4. Normal Pension Age (“NPA”), PPF Compensation Cap (“Cap”) and Treatment of AVCs
Q4-1. The
March Member Announcement noted that ‘a definitive breakdown’ of individual NPAs for the various schemes in the Plan was not available
– what is the situation now ?
A. We now have a full definition covering all members of the Plan. The PPF legislation states:
"
Using the above definition, the NPA
for the Plan is age 60 with the following exceptions:
NPA is 65 for MALE
MEMBERS ONLY who:
· are holding Equivalent Pension Benefits (EPB) or Q entitlements*;
· were a member of the STC Employees (UK) Pension Plan (Including STC Non-Contributory and Works Plans) who left service prior to April 6, 1988;
· were a member of the STC Senior Staff (UK) Pension Plan who left service prior to April 6, 1988;
· were a member of the ICL Pension Fund who left service prior to April 6, 1988;
· were a member of Northern Telecom Retirement Benefits Scheme who left service prior to April 6, 1990;
· were Nortel Networks UK members who left service prior to May 17, 1990 at your own request.
NPA is 62 for MALE MEMBERS ONLY who:
· were Nortel Networks UK members who left service prior to May 17, 1990 at the company’s request.
· were STC Executive Plan members
· were Supplementary Category 3 (ex-ICL and ex-STC) members who left service prior to May 17, 1990.
NPA is 57 for FEMALE MEMBERS ONLY who:
· were STC Executive Plan members
· were Supplementary Category 1 (ex-ICL and ex-STC) members who left service prior to May 17, 1990
· were Supplementary Category 2 (ex-ICL and ex-STC) members who left service prior to May 17, 1990.
NPA is 58 for members who:
· were Supplementary Category 1 (ex-ICL, ex-STC and Northern Telecom) members from May 18, 1990.
· were Female STC Senior Executive Plan Members
* If your NPA is anything other than age 65 and your pension includes EPBs or Q scheme pension, it is only those elements (i.e. the EPBs or Q scheme pension) which have an NPA of 65
Q4-2. I am
still confused about how the ‘Compensation Cap’ works – is it just applied once
or is it reviewed each year and how is the 90% factor applied ?
A. The Cap is only applied once and
only if you are or were under NPA – either at your age on January 13, 2009 if
you were already in receipt of a pension OR at your age when you first put your
pension into payment in the future.
You will have read in the March 2009 Announcement
that the key criteria to determine if your pension may be reduced is your NPA
which can vary depending on which category of Plan membership applies to you
(see full definition in Q4-1). For the purposes of this answer we will assume
that your NPA is 60, you were aged 59 on January 13, 2009 (under
NPA) and were in receipt of a pension of £30,000.
Already in receipt of a pension on January 13, 2009. The first step is to adjust this
figure to reflect any lump sum you may have taken at the time you first took
your pension. Let us suppose that the lump sum you took resulted in a reduction of 20% to
your initial pension. We have to calculate what your current pension would have
been if you had not taken this lump sum and in the example given this would be £37,500
(because £30,000 is 20% less than £37,500).
The Cap
for age 59 at January 13, 2009 was £27,481.56 which is less than your
adjusted current pension of £37,500 so we calculate the ‘Cap Fraction’
which in this case is 0.7328416 (£27,481.56 divided by £37,500). This is then applied to your actual current
pension of £30,000 to give a figure of £21,985.25. Finally, this is reduced to the 90% level to
give a new pension of £19,786.73 i.e. a reduction of 34%.
If you assume that no lump sum was
taken then the new pension would be £24,733.40 i.e. a reduction of 17.5%.
NOT in
receipt of a pension on January 13, 2009. To give an example of this calculation we
have to make more assumptions so let us assume (as above) you were aged 59
on January 13, 2009, had accrued a pension under the Plan of £30,000
at that date and that you actually take your pension in January 2010 but
do not take any lump sum payment.
We need to further assume an inflation figure for your deferred
pension over the next 12 months (say 2.5%) and how the Cap will increase
in that time (say 3.5% which just happens to be the increase applied on
April 1, 2009).
The current Cap at age 60 is £28,924.65
and let us assume no change before January
2010. Your Plan pension entitlement when you retire will have increased
by 2.5% to £30,750 (note inflation increases are currently limited to
5%). Your Plan pension is over the Cap
so your pension will be restricted to £28,924.65 which is then reduced
to the 90% level to give a starting pension of £26,032.19 i.e. a reduction
of 15% to Plan
entitlement.
Note that even if the Cap is not a
consideration, if you are under NPA on January 13, 2009 then your pension
(or entitlement) will be reduced to the 90% level.
In the examples above it is assumed that none
of the Plan pension entitlement includes an element driven by externally
invested
AVCs or redundancy payments taken into the Plan at the time of
retirement. If these elements are
present then for pensions already in payment at January 13, 2009 they will be
excluded for the purposes of the above calculation and for pensions taken in
the future AVCs and redundancy payments will have to be used to buy benefits on
the open market (e.g. an insurance company). Please refer to Q4-3
for more details of the treatment of AVCs and redundancy payments
Q4-3. I
have read in the March announcement letter about the treatment of AVCs and redundancy payments that are a part of my pension –
can you please explain what will happen in more detail ?
A. If you were NOT in receipt of
your pension at the start of Assessment then any AVC sums which are invested with
external providers (e.g. Equitable Life, Winterthur Life, London Life or MGM) cannot
be brought into the Plan when you retire and neither can any redundancy
payments (the latter also known as ‘sacrifice pension’). These sums will have to either be used to
purchase an annuity with an approved external provider of your choice. The foregoing are referred to as Money
Purchase benefits and do not form part of PPF compensation.. However, Defined Benefit (‘DB’) AVCs are part of
PPF compensation since they purchase additional years of service in the Plan.
Members who currently have AVC funds with external providers will
receive personal letters giving details of options available to them. Briefly,
during Assessment and before your take retirement benefits
from the Plan, you may ask for your fund to be transferred from the current
provider to another registered pension plan like a personal pension plan or a
stakeholder scheme in your own name or even a new employer’s plan if this is
allowed by its rules. Alternatively, if you retire from the Plan during
Assessment you may be able to take your AVC fund in full as cash if it is less
than the tax free cash entitlement available to you from the Plan. If you do
not take any of the above actions then ultimately at
the end of Assessment the Trustee will have to discharge any outstanding AVC
money purchase liabilities by purchasing an individual policy for you in your
name - this applies whether or not the Plan enters the PPF. If the foregoing
affects you and you do not a receive a personal letter
then you should immediately contact Towers Watson using the details at the
beginning of this Q&A.
If you were
in receipt of your pension at the start of Assessment then that part of your pension resulting from
externally invested AVCs (e.g. Equitable Life, Winterthur Life, London Life or
MGM) and any pension resulting from a redundancy payment (provided retirement
was not deferred beyond the date of redundancy) are classed as Money Purchase
benefits and will not become part of PPF compensation at the end of Assessment–
please note
that where a redundancy payment was used to provide a lump sum under the Plan,
the Money Purchase benefits which fall outside the PPF calculation will be
reduced by the amount of that lump sum.
Initially, these Money Purchase benefits will continue to be paid as
part of your normal pension payment and, as noted in Q3-8,
inflation increases will be added on April 1st each year. At some time during Assessment, the Trustee
will arrange to ‘buy out’ these Money Purchase benefits with an external
insurance provider and the cost will be charged to Plan funds. Note that the benefits that will be purchased
will be the same as those which members were entitled to under the Plan – i.e.
will include RPI inflation (up to 3% per annum) and, if selected at the time of
retirement by a member, a future 50% benefit for member’s surviving
partner/spouse. Once the buyout or
transfer is completed, members will receive two pension payments each month –
one from the external insurance company and one from the PPF. Note that the foregoing also applies to any
‘survivor’ pensions in payment at the start of Assessment.
Q4-4. I am
under NPA and know that my pension will be ‘capped’ with the reduction being
backdated to January 14, 2009. I now
understand that the ‘overpayment’ in the tax year 2008/2009 will not be clawed
back until the 2009/2010 tax year which could mean that I pay too much tax at
the 40% level in 2008/2009 – how will this be corrected ?
A. Towers Watson (the Plan
administrators) are aware of this issue and have
contacted HMRC with details of any pension overpayment in 2008/2009 which you
will have to repay during 2009/2010.
This should enable HMRC to issue new tax codes for 2009/2010 where
necessary.
If you believe you may have overpaid tax in
2008/2009 but have not received a new notice of coding from HMRC then we
suggest you contact HMRC on 08450 703703.
You should quote your NI number, PAYE reference 961/9900802 and have
your 2008/2009 P60 and any recent payslips to hand.
Q4-5. I
retired at age 50 and hence my starting pension was reduced by the Plan factor
of 3% per annum for every year below 60 i.e. a total reduction of 30%. I am now aged 59 so will there be any further
reduction in my current pension ?
A. Yes. Assuming your NPA is 60 and that your age on
January 13, 2009 was 59 then there will be a further reduction of at least 10%
since for people under NPA PPF compensation is limited to 90% of your
current pension. Depending on the
amount of pension you are receiving, there could be a greater reduction if you
are affected by the Cap so please look at the full calculation in Q4-2
if you think this may affect you.
Q4-6. Now
that the Plan is in Assessment I understand that the amount of pension that can
be paid cannot exceed PPF limits but are there any circumstances where PPF
rules would mean that a member is entitled to more than would be payable under
the Plan ?
A. In almost every case PPF benefits
are either the same for members over NPA or less for members who are under NPA
– the latter because of the automatic restriction of pension to the 90% level.
However, we have identified a few isolated cases (new retirements only) where
the application of more generous PPF early retirement and other factors means
that PPF benefits are marginally better than Plan benefits. Since the Trustee is obliged to apply the
lesser of Plan or PPF benefits then payments for these members will continue at
Plan levels.
If the Plan does enter the PPF at the end of
Assessment then the few members affected by the above would have their
compensation increased to PPF levels and backdated accordingly. All such
members have been or will be personally advised by Towers Watson.
Q4-7. I
retired early and took a lump sum which means I have had a reduced pension for
a number of years. Unfortunately I am under NPA and have had my pension capped
because they used figures that assume I didn’t take a lump sum. Since I have
been effectively ‘paying back’ the lump sum in reduced pension over the years
this surely can’t be correct ?
A. Most members who take a lump sum
and a reduced pension do so because it is a tax efficient way of receiving
benefits from the Plan and/or it suits their circumstances at the time – e.g.
pay off a mortgage, invest it for the future or even a once in a lifetime
holiday. The compensation
cap calculation rules are set up this way so that somebody who took a lump sum
and reduced pension is still subject to the same capped benefit from the
PPF when compared to a member in exactly the same circumstances who elected not
to take a lump sum on retirement.
5. Dependants and Ill-Health Pensions
Q5-3. What are the PPF rules about ill health pensions
?
Q5-1. Are
the PPF rules about pensions for surviving spouses, partners and dependants the
same as in the Plan ?
A. PPF compensation of 50% of
member’s pension is payable to surviving spouses, qualifying unmarried partners
and civil partners upon the death of a member upon production of the relevant
evidence e.g. marriage/civil partnership certificate. In the case of unmarried
partners, evidence will have to be provided of cohabitation and that they were
financially dependent or interdependent with the Plan member to qualify for
benefits.
In accordance with PPF rules, compensation will be paid to dependent children up to age 18 or age 23 if they are either in qualifying further education or is incapable of working by reason of a disability under the Disability Discrimination Act 1995. No compensation is payable beyond the age of 23.
The amount of compensation depends on
whether compensation is being paid to a surviving spouse or partner.
If
it is being paid, the amount of compensation will be as follows;
One child – 25% of the member’s compensation
Two or more children – 50% of the member’s compensation, divided equally
between the children.
If no other compensation is being
paid, the amount of compensation will be as follows;
One child – 50% of the member's compensation
Two or more children – 100% of the member's compensation, divided equally between the children.
Q5-2. I am
aged over 65 and when I retired I seem to recall that my wife’s future pension
was more than 50% of my own – if she survives me will she get more than 50% of
my pension at that time ?
A. No. You may recall that when you retired you had
the option to take your full pension entitlement or a lump sum and a reduced
pension entitlement. Under Plan rules, a surviving partner or spouse would have
been entitled to a maximum of 50% of your full pension even if you decided to
take a lump sum. You may also have
elected to take ‘early retirement’ which would have further reduced your
initial pension without affecting your spouse/partner pension. This may mean that the illustrative
partner/spouse pension appeared to be significantly greater than 50% of your
initial pension.
In summary, whatever arrangement or
entitlements you may have had under the Plan, PPF compensation for a future
surviving partner or spouse will be precisely 50% of your pension at the time
of your death.
Q5-3. What
are the PPF rules about ill health pensions ?
A. With effect from the beginning of
the Assessment (January 14, 2009) no new ill health pension will be
considered or put into payment. In
respect of any existing ill health pension in payment on January 13, 2009, this
will continue for the life of the pensioner.
However, note that if an ill health pension was awarded less than three
years prior to January 14, 2009 then the
PPF has the power to review the circumstances surrounding the grant of the
pension – if the award was judged to be incorrectly made then payment could be
suspended until the member reaches NPA.
If you are in this category the Trustee will write to you
individually. If payments are affected this will not take effect until after
Assessment finishes.
Legislation changed in April 2009 meaning that during
Assessment it is now possible for a member who is terminally ill to apply to
the PPF for a Terminal Illness Lump Sum. The fundamental requirement is that the member must have a progressive illness (with a life expectancy
of less than six months) and must not yet be receiving pension benefits from
the Plan. If you think that that you
might qualify for such a payment then you should immediately contact Towers
Watson using the details at the beginning of this Q&A and they will be able
to assist you with the application process. The foregoing will continue to be
available if the Plan transfers to the PPF at the end of Assessment.
Q6-2. Will my pension still be paid on the same day during Assessment ?
Q6-3. Will I have to pay back any of the tax free cash I received when I
retired ?
Q6-1. I am
a retired pensioner (over NPA) and my last pension statement referred to a number of elements of my
pension e.g. GMP before and after April 1988,
pension built up before and after April 1997, AVC pension, Sacrifice
pension, non increasing elements. Are
they all treated the same under PPF rules and will there be any changes to my
state pension which has reductions because I was ‘contracted out’ while at
Nortel ?
A. The
impact on AVCs and sacrifice pension is dealt with in Q4-3.
Non increasing elements will remain unchanged.
The remainder of the elements will continue to be paid in full (because
you are over NPA) and increases will be as set out in Q3-8.
Your state pension will continue to be paid as normal and changes to your Plan
pension described in this Q&A will not lead to a reduction of any state
benefits you may be entitled to.
Q6-2. Will my pension still be paid on the same
day during Assessment ?
A. Yes. For the
remainder of 2009 your pension will continue to be paid on or immediately
before 18th of the month for that month. From April 2010 the payment
dates will be
harmonised to follow those of the
PPF and changed to 1st of the month in advance. You will be
reminded about this change nearer the time.
Q6-3. Will I have to pay back any of the tax free
cash I received when I retired ?
A. No.
Q7-6. I am over 50 – can I still take early retirement
?
Q7-1. I
have not yet taken my pension and I am under NPA – what are the PPF rules about
taking lump sums and the resulting pension reduction and do they differ
from the Plan rules ?
A. Under the
PPF rules, members can commute part of their pension (i.e. reduce it) in
return for a lump sum. Commutation is only undertaken at the time of
retirement, and is restricted to a maximum of 25% of a member’s pension
entitlement. For most members these provisions are the same as under the
Plan rules. Under the PPF rules, there
are different factors that need to be applied to work out how much your pension
will be reduced to provide you with a lump sum.
Q7-2. If a
deferred member dies before reaching NPA then how much pension will his/her
partner or spouse be entitled to ?
A. If a member had not taken early retirement prior to the start of Assessment and died before reaching his/her NPA for the Plan then the age of the member immediately prior to death will be deemed to be his/her NPA. This means there will be no early retirement reduction and compensation will be payable from this date. Compensation will be payable at 50% of what the member would have been entitled to at NPA but subject to the application of 90% and the Cap. It is irrelevant whether or not the member still works for NNUK since all active members became deferred members on January 14, 2009
Please see Q
4-2 and Q5-1
for further details.
Q7-3. What
happens to death in deferment benefit under PPF rules – I believe the Plan
refunded member’s contributions ?
A. Member’s contributions are not refunded – see Q7-2 for details of survivor’s benefits
Q7-4. I
have had two periods of service at Nortel – I was already a deferred pensioner
for my earlier service and ceased to be an active member for my ongoing current employment at
the beginning of Assessment. How are
these two periods of service treated under PPF rules when I eventually take my pension ?
A. Your accrued benefit for each period of service will be calculated separately. Assuming you were under NPA on January 14, 2009 then if your total benefit is greater than the ‘Cap’ at the time you retire then your benefit will be reduced accordingly. Finally, the 90% factor will be applied to arrive at your initial pension amount.
Q7-5. I have
a ‘defined benefit’ pension from Nortel and from a previous employer. For the purpose of determining whether or not
I am over the ‘Cap’ will the PPF take into account my other pension when I retire ?
A. No. The PPF will only take into account your NNUK
pension. Even if your
previous employer became insolvent and their pension scheme became the
responsibility of the PPF each of your pensions would be treated completely
separately.
Q7-6. I am over 50 – can I still take early retirement ?
A. During Assessment members can apply for early retirement because
the Plan rules currently allow it. Benefits are payable at PPF levels using PPF
early retirement factors and the PPF rates for exchanging pension for a cash
lump sum. If the Plan is eventually transferred to the PPF members can take early retirement
from age 50 (age 55 from 6 April 2010 – see Q7-7
below). Compensation will be reduced using PPF factors. Members must normally
give six months notice before opting for early payment of compensation.. See Q7-7 for more information on the change to minimum
retirement age.
Q7-7. I
understand that the minimum age at which a pension can be first put into
payment will rise from 50 to 55 in 2010 – does this mean that under Plan/PPF
rules no member under 55 in 2010 will be able to draw a pension or will members
who currently have a right to retire at 50 under the Plan rules continue to
have this right ?
A. This
issue is covered by the draft PPF Miscellaneous
Amendment Regulations which provide that members who have a right to
retire at age 50 under the Plan rules will continue to have that right even if
the Plan falls into the PPF and PPF compensation is paid. These
regulations are only in draft and have been published for consultation - they
are not yet law. It seems likely that the
regulations will remain as drafted on this point so the right to retire at age
50 will continue. However, if these draft regulations do not
become law then it is still possible that after April 2010 members will not be
able to take their pension until they reach the age of 55. We will update this answer as soon as the
outcome of the draft regulations is known.
Q7-8. I
will be 60 in 2010 and I left Nortel in 1999 after about 16 years service – do
I have to take my pension when I reach 60 and, if not, what are my options and
what is best for me ?
A. For the
purposes of this answer we will assume
that you will have no AVC entitlement, that your Normal Retirement Date as
defined in the Plan rules (NRD) is 65 and that 60 is your NPA – please see Q4-3
for other NPA definitions that may apply to you.
Whilst the Plan is in Assessment you can take your pension at age 60 without any actuarial reduction but you are not obliged to take your pension until you reach the age of 65.
If you do decide to take your pension at age 60 then please refer to Q7-10 for details of how your initial pension will be calculated. Once you have taken your pension then future increases will be in accordance with Q3-8. In your case, only about two years of your service is after April 1997 so, in accordance with PPF rules, only 2/16 (or about 12%) will be eligible for future increases which are capped at 2.5% per annum.
If you decide to defer your pension beyond age 60 then you may do so for any period up to your 65th birthday. Again, Q7-10 will determine your initial pension at your chosen start date which will then increase in accordance with Q3-8.
However, if the Plan formally becomes the responsibility of the PPF at some time in the future and you had deferred taking your pension beyond age 60 then they will calculate your total pension (compensation) entitlement assuming that you had taken your pension at age 60, deduct any pension payments actually made to you and the balance will be paid to you as a lump sum less income tax. Depending on your own personal tax circumstances this could result in you paying income tax at a higher band . However, HMRC does recognise that ‘long standing underpayment of pension’ can result in too much tax being paid and, following a request from the taxpayer, payments can be ‘spread back’ over the relevant tax years.
Due to the way that inflation is taken into account in Q7-10 and Q3-8 it is also possible that a pension you deferred beyond age 60, but is actually in payment at the time the Plan becomes the responsibility of the PPF, could be reduced if inflation has been at a high level.
If the Plan does not become the responsibility of the PPF at the end of Assessment then there will be no changes to your pension if you deferred it beyond age 60 and it will continue to be paid by an external provider when the Plan is wound up – see Q3-3.
Whenever you put your pension into payment you will usually have the
option to take a lump sum and a reduced pension.
Any decision on the best way forward for you will be driven by your own
individual circumstances so please see the paragraph on independent financial
advice at the top of this Q&A.
Q7-9. How
much notice do I need to give to put my Nortel (final salary scheme) pension
into payment during the assessment period ?
A.
You usually need to give Towers Watson two
months notice of your intention to take your retirement benefits and have
returned all completed paperwork to them within that timeframe. Note that if the Plan enters the PPF at the
end of Assessment then the notice period will increase to six months.
Q7-10. I
understand that deferred pensions are no longer being revalued annually – how
will my future pension take into account ongoing inflation ?
A.
Under Plan rules deferred pensions were revalued
annually in April of each year based on RPI up to a maximum of 5%. The last
such revaluation was carried out in April 2008.
Revaluation under PPF procedures is only carried out once and that is immediately prior to putting your pension into payment. The ‘start’ RPI is two months prior to the start of Assessment i.e. November 2008 (this RPI is 216.0) and the ‘finish’ RPI is two months prior to your selected pension start date. The increase is restricted to a compound rate of 5% per annum but there would be no reduction if the ‘finish’ RPI was lower than the November 2008 RPI. It is of course possible that between the ‘start’ and ‘finish’ dates RPI could exceed 5% per annum or even be negative but this does not affect the calculation in any way
By way of example, if a member’s pension entitlement in April 2008 was £5000 per annum, he put his pension into payment in January 2011 and the RPI in November 2010 was 230.0 (exactly two years from the November 2008 ‘start’ RPI) then his entitlement would be 230.0/216.0 X 5000 = £5324.07. However, if the RPI was any higher than 238.14 (which is 216.0 +5% +5%) then the entitlement would be restricted to £5512.50 (£5000 +5% +5%).
When the final entitlement has been calculated, payment will be restricted to the 90% level and could be less if you are subject to the compensation cap – see Q4-2 for full details.
Q7-11. I have a Q pension as part of my overall
pension and I am still not receiving my pension from the Plan. I
understand that there are still some issues to be clarified
with the PPF. What is the estimated time for all issues with the PPF to
be resolved ?
A.
The method of calculation for a member whose
pension entitlement under the Plan is only
a ‘Q’ Pension has now been clarified and Towers Watson will be able to advise
you of your options on request.
Any member whose pension entitlement under the Plan includes a ‘Q’ element and other elements will still not be able to receive their pension since we have not yet reached agreement with the PPF on how their rules apply to such entitlements.
In addition, there
are other small categories of members where we are still seeking clarification
of the rules that need to be applied. If this applies to you Towers
Watson will advise you accordingly.
We apologise to members for the continuing delay and will do our utmost to have all issues clarified as soon as possible.