AA to move final salary pension scheme members to Care arrangement

Motoring association AA will proceed with proposed changes to its defined benefit (DB) pension scheme, moving all members of its final salary pension plan to a career average revalued earnings (Care) arrangement.

At present, the AA operates both a final salary section and a Care section within its DB pension scheme.

The existing Care arrangement will undergo amendments as part of the planned changes, with the inflation measure for pension indexation moving from the Consumer Price Index (CPI) to the Retail Price Index (RPI). Affected employees will also pay additional contributions of 1.5% of salary or have the option to change accrual rates.

The change to the DB scheme aims to stabilise an anticipated increase in pension costs, reduce the exposure to potential pension risks, increase industry competitiveness, and also provide a more consistent pension offering to members of the DB scheme.

A 60-day consultation on the changes ran from 15 March 2017.

The AA has also agreed a nine-year deficit funding plan with the pension scheme trustees following a triennial review of the DB scheme.

The AA’s UK DB pension scheme deficit increased from £202 million in 2013 to £366 million at 31 March 2016. The organisation attributes this increase to the reduction in long-term gilt yields.

The deficit funding plan involves the AA making additional contributions of £8 million a year for the next two years. Contributions will then rise to £11 million plus inflation per annum from April 2019, and to £13 million plus inflation per annum from April 2021 to June 2026. These payments will be in addition to ongoing deficit reduction contributions of £13 million, which will continue up to 2038.

The AA predicts that the total deficit reduction payment to the UK pension scheme in the 2018 financial year will be approximately £20 million.

Bob Mackenzie, executive chairman at the AA, said: “We are pleased to have agreed a new package that will fund our pension deficit over a reasonable period and will allow us to continue to provide good and competitive pensions for our staff while helping to control the impact of rising costs.

“The negotiations with our staff and the pension scheme trustee have been positive and we appreciate the way in which the long-term benefits of the changes proposed have been received. The agreement is a recognition of the inherent stability and resilience of our business and the strength of the brand, as well as the progress we’ve made as we position the AA as the UK’s pre-eminent membership services organisation.”