Government Actuary's Department
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Reasonableness review of network operators’ pensions

GAD supported Ofgem through a reasonableness review of pension scheme costs of the gas and electricity network operators’ defined benefit pension schemes.

We have supported the Office of Gas and Electricity Markets (Ofgem) by undertaking a reasonableness review of pension schemes run by various power companies.

The Government Actuary’s Department (GAD) completed the high-level review of network operators’ (NWOs) defined-benefit pension costs. The findings assist Ofgem in its consideration of price control allowances in relation to the pension scheme established deficits.

GAD also considered responses provided in the NWO questionnaires provided by Ofgem on how schemes have considered the interests of consumers.

Pension costs

NWOs provide their employees with access to occupational pension schemes and make contributions to help fund their retirement income.

Ofgem regularly reviews the pension allowances that the NWOs can recover from charges to consumers as part of their regulated revenue.

GAD last supported Ofgem in reviewing the reasonableness of pension costs in 2020. At the 2023 review, GAD considered how the following aspects had changed since the previous review:

  • benefit design
  • investment strategy
  • methods and assumptions adopted at 2021 or 2022 actuarial valuations

Key findings

While GAD did not identify any major concerns relating to benefit design, investment strategy and funding approaches, there were several notable developments, including:

  • a general improvement in funding positions, with 5 schemes now in surplus
  • increased levels of de-risking in the investment strategy
  • high inflation and the extent to which the increase applied to pension increases, noting that some pension scheme rules include provisions to cap inflation-linked increases (for example, if inflation exceeds 5% in a year)

All companies have been able to describe some examples of actions which they consider to be evidence of them acting in the consumer interest, including:

  • commissioning analysis which considered consumer interests
  • negotiating with trustees on valuation concessions
  • engaging with trustees on investment strategy
  • managing the liabilities so that consumers are not unduly exposed to higher costs

In response Ofgem published its decision letter following consideration of the GAD report and wider regulatory policy.

GAD review

One of the report’s authors, GAD actuary Scott Madden, said: “The review highlighted to Ofgem that there has been a general improvement in the funding positions of the network operators’ pension schemes.

“It was interesting to see the changing defined benefit landscape – a recent environment of higher inflation and interest rates, with development of longer-term objectives – reflected in the network operators’ pension schemes.

“These stakeholders have a particular challenge in ensuring that the consumer interest is appropriately taken into account, and we were happy to support Ofgem in forming its view.”

Contributions required to fund these (defined benefit) pension schemes are assessed periodically through actuarial valuations.

The areas highlighted above are key factors in determining the NWOs defined benefit pension costs. GAD did not identify any major concerns with these aspects at this review.

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