Triennial pension review & consultation concluded

8 June 2017

AA's triennial pension review agreed and consultation

on changes to scheme concluded

At the AA's Board meeting today, ahead of its AGM, the following arrangements with respect to the AA's UK pension scheme were agreed:

The triennial actuarial review

The triennial review of the AA's UK defined benefit pension scheme has been concluded and the Trustee and the AA have come to agreement on the deficit funding plan.

The triennial valuation of the UK's pension scheme's deficit as at 31 March 2016 is £366m compared with the previous 2013 triennial deficit valuation of £202m. The increase in the deficit is largely caused by the reduction in long term gilt yields.

We have agreed a nine-year deficit recovery additional funding plan with the Trustee, taking into account the continued funding of the previous deficit. We will make additional contributions of £8m per annum for the next two years rising to £11m plus inflation per annum from April 2019 and £13m plus inflation per annum from April 2021 to June 2026. These will be incremental to the existing deficit reduction contributions to the UK pension scheme of £13m increasing with inflation through to 2038. The total deficit reduction payment to the UK pension scheme in the 2018 financial year will be approximately £20m. The next triennial actuarial review is scheduled for three years as at 31 March 2019.

The Pensions Regulator has been proactively involved in the valuation process and has reviewed the terms of this agreement.

Changes to the pension scheme

The AA has concluded the period of consultation with affected employees on proposed changes to the defined benefit pension scheme which has Final Salary sections and a CARE (career average revalued earnings) section. Having considered feedback from employees and their representatives, the AA has decided to proceed with the changes as proposed to help to stabilise service charges and enhance our competitiveness in the industry.

Unlike many companies, the AA has preserved defined benefits for current scheme members at this time. All employees currently in a Final Salary section of the scheme will move to the existing CARE section to build up future defined benefit pension benefits. Changes will also be made to the CARE section with the inflation measure for pension indexation moved to CPI from RPI and employees will pay additional contributions of 1.5% of salary or have the option to change accrual rates. The IDU (Independent Democratic Union - the recognised Union in the AA) are supportive of the changes against an alternative which could have been a complete close down of all defined benefit arrangements in the AA and replacement with defined contribution schemes.

The changes mitigate pension liabilities by:

· Helping to stabilise the anticipated increase in pension costs to the business.

· Reducing the exposure to pension risks.

· Increasing our competitiveness within our industry.

· Providing more consistent pension offering across our existing defined benefit scheme members.

Bob Mackenzie, Executive Chairman, 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."

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