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ITEM PF16

PENSION FUND COMMITTEE – 21 MAY 2004

THE FUNDING STRATEGY STATEMENT

Report by Head of Finance

1. This Committee received a report at its August 2003 meeting on proposals from the Office of the Deputy Prime Minister (ODPM) to require the development of a Funding Strategy Statement. The ODPM has now published regulations to enact this requirement, and the first Funding Strategy Statement must be published by 31 March 2005. CIPFA’s Pension Panel have published guidance on preparing and maintaining the statement, and administering authorities must have regard to this guidance in compiling their Statement.
2. This report sets out the key requirements of the regulations and associated guidance, highlights some of the key issues that will need to be addressed before the Statement can be finalised, and proposes a process and timetable that will enable this Committee to meet its obligations.

The Content of the Funding Strategy Statement

3. The content of the statement is set out within the CIPFA guidance. There is a requirement to include sections on:

• the purpose of the Funding Strategy Statement,
• the aims and purpose of the Pension Fund,
• the responsibilities of key parties,
• solvency issues and target funding levels,
• links to the investment policy, and
• the identification of risks and appropriate counter measures.

4. The ODPM’s stated purpose behind the Funding Strategy Statement is to provide a clear statement of how the Administering Authority is going to meet the Pension Fund’s liabilities in the future. The increase in transparency and accountability should benefit all employers and scheme members, and should help in gaining greater understanding of the links to Council tax increases.
5. The ODPM also sees the introduction of the Statement as providing a framework under which Administering Authorities can take a prudent but longer term view of funding future liabilities. This in turn should allow Administering Authorities to plan for a more stable employers’ contribution rate, in line with the regulatory requirements.
6. The ODPM and the CIPFA guidance make it clear that there should be appropriate consultations in preparing the Statement. The CIPFA guidance defines this as meaningful dialogue with officers and elected members of all tax raising employing authorities, and with corresponding representatives of the other employing organisations. The guidance is clear that this dialogue should start at the initial preparation of the statement, and continue throughout the process.
7. Whilst the final Funding Strategy Statement is not required to be published before 31 March 2005, the regulations and guidance make it clear that the Actuary must have regard to the Statement in completing the 2004 Fund valuation. The Statement must therefore exist in draft form later this year, to influence the discussions with the Actuary in respect of the Valuation results.

Issues Associated with the Funding Strategy Statement

8. The main issues to be associated with the development of the Funding Strategy Statement are likely to be around the degree different employers wish to follow their own strategies. The main areas of contention could be around the period set to recover any funding deficit, and around investment patterns. The development of the Statement will require all employers to consider these issues in much greater detail than they have previously.
9. Traditionally, the Actuary has determined the period over which any Fund deficit is to be recovered, as part of the Valuation process. A single recovery period has been set for the Fund as a whole. The period has traditionally been around 12 to 13 years, reflecting the average future working life of Fund members.
10. Part of the reasoning for the introduction of the Funding Strategy Statement is to encourage a more prudent longer term view of the recovery period for any Fund deficit. Actuaries are therefore likely to be discussing recovery periods of 20 to 30 years for the current valuation.
11. Different employers are likely to have a different view as to the extent that the recovery period is extended. Risk adverse and cash rich employers will be looking for the shortest possible recovery period. Employers with a high appetite for risk, and a limited ability to raise additional income will be looking for the longest possible recovery period.
12. There will also be the need to take a view on the membership profile of each employer. Those employers with an aging or declining number of scheme members will have a limited ability to extend the current recovery period, whereas those with growing membership can spread recovery over a longer period.
13. The extent to which the Funding Strategy Statement can accommodate each individual employer’s wishes, and the extent to which we can continue to group the small employers for contribution rate purposes, will be one of the future challenges.
14. The second challenge will be around the extent that employers are seeking different investment patterns. The Funding Strategy Statement must show how the investment strategy is compatible with the funding strategy, and cover the risks associated with the different strategies.
15. Risk adverse employers, and those with mature scheme membership, will be looking for safer investment returns, associated with assets such as index-linked bonds. However, when linked to a short recovery period, this will require sharp increases in employer contribution rates.
16. Employers with a greater appetite for risk, and growing scheme membership may well be happier with a riskier investment strategy, based predominantly on equities.
17. In finalising the Funding Strategy Statement, this Committee will need to consider the various wishes from the employers, and determine to what extent these can be met, and the administration costs of running separate investment strategies for different employers.

Proposed Timetable

18. The proposed timetable for meeting the above requirements is as follows:

• July 2004: Workshop with all employers invited at officer and member (or equivalent) level, to provide an outline of the requirements associated with the Funding Strategy Statement, and the key consultation issues that each employer needs to consider. The workshop would be a joint venture between officers from the administering authority and the Fund Actuary. Detailed information packs covering the regulations, the CIPFA guidance and the draft Statement will be available following the workshop.
• September 2004: Individual sessions between officers of the administering authority and each employer to discuss the key issues from the perspective of each employer, and to allow employers to clarify outstanding issues.
• October 2004: Close of initial consultation process.
• November 2004: Presentation of draft Funding Strategy Statement to the Pension Fund Committee
• December 2004/January 2005: Refinement of draft Statement in discussion with the Actuary in the light of the results of the Valuation process. Further discussion with employers.
• February 2005: Final Funding Strategy Statement and 2004 Valuation Results reported to Pension Fund Committee.
• March 2005: Publish Funding Strategy Statement.

19. The Committee is RECOMMENDED to note the report, endorse the timetable set out in paragraph 18, and determine what other involvement, if any, it wishes to have in the process.

CHRIS GRAY
Head of Finance

Background Papers: The Local Government Pension Scheme (England and Wales) (Amendment) Regulations 2004 - ODPM

Guidance on Preparing and Maintaining a Funding Strategy Statement - CIPFA

Contact Officer: Sean Collins, Assistant Head of Finance Tel: (01865) 815411

May 2004

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