Meeting documents

Pension Fund Committee
Friday, 27 August 2004

PF270804-16

Division(s): N/A

Report by the Head of Finance

Introduction

At its last meeting, this Committee received a report on the proposals for preparing our first Funding Strategy Statement. As part of that report, the Committee agreed a process to include a workshop in July, to brief all employers, and receive initial views on the content of the Funding Strategy Statement. This report provides feedback from the workshop and includes an initial draft statement. The Committee is asked to note the feedback, endorse next steps, and offer any comments on the current draft statement, the key points of which are covered in the report.

Feedback from the Workshop

Attendance at the workshop was disappointing. It was felt that 3 weeks notice was not sufficient given the level of individual the invitation was aimed at. In total, the workshop was attended by 9 employers, although this did include representatives of 4 of the largest Fund members.

The importance of this initial Funding Strategy Statement was highlighted by the Fund’s Actuary, who presented some indicative figures for the 2004 Valuation. Whilst the Actuary did highlight a number of factors that needed to be reviewed before final figures could be produced, he did confirm that the figures presented were a good guide, and reflected figures being reported elsewhere across the Country. The key figures reported were:

Funding Level 2001: 91% 2004: 63%

Average Employers Contribution Rate 2001: 15% 2004: 31%

This average contribution rate is based on recovering the fund deficit over the traditional 12 year period, which reflects the average remaining working life of a scheme member. The Funding Strategy Statement invites us to look at longer recovery periods. The Actuary presented options, up to a recovery period of 30 years, which resulted in a contribution rate of 22.2%.

Traditionally, any large increase in employers rate has been increased in 3 steps. The Funding Strategy Statement invites us to look at increasing the number of steps beyond 3 years, and therefore into future Valuation periods. The Actuary presented indicative results if we were to increase the steps to cover a period to 6 years.

Other issues that the Funding Strategy Statement invites us to consider are whether we should be looking to fund 100% of our liabilities, and the extent to which our investment strategy is aligned with our funding objectives. The Actuary reported his concerns around the level of risk associated with reducing the target funding level below 100%. He also discussed the technical difficulties of introducing separate investment strategies for different employers, based on their funding positions.

The workshop discussed a number of potential changes to the Pension Scheme itself, which could impact on the funding position, and the rate of employer’s contribution. These changes, including potential increases in employee contributions, are subject to a Government Green Paper promised for the end of September this year. These changes lie outside the scope of the Funding Strategy Statement, and are likely to be announced too late to affect the 2004 Valuation results.

The workshop expressed no strong views on any of the issues raised by the Actuary, and expressed a wish to see a proposed single model to fit all employers.

The Proposed Way Forward

In light of the wishes expressed at the workshop, officers in conjunction with the Actuary have produced an initial draft Statement. This is attached at Annex 1 (download as .doc file). The draft statement looks to balance risk and potential costs to employers. It is based on the following key assumptions:

A reduced recovery period where the Administering Authority and Actuary have concerns over an employer’s scheme membership over that 25 year period

Stepping of contribution rate increases over a normal maximum of 3 year period, with the Administering Authority and Actuary able to agree variations of up to a 6 year period in exceptional circumstances

Based on the indicative figures supplied by the Actuary, this would result in average employer contribution rates of 18% in 2005/06, 21% in 2006/07, and then 24% from 2007/08 onwards. For every £100,000 of salaries, these figures would imply an average budget increase of £3,000 a year for the next 3 years, resulting in a total increase of £9,000 by 2007/08.

Employers would of course be free to opt for shorter recovery periods, and reduced stepping, to be funded by greater increases in the contribution rate, or the payment of one off sums of money. Employers would not be free to seek any longer recovery period, or increase in stepping.

Employers will need to consider, whether in light of these indicative figures, the proposed funding strategy as summarised above, provides sufficient flexibility for them to meet their budget requirements. Where employers are seeking further flexibility, they will need to propose amendments to the Funding Strategy Statement. As agreed in the previous report, comments could be made in the period to October 2004 on an informal basis, or during the formal consultation period once this Committee has agreed a draft at its meeting in November. Employers have been invited to contact officers for a further discussion as part of the current informal process.

As part of the formal consultation process, it is proposed to cover the Funding Strategy Statement at the Pensions Forum, scheduled for the morning of 30 November 2004. At that stage, we should be able to feed in more up to date Valuation figures, plus the key aspects of the Government Green paper.

RECOMMENDATION

The Committee is RECOMMENDED to note the feedback from the workshop, endorse the next steps, and offer any comments on the draft Funding Strategy Statement that it wishes to make at this time.

CHRIS GRAY
Head of Finance

Background Papers: Nil

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