evoc pension presentation june 2013. david davison spence & partners ltd actuaries & pension...

EVOC Pension Presentation

June 2013

• David Davison

• Spence & Partners Ltd

• Actuaries & Pension Consultants

• Head of Charity / Not-for-profit Practice

• Advise 100’s of charities on stand alone & multi-employer pension

schemes

• Involvement with CFG / ICAS

• Steve Webb / Pension Minister DWP ‘Working Party’

Presenter

Private and confidential 2

Agenda

Defined benefit risks and issues

Accounting position

LGPS issues

Pension Trust issues

Summary and conclusions

Questions

2

• Wedgwood Museum

• People Can

• Spirit of Enniskillen Trust

High profile cases

Private and confidential 4

• In general charities do not tend to have:-

• A strong and flexible underlying asset base

• An asset base increasing in line with pension liabilities

• Flexible net income

• Clear division of restricted & unrestricted assets

• Organisations function on tight margins

• Boards focus on ‘charitable objectives’

• Competition for income

• funding / tenders / donations / rents

• Pressure to re-structure / merge

Charity background

Private and confidential 5

• Evolution out of or provision of services for public sector

• Competition for staff

• Benevolent employers

• Legacy DB

• Retained much longer than in private sector

• Unsustainable

Charity background

Private and confidential 6

Introduction

Confidential: internal use only 4

Defined Benefit-Risks and Issues

• Liabilities = benefits promised to members plus expenses

• Estimate of cost based upon salary, price inflation and life expectancy

• Time value of money

Defined benefit scheme-How is it valued?

Amount Term payment Present value at 5%

Present value at 9%

£100 1 95 92

£100 5 78 65

£100 10 61 42

£100 20 38 18

Private and confidential 8

Defined benefit schemeHow does it work?

Liabilities

Assets Contributions &Investment return

Benefits

Past DeficitEmployer guarantee

AssetsLiabilities

Past

FutureContributions &Investment return

Future Deficit

Private and confidential 9

Pension funding

Age

Cont

ributi

on

20 65

5%

25%

45%

Over-pays

Under-pays

Private and confidential 10

• Accounting – FRS17

• SFO / On-going

• Cessation / S75

Key funding measures

Private and confidential 11

• Members pay a fixed % of salary (which may increase for benefits

building up in the future)

• Employer contribution assessed by the Scheme Actuary

• Build assets to pay benefits when due based upon contributions and

investment return

• Objective of meeting cost during employee’s service

Funded Defined Benefit – Characteristics & risks

Private and confidential 12

• Uncertain cost

• Funded on basis that the scheme continues

• Increased focus on prudent funding

• Lengthening longevity risk as mortality rates improve

• Much higher liability on exit/closure

• Cross generation subsidy unless contributions reflect ultimate cost

• Cross company subsidy if non segregated multi employer

Funded Defined Benefit – Characteristics & Risks cont’d

Private and confidential 13

• Reduced asset returns

• Falling gilt yields

• Rising inflation

• Lengthening longevity

• Requirement for ‘prudent’

funding

• Insolvencies/administration

• Rising contributions

• Falling membership-affordability

An ‘imperfect’ storm

Private and confidential 14

• Active member test

• Closure agreement by all participants

• Inadvertent trigger

• Dealing with re-structures

• Some new flexibility

• Inconsistent with stand alone and segregated multi-employer schemes

• Cease future accrual and fund over a very long term

Multi-employer schemes- Section 75/Cessation

Private and confidential 15

• Unaffordable exit costs forces organisations to continue to accrue

• Payment within Pension Trust schemes without benefit ‘secured’

• 2011 DWP review didn’t greatly help although did recognise specific

charity issues

Multi-employer schemes- Section 75/Cessation

Private and confidential 16

• ‘Orphan’ debt

• Wedgewood case highlighted risks- £134m

• Connected and unconnected employers

• ‘Cross subsidy’ inconsistent with charity law

• Are charitable assets available to pension scheme?

• Concern for charity trustees

• ‘Unmanageable’ and ‘unidentifiable’ risk- weak and strong organisations

• ‘Domino’ effect

Last man standing

Private and confidential 17

• Higher under multi-employer last man standing

• Providing enough ‘stronger employers’ in scheme and total covenant in

excess of total liabilities

• Future accrual increases risk

• Impact on job security

Member security

Private and confidential 18

• Restricted, unrestricted and designated funds

• Can pension scheme access charitable assets?

• Donations

• Tendering for services

• Off balance sheet liabilities

• Establishing the employer covenant

• Auto-enrolment

• Scheme retention- move to DC

• Insolvency/ administration

Other issues

Private and confidential 19

Accounting position

• FRS17 disclosure

• Disclose as DC where share of underlying assets/ liabilities cannot be

identified

• Existing inconsistency

• Balance sheets overvalued

• Risk not being identified or understood

• Will create a more consistent playing field

• Will force some level of disclosure

• Inability to ‘hide’ behind the exemption

Accounting position – FRS102

Private and confidential 21

• For each £10,000 per annum of deficit contributions broadly £100,000 negative on

balance sheet

• Net present value of contributions likely to be higher than FRS17 calculation-

encourage FRS17 calculations

• What would be bank/ funder/ donators view about ‘true and fair’ representation

• Re-negotiating banking covenants?

• Bringing deficits on to the balance sheet for the first time

• Negative balance sheets

• Introduction from 2015 – early adoption being encouraged

Accounting position

Private and confidential 22

LGPS Specific

• Liability transfer basis – past service liabilities

• Public service review

• FRS17 accounting

• ‘Fair deal’

• Exit process and timescales

• Strain on fund costs

• Integration with auto-enrolment

LGPS Specific

Private and confidential 24

Pension Trust specific

• Multiple schemes

• Growth Plan

• SHPS/SHAPS

• SVSPS

• CARE Scheme

• Independent Schools Pension Scheme

• Closed / Open

Pension Trust specific

Private and confidential 26

• Funding

• Consistently used real return assumptions 2+ times those of LGPS

• Future service contributions consistently 10% below those in LGPS

• LGPS funding rates remained stable whilst TPT schemes fell by 20%-

30%

• Employer covenant-weaker than LGPS

• Rising average membership ages

• Reducing investment returns

• Even where assumed investment returns achieved funding position has

deteriorated

Pension Trust specific

Private and confidential 27

• Four options

• GP1 & GP2 – defined benefit

• GP4 – defined contribution

• GP3 - unclear

• Need to understand were liabilities sit in GP1-GP4 and also how spread

across active, deferred and pensioner members

• ‘Orphan liabilities’ around 20%

• There are options to reduce debts particularly where liabilities mostly in

GP3

Growth Plan

Private and confidential 28

• Managing very significant deficits

• Perception of inconsistency

• DB promotion in a DC environment

• Governance

• Balance of powers

• Committees/ Employer Groups

• Clear terms of reference

• Retained salary link

• Pension Trust DC options

Pension Trust specific

Private and confidential 29

Confidential: internal use only 30

Summary & Conclusions

• Pensions are becoming a much higher priority for Charities

• Wide range of knowledge levels - Board & Executive

• Focus should be on:

• Effective risk management

• Affordability- now and in the future

• Effective staff rewards

• Consistency and fairness

• Impact of auto-enrolment

• You need to take action

Strategic advice

Private and confidential 31

• Need for change

• Legislation- DWP/ Treasury

• Practice and approach- Schemes

• Mounting pressure

• Lobbying continue

• Difficult funding negotiations ahead

• Communication is key

• There are options in each scheme

• Restructuring flexibility

Conclusions & objectives

Private and confidential 32

• Available at www.spenceandpartners.co.uk/blog/

The Charity Trustees Pension Checklist

Private and confidential 33

Questions

david_davison@spenceandpartners.co..uk

www.spenceandpartners.co.uk