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