the gathering pension presentation february 2013
TRANSCRIPT
The Gathering Pension Presentation
February 2013
Agenda
Defined benefit risks and issues
Accounting position
LGPS issues
Pension Trust issues
Summary and conclusions
Questions
2
Introduction
Confidential: internal use only 4
Defined Benefit-Risks and Issues
• Build assets to pay benefits when due based upon contributions and
investment return
• Wholly unknown cost
• Funding and contributions can be highly volatile
• Assumes scheme continues
• Much higher liability on exit/closure
Defined Benefit- Risks
Private and Confidential 4
• 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 5
• 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 6
• 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 7
• ‘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 8
• 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 9
• 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 10
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
• FRED48/ FRS102
• Will create a more consistent playing field if implemented
• Proposals will force some level of disclosure
• Inability to ‘hide’ behind the exemption
Accounting position
Private and Confidential 12
• 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
Accounting position
Private and Confidential 13
LGPS Specific
• Liability transfer basis
• Public service review
• FRS17 accounting
• ‘Fair deal’
LGPS Specific
Private and Confidential 15
Pension Trust specific
• 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 17
• Growth Plan & Legislation changes
• Managing very significant deficits
• Perception of inconsistency
• DB promotion in a DC environment
• Accounting-auditor pressure
• Governance
• Balance of powers
• Committees/ Employer Groups
• Clear terms of reference
• Communication
Pension Trust specific
Private and Confidential 18
Confidential: internal use only 19
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
Strategic advice
Private and Confidential 19
• 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 21
