: YMCA Pension & Assurance Plan Pensions ‘Road Shows’ 2017

Purpose of the ‘Road Shows’ To update Participating Employers on the outcome of the 2017 triennial actuarial valuation To provide information on future deficit contributions To explain a required change to the calculation of S75 debts inform gether with To discuss the proposed liability reduction through an Enhanced Transfer Value exercise To update on changes to the Member’s entitlements To provide the opportunity for representatives of Participating Employers to discuss the operation and financing of the Pension Plan, recognising that through changes in CEOs, Chairs and trustees at a local level previous knowledge and understanding may be lost

Historical actions PENSION DEFICIT In the early 00’s, as the impact of life expectancy tables markedly increased, it became clear that the liabilities of the scheme were growing at a much faster rate than the ability of the employees and employers to pay in to the scheme – even with significantly increased rates of contributions PENSION DEFICIT Liabilities of the Plan Assets of the Plan Action was taken to try and slow the growing pension deficit: 1 May 2007 – ceased accrual of service 1 May 2011 – broke link with final salary The Pension Deficit is apportioned to Participating Employers (PEs) based on the periods of service of individual members with different PEs. This was initially done on the basis of known Service History as at 1st May 1995. This data has since been refined to enable it to be done on a ‘Full Service History’ (FSH) basis, that is considered to be 99.9% accurate.

2017 Triennial Valuation Pension Trustees of all Pension Plans are required to have an external valuation of the liabilities and assets of the Plan every 3 years – hence Triennial Valuation Completed by an impartial and objective Actuary engaged by the Pension Trustees This looks at the liabilities for all of the members of the Plan, both pensioners and deferred members (deferred members are people with service in the Plan at some time, but who are not yet retired)

Triennial Valuation (Cont’d) Liabilities: “Technical Provisions” - The actuary projects the expected cash flows to pay benefits in respect of members up until their membership ceases through death A current cash value of the liabilities is calculated by discounting these future benefits payments back to today at appropriate long term interest rates The value of liabilities less the current value of the assets is the deficit Key assumptions: Long term interest rates Long term inflation Investment returns Mortality Long term interest rates and inflation are based on market yields on Government bonds Actuary must include prudence margins over best estimates for assumptions

Triennial Valuation Outcome (Cont’d) The importance of interest rates For example, obligation – pay £1,000 at the end of each year for 1,10,20 years How much to put in bank today = the liability? Term -years Interest rate 1 10 20 0% pa £1,000 £10,000 £20,000 4% pa £962 £8,111 £13,590 10% pa £909 £6,144 £8,513

Triennial Valuation Outcome (Cont’d) Valuation result 1 May 2017 1 May 2014 £m £m Liabilities** 174.8 129.5 Assets 139.8 90.8 Deficit 35.0 38.7 Funding level 80% 70% (Assets/Liabilities) For the first time the deficit has not increased from the previous valuation Note the substantial increases in both liabilities and assets since 2014 (** called Technical Provisions)

Triennial Valuation Outcome (Cont’d) Why has the deficit reduced? Positive Deficit contributions and the S75 debt payments from former PEs - £14m Much better than expected asset performance – showing an increase of £30m – showing the investment strategy of the Pension Trustee has been successful, especially in a very difficult financial environment New mortality table – lower rate of improvement - £4m Negative Liabilities increased due to a reduction in long term market interest rates and increased expected inflation (based on benchmark yields on long term Government stocks) - £39m New commutation factors/miscellaneous - £4.5m

Triennial Valuation Outcome (Cont’d) What will this mean to deficit contributions? The current contributions, from the 2014 valuation, including 3% increases each year were expected to eliminate the deficit by May 2027 The result of the 2017 valuation confirms that continuing with these contributions, including 3% increases each year, is expected to eliminate the deficit by May 2027 So – no change to current deficit contributions – “Steady as you go” On exit from the Plan, PEs will pay the GREATER of either: (a) their remaining deficit contributions to the end of the deficit reduction period, or (b) their S75 debt to ensure that they pay their share of the deficit (think of it as a mortgage from 2014)

Updating the allocation of deficit contributions among PEs After each triennial valuation the Actuary normally recalculates the allocation of the total deficit contributions among PEs based on the Technical Provisions liabilities, based on the full service history of individual members Recognising that the continuation of the overall contributions from the 2014 valuation is expected to eliminate the deficit by May 2027 as anticipated, the Trustee has determined that pending the potential outcome of the proposed liability reduction exercise (with Enhanced Transfer Values), and other steps taken, it will be more appropriate to review the deficit allocation at the next valuation It is important to note that when the data is updated at the next valuation, there will be changes to a PEs liability profile, and share of the deficit contributions – either up or down

‘Orphan Liabilities’ If one Participating Employer (PE) fails – either through insolvency or wind-up, then the pension liability owned by that YMCA has to be re-apportioned amongst the remaining PEs. This is on the basis that all PEs are considered to have ‘joint and several responsibility’ for the liabilities of the Plan. Prior to the 2014 Triennial Valuation, ‘orphan liabilities’ were created through the insolvency of the Welsh National Council of YMCA, and the wind-up of Gloucester YMCA Between 2014 – 2017, ‘orphan liabilities’ were created by the insolvency of Herrington Burn YMCA, and the partial insolvency of High Wycombe YMCA Adjustments to the schedule of payments arising between Triennial Valuations by ‘orphan liabilities’ are only recognised once every three years.

Section 75 debt The amount required to provide the estimated cost of insuring, or buying out, liabilities – the assumptions used are much more cautious than for the Technical Provisions Deficit and Deficit Contributions At 1 May 2017 the total Section 75 (S75) debt was £105 million, up 6% from the amount at 1 May 2016 due to lower interest rates compared with last year PEs are provided with an updated S75 debt at 1 May each year – this is the PE’s share of the S75 liability, based on full service history, attributed to the member’s service with the PE A new calculation, based on market conditions at the time, is prepared when a PE exits the Plan Presentation title 2014

Section 75 debt ….continued New accounting regulations for the treatment of insured pensions, or annuities, require the allocation of the S75 debt among PEs to change Before 2000 the plan bought annuities for members when they retired – these annuities are assets of the Plan as a whole Previously S75 debts were calculated ignoring annuities (i.e. for the relevant PE where the annuitant worked the liability for the annuitant was taken as zero as the Plan held a matching asset) Now the full liability for the annuitant must be attributed to the relevant PE but only a share of the value of the matching asset owned by the Plan as a whole is attributed to the PE As a result, PEs with members for whom the Plan bought an annuity will have an increase in S75 debt; PEs with no “annuitant members” will have a decrease in S75 debt

Section 75 debt ….continued

Expenses of the YMCA Pension Plan The costs to run a multi-employer pension plan generally are more expensive than a single employer one. The Pension Trustee is conscious of these costs and manage them tightly. Such costs include: Administration - both internal and external, including paying pensions investment advisor costs Specialist legal advisors - including dealing with disputes such as Hastings & Huddersfield Governance - meeting expenses and insurance Actuarial services Levy to the Pension Protection Fund and other bodies Audit costs   A couple of years ago the Pension Regulator produced an online tool to enable pensions schemes to benchmark their cost. The YMCA pension Plan came out in the lower quartile for multi-employer schemes of our size.

Update on membership of the Plan 2011 2014 2017   Deferred Members 1188 1049 919 Pensioner Members 516 616 609 Participating Employers 112 97 81

Changes to Member Entitlements As part of a routine review of the entitlement to members, the Pension trustee has reviewed key aspects of the offers it can make, in light of emerging practice and changes to legislation Historically, the Plan has only been able to provide transfers out that included a 30% reduction in any transfer value – to reflect the under-funding of the Plan On the advice of the Plan actuary, the basis of transfer values has now been modified, and will be paid at 100% of the new basis Pension Trustee has recently reviewed commutation rates, in line with market norms, and have improved the rates to reflect this Cash Commutations (Lump Sums) continue to be a popular option at the point of retirement, with members electing to sacrifice some of their annual pension for the release of a tax-free cash sum. This will continue to be offered, but members will also continue to be able to take their full pension should they wish Trivial Commutation, where a members’ pension is considered to be a trivial amount will also be an offer made to members – either at retirement or even post retirement

Changes to Member Entitlements (Cont’d) Trivial Commutation (lump sum in lieu of pension) HM Revenue and Customs (HMRC) has recently increased the amount of cash you can take in lieu of a small pension, referred to as Trivial Commutation. To qualify for a Trivial Commutation Lump sum, you must currently be at least 60 years old and the maximum overall value of all your pension pots added together (excluding the State Pension) has to be less than £30,000, (this limit used to be £18,000). If the value of your pension benefits are £10,000 or less (increased from £2,000), you may be able to take a cash sum without considering any other pension pots you have. Current pensioners who fall within the new rates, will now be targeted, to assess their wishes

Liability Reduction Process The process is now limited to the ETV process, and the costs for PEs will now be limited to the ETV. All Participating Employers (PEs) have received individual letters inviting them to engage in the Liability Reduction process, and outlining the individual PE costs that would follow, for the general costs, and the costs for Independent Financial Advisors (IFA) for individual members Target was set of 70% of the s.75 liabilities, as general indicator of PEs being willing to engage – if this is not reached, then assumption made that there is not sufficient support A number of PEs indicated that their governance cycle would not allow for decisions to be made by local Boards until the end of September ‘17 With a number of PEs still to respond, it is anticipated that the target of 70% will reached. Currently this is: 65%

Liability Reduction Process Cont’d… A formal submission has been made to the Pension Trustee by employer representatives, asking the Trustee to consider funding the enhancements for the Enhanced Transfer Value exercise The Pension Trustee has now taken legal and actuarial advice, to determine if they can fund and pay the enhancements, without the remaining deferred and pensioner members suffering any short or long-term detriment – also that they are allowed by law to do it! Important to protect remaining PEs from any additional deficit funding strain Pension Trustee has now agreed they will be able to fund the ETV process, with some caveats to protect the Plan from excessive strain. As soon as decisions have been made, then a further communication will be issued to all PEs explaining the outcome

Thank you for your attendance today, and we hope the Presentations have served to assist your understanding of the Pension issues. If you have any questions that have not been addressed today, then please contact: Paul Smillie – paul.smillie@ymca.org.uk Company Secretary, The YMCA Pension Plan Trustee Limited Or Keith Fletcher – keith.fletcher@ymca.org.uk Representing the Principal Employer YMCA Pension Website – www.pensions.ymca.org.uk