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? AmountTerm paymentPresent value at 5% Present value at 9% £ £ £ £ Private and confidential 8

Defined benefit scheme How does it work? Liabilities Assets Contributions & Investment return Benefits Past Deficit Employer guarantee Assets Liabilities Past Future Contributions & Investment return Future Deficit Private and confidential 9

Pension funding Age Contribution % 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 The Charity Trustees Pension Checklist Private and confidential 33

Questions