1. The Gathering Pension Presentation February 2013

2. Agenda Defined benefit risks and issues Accounting position LGPS issues Pension Trust issues Summary and conclusions Questions 2

3. Introduction Confidential: internal use only 4 Defined Benefit-Risks and Issues

4. 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

5. 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

6. 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

7. 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

8. ‘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

9. 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

10. 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

11. Accounting position

12. 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

13. 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

14. LGPS Specific

15. Liability transfer basis Public service review FRS17 accounting ‘Fair deal’ LGPS Specific Private and Confidential 15

16. Pension Trust specific

17. 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

18. 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

19. Confidential: internal use only 19 Summary & Conclusions

20. 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

21. 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

22. Questions david_davison@spenceandpartners.co..uk Private and Confidential 22