Evoc pension presentation june 2013
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EVOC Pension Presentation June 2013. Presenter. 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

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EVOC Pension Presentation June 2013

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Evoc pension presentation june 2013

EVOC Pension PresentationJune 2013


Presenter

Presenter

  • 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’

Private and confidential 2


Agenda

Agenda

Defined benefit risks and issues

Accounting position

LGPS issues

Pension Trust issues

Summary and conclusions

Questions

2


High profile cases

High profile cases

  • Wedgwood Museum

  • People Can

  • Spirit of Enniskillen Trust

Private and confidential 4


Charity background

Charity background

  • 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

Private and confidential 5


Charity background1

Charity background

  • 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

Private and confidential 6


Introduction

Introduction

Defined Benefit-Risks and Issues

Confidential: internal use only 4


Defined benefit scheme how is it valued

Defined benefit scheme-How is it valued?

  • Liabilities = benefits promised to members plus expenses

  • Estimate of cost based upon salary, price inflation and life expectancy

  • Time value of money

Private and confidential 8


Defined benefit scheme how does it work

Defined benefit schemeHow does it work?

Future Deficit

Liabilities

Contributions &

Investment return

Assets

Future

Liabilities

Past Deficit

Past

Employer

guarantee

Assets

Contributions &

Investment return

Benefits

Private and confidential 9


Pension funding

Pension funding

45%

Under-pays

25%

Contribution

Over-pays

5%

20

65

Age

Private and confidential 10


Key funding measures

Key funding measures

  • Accounting – FRS17

  • SFO / On-going

  • Cessation / S75

Private and confidential 11


Funded defined benefit characteristics risks

Funded Defined Benefit – Characteristics & risks

  • 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

Private and confidential 12


Funded defined benefit characteristics risks cont d

Funded Defined Benefit – Characteristics & Risks cont’d

  • 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

Private and confidential 13


An imperfect storm

An ‘imperfect’ storm

  • Reduced asset returns

  • Falling gilt yields

  • Rising inflation

  • Lengthening longevity

  • Requirement for ‘prudent’ funding

  • Insolvencies/administration

  • Rising contributions

  • Falling membership-affordability

Private and confidential 14


Multi employer schemes section 75 cessation

Multi-employer schemes- Section 75/Cessation

  • 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

Private and confidential 15


Multi employer schemes section 75 cessation1

Multi-employer schemes- Section 75/Cessation

  • 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

Private and confidential 16


Last man standing

Last man standing

  • ‘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

Private and confidential 17


Member security

Member security

  • 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

Private and confidential 18


Other issues

Other issues

  • 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

Private and confidential 19


Accounting position

Accounting position


Accounting position frs102

Accounting position – FRS102

  • 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

Private and confidential 21


Accounting position1

Accounting position

  • 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

Private and confidential 22


Evoc pension presentation june 2013

LGPS Specific


Lgps specific

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

Private and confidential 24


Pension trust specific

Pension Trust specific


Pension trust specific1

Pension Trust specific

  • Multiple schemes

    • Growth Plan

    • SHPS/SHAPS

    • SVSPS

    • CARE Scheme

    • Independent Schools Pension Scheme

  • Closed / Open

Private and confidential 26


Pension trust specific2

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

Private and confidential 27


Growth plan

Growth Plan

  • 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

Private and confidential 28


Pension trust specific3

Pension Trust specific

  • 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

Private and confidential 29


Evoc pension presentation june 2013

Summary & Conclusions

Confidential: internal use only


Strategic advice

Strategic advice

  • 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

Private and confidential 31


Conclusions objectives

Conclusions & objectives

  • 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

Private and confidential 32


The charity trustees pension checklist

The Charity Trustees Pension Checklist

  • Available at www.spenceandpartners.co.uk/blog/

Private and confidential 33


Questions david davison@spenceandpartners co uk www spenceandpartners co uk

[email protected].ukwww.spenceandpartners.co.uk


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