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Scheme Funding

Scheme Funding. TUC Pensions: From Reform to Reality Conference. TUC Conference. Reform to Reality Reality is here for SSF, it is now and the future Interactive presentation of the issues Trustees are facing. Aims of the presentation. To increase understanding of roles

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Scheme Funding

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  1. Scheme Funding TUC Pensions: From Reform to Reality Conference

  2. TUC Conference • Reform to Reality • Reality is here for SSF, it is now and the future • Interactive presentation of the issues Trustees are facing

  3. Aims of the presentation • To increase understanding of roles • To consider and discuss challenges • Emphasis on approach and not answer

  4. Scope of the workshop • High level review • Focus on key issues • To involve all participants • Not a test

  5. Trustee knowledge and understanding • Scope document available (on our website under ‘Information for trustees’) • E-learning: first modules of ‘Trustee toolkit’ released, funding modules expected autumn 2006

  6. Format of case study • Break out topic – Agreeing appropriate recovery plan • Feedback from 2 tables • Plus other comments • Further Q & As at end of the session • Regulator is not here to give answers, but to give support in considering the issues

  7. Timing of presentation and case study • Scheme Specific Funding – 15 min • Presentation on case study – 15 mins • Breakout – 20 mins • Report back – 10 mins • Q & As – 10 mins

  8. The future is now… • MFR phasing out • SSF phasing in • But impacts decision making now… • …even before full transition

  9. The future is now… Trustee role central: • Handling conflicts of interest • Setting funding target • Agreeing recovery plan • Adapting to changes • Scheme is a key stakeholder in business

  10. Therefore… Great expectations

  11. What is SSF? Scheme specific funding: • A new approach to funding • Assets to cover technical provisions • Assumptions specific to your scheme and employer • Amount to provide for your scheme’s liabilities

  12. What is SSF? If insufficient funds, recovery plan needed: • To reach technical provisions • Over recovery period • Period specific to your scheme and employer • Payment profile tailored to your scheme and employer

  13. The Pensions Regulator’s approach • Generally trustees and employers to agree • Regulator’s approach contained in the regulator’s statement issued in May 2006 • Triggers referred to • One of regulator’s tools for identification • Other methods available • Our triggers are not your targets • Our approach on no-names contact…

  14. Practical example • Case study • Breakout - agreeing the appropriate recovery plan • Opportunity to apply principles

  15. Case studyFiltraCure plcandFiltraCure pension schemeFiltraCure plc is a fictitious company, the details of which we have created for this workshop. No resemblance to any other entity is intended and, if any, this would be entirely coincidental.

  16. Employer status Scheme status Trustees FiltraCure plcIntroduction

  17. Case studyFiltraCure plc • Medium sized plc • Pharmaceuticals • Approx 2,000 staff • Turnover of £350m year to 30 Sept 2005

  18. Developing new drug to treat dust allergy Seeking new worldwide licences Delays in licensing Competition issues Currently restructuring Case studyFiltraCure plc

  19. Case studyFiltraCure pension scheme • 3,800 members • Single employer defined benefit scheme • Closed to new members two years ago • MFR funding level 95% • Contributions £6m per annum including £1m to past deficit • Rules give trustees power to set schedule of contributions with agreement of employer

  20. Case studyFiltraCure pension schemeTrustee Board • Three company-appointed trustees: • finance director (chair of trustees) • company secretary • human resources director • Three member-nominated trustees: • production line manager • research manager • pensioner and ex-employee

  21. Trustee conflicts • Can arise • Vital to identify early on • Must act on • Introduce procedures to facilitate • Where appropriate seek advice on how to manage • Guidance on our trustee web pages

  22. Trustee conflicts When making decisions: • Must be in best interests of scheme members • Other duties and interests must be set aside In particular: • Must fulfil general and statutory duties • This includes SSF

  23. Understanding covenants

  24. Covenants Covenant • Employer’s financial position… • Its prospects… • …and willingness to fund benefits Therefore • Essential for trustees to assess covenant… • …with appropriate professional advice

  25. Understanding covenants Financial position • Existing cash resources • Credit ratings Prospects • Future forecast cash resources • Change in priority of free cash distribution • Alternative ability to raise funds in market

  26. Understanding covenants Willingness • Negotiation between sponsor and trustees • Back up support of new legislation and regulatory powers

  27. Financial position Competing financial demands Not constrained Soft constrained Hard constrained Few Many

  28. Technical provisions

  29. Trustee deliverables Methods and assumptions Statement of funding principles Actuarial valuation Recovery plan Schedule of contributions Input from • Trustees • Employers • Actuary • Other advisers • Iterative process • 15 months to complete

  30. Technical provisions Investment return (Investment mix) (Employer covenant) Technical provisions Applied on scheme specific basis Mortality ratesSalary increasesRPIMember profile

  31. Technical provisions Prudence Employer ability to make good shortfall (if any) Risk adopted in assumptions Risk adopted in assumptions

  32. Breakout topicRecovery plans

  33. The goal Breakout topicThe recovery plan • To eliminate the shortfall • As quickly as employer can reasonably afford

  34. Breakout topicThe recovery plan Two issues • The period to meet the shortfall • The structure of payments over period

  35. Breakout topicThe recovery plan Commonly Hard constrained Soft constrained Non constrained Time to eliminate shortfall

  36. Breakout topicThe recovery plan Factors include • The membership profile • The employer’s business plans and covenant • The position on scheme winding up • The position on potential insolvency

  37. Breakout topicThe recovery plan • Assume £40m funding shortfall • Discuss competing demands on funds • Review recovery plan options – length and profile • Feedback

  38. Breakout topic Three key questions • How would you balance the competing demands? • What length recovery plan? • How would the payments be structured over time?

  39. Scheme specific funding key messages • Trustee role vital • Need to assess employer covenant • Financial assumptions specific to scheme and employer • Recovery period and payment structure also specific • Our triggers are not your targets

  40. Scheme specific funding key messages • Eliminate shortfall as quickly as employer can reasonably afford • Conflicts need to be identified and managed

  41. Scheme specific funding key messages The Pensions Regulator’s role • Regulator is referee not player • But will intervene where appropriate • Powers to impose

  42. Any questions?

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