ITEM 8
STRATEGY & RESOURCES
COMMITTEE
12 JULY 2006
PENSION FUND VALUATION
Report of the:
Director of Finance
Contact:
John Turnbull
Urgent Decision?(yes/no)
No
If yes, reason urgent decision required:
Annexes/Appendices (attached):
Appendix 1 – Extract from Surrey County Council
report to the Audit and Governance Committee
dated 13 January 2005 (excludes effects on County
Council Budget and other Bodies as well as Annexe
4, the funding strategy statement, previously
reported to Financial Policy Panel. Includes:
Annexe 1 – Summary of results by employer
for membership up to 31 March 2004
 Annexe 2/3 – Statement of contributions by
participating employers
Other available papers (not attached):
Financial Policy Panel Agenda 9 November 2005,
item 2 – Pension Fund Strategy Statement
Surrey pension Fund – Actuarial Valuation as at 31
March 2004
This item covers the outcome of the actuarial valuation of the Surrey County Council
Pension Fund (31 March 2004) and updates the Committee of changes on the review of
the local government pension scheme.
Notes
RECOMMENDATIONS
That the Committee:(1) Receives this summary of the outcome of the 2004
Pension Fund valuation;
(2) Notes the position on the solvency of the fund as at 31
March 2004;
(3) Confirms that the action taken is appropriate and that
no further action is required at this stage.
1
Implications for Community Strategy and Council’s Key Priorities
1.1
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The ‘People and Performance’ agenda is at the heart of the Corporate Plan. The
local government pension scheme contributes towards the Council’s aim to be a
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ITEM 8
caring and fair employer with a high-performing workforce. The cost of the
scheme must however be sustainable if the Council’s priorities are to be achieved
in the longer term.
2
Implications for Committee’s Key Service Priorities
2.1
3
4
There are no specific key service priorities covering pensions for 2006/07.
Introduction
3.1
Every three years actuaries carry out a valuation of each Local Government
Pension Fund to assess the financial position of the fund and to determine future
employer contribution rates.
3.2
The fund was valued as at 31 March 2004 by the actuaries, Hymans Roberson,
and the valuation report was issued in March 2005. The valuation covered the
position of the Surrey Pension Fund as a whole and, within this, the position of
individual employers. A copy of the valuation report has been placed in the
Members’ Room.
3.3
This report provides details of the overall fund position and the individual position
for Epsom and Ewell Borough Council.
3.4
Central Government is undertaking a review of public sector pension
arrangements and specifically the LGPS. This report also updates the position on
that review.
Surrey Pension Fund Overall Position
4.1
The triennial actuarial review of the Pension Fund at 31 March 2004 has resulted
in an increase in employer contributions payable from April 2005. Estimates had
been provided to the individual employing organisations in November 2004
allowing the extra costs to be built into their 2005/06 budgets.
4.2
Last November the Executive Director of Performance and Resources from
Surrey County Council gave a presentation to the Financial Policy Panel, with all
Councillors invited to attend, in which he covered some of the current pension
fund issues. He also consulted on the draft pension fund strategy statement which
was included in the Financial Policy Panel agenda dated 9 November 2004. The
strategy aims to achieve 100% solvency over 20 years.
4.3
Overall, the solvency of the Surrey Pension Fund has decreased from 75% to
68%. Employer pension fund contributions on current staff have increased by an
average 2.5%. The position on the valuation and in particular on ‘back-funding’
or additional monetary amounts paid to bring the cover up to 100% over 20 years
varies for each employer.
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ITEM 8
STRATEGY & RESOURCES
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The fund position as reported to Surrey County Council’s Audit and Governance
Committee is shown in Appendix 1 along with annexes 1 and 2 to that report
covering individual employers within the fund.
4.4
5
Epsom and Ewell Borough Council’s Position
5.1
This Council currently pays contributions into the Pension Fund to secure future
service funding at a rate of 10% of payroll. Additionally, the annual lump sum
payment in respect of past-service deficiencies was £577,000 in 2004/2005.
5.2
As a result of the actuarial valuation, the change in the solvency level for Epsom
and Ewell Borough Council has been analysed as follows:
Funding level at 31 March 2001
Change in Valuation Assumptions
Surrey fund investment returns better than average local
authority fund returns
Average local authority fund returns less than expected
Effect of salary increases
Effect of pension increases
Effect of contributions paid
Effect of demographic assumptions
Miscellaneous items
Funding level at 31 March 2004
EEBC
Fund as a
whole
%
%
74.0
-4.1
2.1
75.1
-3.6
1.7
-16.8
-13.7
2.4
1.5
17.7
2.6
-4.0
75.5
1.0
1.2
6.7
1.2
0.5
68.1
5.3
The solvency of the Council’s share of the Fund has increased from 68.1% to
75.5%. The main reason that the solvency position has improved compared to the
fund average is that the Council made additional contributions from capital
reserves.
5.4
The deficiency calculated for the Council as at 31 March 2004 was £9.8 million
and, allowing for the equity risk premium and the increase in the deficit recovery
period, the new contribution rates for the Council are:-
Page 3 of 6

The ongoing rate is to rise from 10% to 12.5% of payroll;

The annual lump sum payment is to increase marginally from £577,000 in
2004/05 to £584,000 in 2005/2006 and to increase by pay and price inflation
thereafter. The back-funding rate is reduced from 13.6% to 11.8% providing a
total contribution rate of 24.3% (was 23.5%).
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ITEM 8
5.5
Having taken into account revised assumptions on the abolition of the 85-year
rule, options were given to employers to step the increase in contributions over
either 3 or 6 years. This option was not considered by this Council since the
increase in the annual lump sum payment is marginal. There was no discretion to
step the increase in the ongoing contribution rate.
5.6
The new employer contribution rates took effect from 1 April 2005. The increase
in the ongoing rate resulted in additional contributions of £170,000 in 2005/2006
which has been included in the base budget.
Options
6.1
The LGPS is a statutory scheme which is currently being reviewed by central
government. Contributions payable have been certified by the actuary following
consultation on the funding and investment strategy. Whilst the Council does
exercise some local discretion, for example over the operation of some aspects of
the early retirement scheme, these options are now generally exercised on the
basis that the costs of any local decisions must be covered by salary savings
within three years.
6.2
In December 1999 the Department of the Environment, Transport and Regions
(DETR) provided guidance on the capitalisation of pension fund contributions.
This gave limited scope for authorities to make a lump sum injection into pension
funds using capital receipts. The certified additional monetary amounts for
2001/02 was £1.1 million. This Council took advantage of that opportunity and
invested £7.1 million from capital reserves into the fund. Despite fund
performance being less than anticipated when that decision was taken, the level of
back-funding has significantly reduced and the solvency increased as a result of
that decision. It is not proposed that a further capitalisation is sought at present:(a) because the Council’s level of capital reserves is currently being held at
around £7 million to fund the capital programme and generate interest on
balances to help fund services – this provides only limited scope for a
further payment, and would increase the risk of the Council having to
borrow to fund future capital programme expenditure
(b) although an application for capitalisation could be made, the guidance
issued in 1999 was seen as a one-off opportunity allowing the phased use of
capital receipts between 1999 and 2003. It is questionable whether an
application would be approved.
7
Financial and Manpower Implications
7.1
Page 4 of 6
The 2005/06 budget includes provision for pension fund on-costs at 12.5% of
salaries and £688,000 for other cash payments, including discretionary decision
payments and additional monetary amounts to reduce the fund deficit. These
provisions are sufficient to cover the cost of payments certified in the valuation
report.
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ITEM 8
Human Rights and Other Legal Implications
8.1
The Committee will be aware of the statement made by the Deputy Prime
Minister earlier this year of his intention, subject to statutory consultation, to
revoke the implementation of changes to the LGPS which were from April 2005.
8.2
The changes made were:
To remove the right to unreduced pension before the age of 65 (the 85 year
rule)

To increase the minimum retirement age, other than that due to permanent illhealth, from 50 to 55.
8.3
The pension fund administrators advise that changes have been implemented, as
required by the regulations, pending the outcome of the review. The Employers’
Association for local government has expressed concern that there will be a cost
of revoking the regulations. The Surrey Pension Fund actuary has indicated that
the changes have been reflected in the valuation and an average cost to an
employer if they are revoked may be in the order of 1.6% on pay-roll (£100,000
per annum for this Council).
8.4
The Deputy Prime Minister has confirmed that he will consult with stakeholders
on the future of the LGPS
8.5
The Director of Finance consulted with the Chairman of the committee before
responding to the employee organisation and the ODPM as follows:The Council supports the initiative for establishing a tripartite committee to
consider the measures that are required to ensure that the scheme is affordable
and sustainable in the long term. We feel that consultation with employees as
well as employers is critical to successful implementation of much needed
changes.
We are concerned that employees should have been fully consulted on the
changes and therefore believe that the changes should only be made
retrospectively if employee representatives accept that this is in their best
interests in the longer term. We would however seek assurance that the
Government will:(a) following consultation, introduce a new statutory instrument so that
reforms can be introduced from April 2006 at the latest, and
(b) either finance the cost of deferral, or ensure that changes made by
April 2006 provide for the recovery of this cost so that employers
pension fund contributions as recently certified do not have to be
further increased.
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ITEM 8
We would also encourage the Government to ensure that the changes currently
proposed for 2007/08 are given appropriate priority by the Deputy Prime
Minister’s Pensions Committee reflecting the need for changes to address the
concerns of Council Tax payers, local government employers and employees.
9
Proposal
9.1
The Council has therefore taken steps to reduce future costs by making additional
capital contributions and has made full provision for payments required in the
2004 valuation. The Council has also made representation on the need for
changes to the scheme to ensure that it is sustainable in the longer term.
9.2
It is therefore proposed that the Committee:9.2.1 receives this report on the outcome of the 2004 Pension Fund valuation
9.2.2 notes the position on the solvency of the fund as at 31 March 2004
9.2.3 confirms that action taken is appropriate and that no further action is
required at this stage
10 Risk Assessment and Conclusions
10.1
As anticipated, the March 2004 pension fund valuation has resulted in the need to
make additional employer contributions from April 2005.
10.2
The solvency of the fund as a whole has worsened due to lower than anticipated
fund performance, due to the fall in the equity market, and also due to members
living longer and thus drawing benefits for longer. The Council’s solvency has
however improved as a result of the payment of additional contributions using
capital reserves.
10.3
The management of pension fund risks is covered in the funding strategy
statement and statement of investment principles.
10.4
The Council has included full budget provision for the certified payments in the
valuation report, but there is a financial risk that the changes made to the scheme
in April 2005 will be revoked.
10.5
The longer term risks will need to be addressed in the review of the statutory
LGPS announced by the Deputy Prime Minister.
WARD(S) AFFECTED: n/a
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