EVOC Pension Presentation June 2013

1. EVOC Pension PresentationJune 2013

2. 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

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

4. High profile cases • Wedgwood Museum • People Can • Spirit of Enniskillen Trust Private and confidential 4

5. 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

6. 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

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

8. 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

9. 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

10. Pension funding 45% Under-pays 25% Contribution Over-pays 5% 20 65 Age Private and confidential 10

11. Key funding measures • Accounting – FRS17 • SFO / On-going • Cessation / S75 Private and confidential 11

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. Accounting position

21. 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

22. 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

23. LGPS Specific

24. 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

25. Pension Trust specific

26. Pension Trust specific • Multiple schemes • Growth Plan • SHPS/SHAPS • SVSPS • CARE Scheme • Independent Schools Pension Scheme • Closed / Open Private and confidential 26

27. 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

28. 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

29. 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

30. Summary & Conclusions Confidential: internal use only

31. 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

32. 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

33. The Charity Trustees Pension Checklist • Available at www.spenceandpartners.co.uk/blog/ Private and confidential 33

34. Questionsdavid_davison@spenceandpartners.co..ukwww.spenceandpartners.co.uk