Monday, November 19, 2007

Pension Fund Actuarial Valuation and Investment Strategy

Okay, this is not the most exciting post I have ever done. But in its own way, the training on “Actuarial Valuation and Investment Strategy” I went on last Wednesday evening at the Tower Hamlets Town Hall was pretty important.

To put it very simply (never an easy thing to do with pensions) the valuation is an educated guessimate on whether the pension fund will have enough money to pay its commitments to staff without undue risk or strain to the Council tax. The scheme advisers “Hymans Robertson” gave the presentation.

This is important stuff not only to staff in the pension scheme (LGPS) but also Council tax payers and service users. If the wrong investment strategy is followed then staff may find their jobs at risk if local services are slashed in order to pay for poor investment returns or unexpected financial “shocks”. Also, we may have a rerun of the industrial strafe of 2006 when patchy governance across the LGPS caused (in part) pressures on the Government to cut future pension benefits.

Firstly the usual “health warning” - this is my own interpretation of the meeting, not an official account, not the council, Hymans Robertson nor the Labour group position and the 2007 figures quoted are estimates at the moment.

I have been the Staffside “Observer” on the Councils (LGPS) investment panel for over 10 years. I also go to the Council “Pension and Accounts Committee” meetings on behalf of the joint trade unions. UNISON believes trade unions should play an active rule in the Governance arrangements of Council pension schemes and that we should have proper representation, not just observer status ,on our pension panels and committees. We prefer the term “Member Nominated Representative” (MNR). A consultation with the Government regulators on LGPS governance arrangements has recently finished.

All councillors had been invited but only about 12 turned up. I sat with Pension and Accounts Chair Cllr Bill Turner and Cllr Anwara Ali. Both good UNISON members of course.

The crucial bit about the triennial valuation is the” assumptions” made and “cash flow”. Some schemes (not my own!) deliberately fiddle the investment assumptions they make in order to keep Council tax low. They pretend that they do not have to put so much money into the scheme since they overestimate how fast their investments will grow or that the life expectancy of members will be lower than should be expected. This is just Gerrymandering by any other name.

Other schemes “plan” to pay off any deficit over unrealistically long periods of time. Tower Hamlets use a 20 year cash flow which is average for LGPS (unlike the private sector where I believe that the regulator expects 10 years or less). While some schemes use 40 years plan which is well "iffy". Another reason why we need trained independent trade union reps on all council pension schemes.

The “good news” for our pension scheme (I kid you not) is that more pensioners died than was expected. So less strain on the scheme.

There was a bit about Asset Liability modelling and generating “random” scenarios which just hurt my head. Don’t think many councillors got it in either.

Our scheme’s financial position had improved from 2004 and now stands at 77% funding (assets compared to liabilities) compared to 73%. At the moment there is some £706 million of assets investment in the UK and the rest of the world. A lot of money to you and me but the LGPS is nationally worth around £100 billion. It needs looking after.

7 comments:

Anonymous said...

What age can you pull a full pension at ...remind the hard pressed council tax payers?

John Gray said...

Hi Anon

It use to be 60 if you joined the scheme at 20 (40 years service). This has now been changed to 65.

Unlike bosses pensions it seems, some of them only take 20 years to get a full pension! :

http://www.hrmguide.co.uk/rewards/directors-pensions.htm

Directors' Bumper Pensions

September 6 2006 - Directors of the UK's top 100 companies have amassed pensions worth nearly £1 billion, according to the latest annual TUC PensionsWatch survey.
The TUC's analysis of boardroom pensions shows the average executive can retire at 60 on a final salary pension worth nearly £3 million. The largest director's pension in each company is worth nearly £5 million, over 40 times more than most staff pensions.
The biggest final salary pension in the survey is worth more than £19 million and would pay the director nearly £1 million a year, and five directors have a pension worth over £12 million. One employer paid over £1 million into a director's money purchase (or defined contribution) pension in 2005, and the five biggest payouts to this type of pension top £300 000 annually.

Other key survey findings include:
Defined benefits pensions

• Directors of the UK's top companies share pensions with guaranteed pay-outs (known as defined benefits, DB, or final salary schemes) worth £950 million.
• On average each director's pension is worth £2.7 million.
• The average for directors with the largest pension in each company is £4.9 million.
• The average director's DB pension would pay out more than £168 000 a year, almost 24 times the average occupational pension.
• For the directors with the biggest pension in each company, the average would be over £290 000 a year, over 40 times the average for all employees (£7124).
• The proportion of directors with final salary pensions has remained at over 80 per cent since the survey began in 2003, despite the growth in riskier defined contribution schemes for employees.
• Only around one-third of UK companies have a salary related scheme open for all employees.
• Over three-quarters (77 per cent) of companies allow directors to retire on a full pension at 60.
• Directors' final salary pensions are most likely to build up twice as fast as the most common rate for employees in DB schemes, meaning that it takes staff 40 years, on average, to reach full pension but directors only half that time.
Defined contributions pensions
• Where directors are in money purchase schemes, where the pension will depend on the performance of investments (defined contribution or DC), the average annual employer contribution is £103 000.
• The average for company directors receiving the highest payment in each company is £147 000.
• Employer contributions to directors' DC schemes was, on average, the equivalent of just under 19 per cent of salary, and 20 companies paid 25-35 per cent of salary into pensions, compared to the average for all employees of just 6.6 per cent.
• The highest annual employer contribution to a director's defined contribution pension was £1 077 882, the rest of the five biggest annual contributions range from £298 000 - £360 000.
TUC general secretary Brendan Barber said:
"Britain's boadrooms and business lobby groups have failed to tackle upstairs-downstairs style company pensions. If bosses were in the same scheme on the same terms as staff, they would still build up massive pensions compared to employees but they would be fairer. It would also help reduce their company pension deficits.
"Investors should demand uniform and open reporting of staff and executive pensions from companies and ensure that the funds of shareholders, including thousands of pension fund members, are not being lavished on luxury pensions that have no link to business performance."

Anonymous said...

I guess they also pay considerably more tax than you? - which of course helps pay your wages...maybe they take a lot less time off, lead big organisations and work under more stressful conditions? If you wanted to be a Director of a Company what exactly stopped you? Instead you made your choices and work where you do - no doubt your job has a lot less pressure and responsibility - life is a series of choices - instead of casting envious eyes on their deal why don't you get off your arse and get yourself into the same position?

John Gray said...

Oh temper Henry

Sorry to have upset you, but I must admit that I wonder why haven’t you got enough grace to admit when you are wrong? I think you are now beginning to realise the dangers of relying on the Daily Hate to shape your world.

Chill out a bit and maybe you will realise that there are more important things in life than just making money (good luck to those who do – as long as they don’t treat people crap along the way and pay their fair share in taxes).

Anonymous said...

and the answer to the question is?

John Gray said...

Well either

“It use to be 60 if you joined the scheme at 20 (40 years service). This has now been changed to 65”.

Or "I made a choice to work in a very stressful and pressurised environment supporting and fighting for ordinary working people rather than trying make rich people richer?"

Tom Powdrill said...

"instead of casting envious eyes on their deal"


err...


"What age can you pull a full pension at ...remind the hard pressed council tax payers?"

consistency is not your strong point is it mate?