SFHA actuarial valuation provides unwelcome news

David Davison

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In February this year my blog asked the question “Will the SFHA Pension Scheme be the next to fall in the Pension Trust house of cards?  Well the house may not have collapsed but it’s certainly in serious need of repair!!

The Pensions Trust has been communicating the results of the SFHA actuarial valuation with participants over the last couple of months and as I’d suspected the news is not good. The valuation was calculated at 30 September 2009 and the key results were:-

  • The funding position has deteriorated to 64.8% from 83.4% in 2006
  • The deficit has increased to £160.1m from £53.6m
  • The contribution to fund the past service deficit has increased to 10.4% over a 15 year period from 5.3% over a 12 year period in 2006
  • The total final salary contribution has risen from 23.1% to 29.6%
  • There have also been very significant rises in the CARE contributions

Interestingly the 2006 buyout deficit quoted at £339.8m (33.7% funding level) was not updated in the presentation but I think it’s reasonable to assume it hasn’t improved!!

The reasons for the deterioration in the funding position is quoted as a combination of poor investment returns and the requirement for more prudent assumptions in respect of longevity and inflation, however, does this present the whole story and are there additional questions that the participants need to address to the Pensions Trust?

Participants may want to ask:-

  • Investment markets have undoubtedly been poor and returned less than assumed over the period however has the funding position been worsened by a consistent under-performance of the funds underlying assets?
  • Have these assets been invested in appropriate asset classes to effectively achieve returns whilst managing risk?
  • Yes, there has been a requirement for a strengthening of the assumptions used however there was already a very significant deficit present in the scheme at the 2006 valuation and does the further deterioration in the funding position not also reflect that the assumptions used at that point were not as prudent as they might have been and have required additional strengthening in the most recent valuation?
  • Have the assumptions been strengthened to a reasonable degree in the 2009 valuation or is there likely to be more bad news to come in 2012 and beyond?

As part of the valuation briefing the Pensions Trust also outlined the results of their benefit review and this too provided employers with few crumbs of comfort and little recognition of the position in which employers in the scheme find themselves.  A series of 5 statements have been made by the SFHA Committee and employers have been asked to comment on these and I would actively encourage them to do so.

A couple of these in particular are worth highlighting.

  • There is an assertion that there should automatically be an employer to member contribution ratio of 2:1. Is it the role of the SFHA Committee to outline contribution practice to employers? Many employers provide contributions to schemes on a basis below 2:1 and indeed many schemes are moving towards shared cost arrangements. Should this not be an option for participants in SFHA?
  • The statement is also made that employers wishing to offer defined contribution options can do so outside the scheme. Whilst I am pro choice for employers as more competitive DC options may exist elsewhere in the market, or indeed in due course may be provided by NEST, the assertion that such steps if taken by employers could be deemed to be selection against the scheme seems inconsistent. Many participants have numerous staff who do not participate in the SFHA scheme and no doubt this will continue to be the case, frequently as a result of the contribution level being seen as a barrier to entry. These individuals will need to be automatically enrolled in NEST so why should it not be possible to offer alternative provision without the risk of selection against the scheme?

SFHA participants need to consider their options carefully and ensure that they forcefully communicate their views to the SFHA Committee and the Pensions Trust.

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers

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