Public Employees Contributory Retirement Scheme (PECRS): Actuarial Valuation Report as at 31 December 2013

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A decision made 27 February 2015:

Ministerial decision reference MD-C-2015-0031
Decision summary title Public Employees (Contributory Retirement Scheme) (General) (Jersey) Regulations 1989
Decision summary author	Project Director, Pensions	Is the decision summary public or exempt?		Public
Report title Public Employees Contributory Retirement Scheme (PECRS) Actuarial Valuation Report as at 31 December 2013
Report author or name of person giving report	Project Director, Pensions	Is the report public or exempt?		Public
Decision and reason for the decision To lay before the States the Public Employees Contributory Retirement Scheme (PECRS) Actuarial Valuation at 31 December 2013. Under article 3 (3) of the Public Employees (Retirement) (Jersey) Law, 1967, an actuary, appointed by the Committee of Management of the Public Employees’ Contributory Retirement Scheme (PECRS) has to regularly review the operation of the fund and make a report to that Committee (who will then pass a copy to the Chief Minister) on the financial condition of the fund and the adequacy or otherwise of the contributions payable to support the pensions and other benefits payable under the Scheme. A copy of every report produced under article 3 (3) must be laid before the States as soon as may be after it is made (Article 3 (5) of the Law). The report was signed by the Scheme Actuary on 31st October 2014 and the Chief Minister is now able to lay the report before the States. In addition to the Scheme Actuary’s report, the States Employment Board’s Actuarial advisor was asked to comment on the PECRS 2013 Valuation results and this report is also included.
Resource implications There are no financial or staffing implications.
Action required The Project Director – Pensions is requested to arrange with the States Greffe for the Report to be laid before the States at the earliest possible date.
Signature			Position Senator I J Gorst Chief Minister

Date signed			Effective date of the decision

Public Employees Contributory Retirement Scheme (PECRS): Actuarial Valuation Report as at 31 December 2013

Report of the Chief Minister

Article 3(3) of the Public Employees (Retirement) (Jersey) Law 1967 (L.11/67) requires the appointment of an Actuary to review the operation of the Public Employees’ Contributory Retirement Scheme. Under Regulation 6(1) of the Public Employees (Contributory Retirement Scheme) (General) (Jersey) Regulations 1989 (R & O 7956) the Scheme’s Committee of Management has obtained a report from the Actuary for the period to 31 December 2013.
In accordance with Regulation 6(2) of the Public Employees (Contributory Retirement Scheme) (General) (Jersey) Regulations 1989, this accompanying report from the Chief Minister presents to the States the Actuary’s report.
The Scheme’s Committee of Management and the States Employment Board have formally accepted the report, which was signed by the Scheme’s Actuary on 31 October 2014.
In particular, the Actuary has concluded that the Scheme had a slight surplus of £92.7m based on the provisions of the Scheme at the valuation date.

Valuation result

The main conclusions from the valuation are that:
- There is a past service surplus of £93.7 million as at December 2013;
- The anticipated future contributions are less than the value of future benefits in respect of active members as at 31 December 2013. Assuming the proposed Scheme changes are implemented with effect from 1 January 2016 as planned, the future service deficiency is £1.0 million;
- Putting these two elements together, the Scheme’s overall surplus as at 31 December 2013 is £92.7 million, equivalent to a funding ratio of 105.5%.
The Scheme Actuary has highlighted that the funding position is sensitive to changes in market conditions and that since the valuation date the funding position has worsened. It is, of course, not known whether this worsened funding position will be reflected in the next valuation of the Scheme but it does highlight the importance of retaining any temporary surplus to offset future adverse experience.

Dealing with a surplus

The treatment of any surplus disclosed by a valuation is covered by Regulation 6(3)(a), (b) and (c) of the Public Employees (Contributory Retirement Scheme) (General) (Jersey) Regulations 1989.

a) Firstly, full reimbursement will be made to those surviving members who have suffered a reduction in pension increases, excluding those members under the 1967 Regulations and the Former Hospital Scheme Regulations who will have received a top-up payment from their former employer.

b) Secondly, the benefits for all current deferred pensioners and pensioners will be restored to the amount that would have applied had the pension increases been equal to the full increase of the Jersey Cost of Living Index.

Members of the States Assembly may remember that the 2007 valuation disclosed a deficiency of £63.2m. As there was no agreement between the Chief Minister and the Joint Negotiating Group (JNG) on how to deal with the deficiency the default position applied and all future pension increases were decreased by 0.3% per annum.

The 2010 actuarial valuation concluded that the Scheme had a slight surplus of £40.6m based on the provisions of the Scheme at the valuation date and where a surplus is disclosed at a valuation, the Regulations governing the Scheme require the Committee of Management to restore any previous reduction or cancellation of increase in pension or deferred pension which has taken effect in the previous six years.
In order to utilise the surplus under the 2010 valuation the Scheme Actuary calculated that all future pension increases to pensions and deferred pensions due on or after January 2013 should be based on the annual increase in the Jersey Cost of Living less 0.15% per annum.
The surplus of £92.7 million as at December 2013 will be dealt with in the following way:

a) Firstly, full reimbursement will be made to those surviving members who have suffered a reduction in pension increases paid from the Scheme during 2013 and 2014, excluding those members under the 1967 Regulations and the FHS Regulations who received a top-up payment from their former employer.

b) Secondly, the benefits for all current deferred pensioners and pensioners will be restored to the amount that would have been applied had the pension increases granted on January 2013 and January 2014 been equal to the full increase in Jersey RPI (i.e. assuming the 0.15% p.a. reduction in pension increases had not applied).

c) Finally, future increases in pensions and deferred pensions due on or after 1 January 2015 will be assumed to equal the annual increase in Jersey RPI.

The re-imbursement of the 0.15% reduction was applied to member benefits in November 2014 in accordance with the Regulations. The surplus remaining after the restoration of pension increases outlined above is £54.6 million, equivalent to a funding ratio of 103.2%.
If a surplus remains after the restoration of previous pension increase reductions then the provisions of the Scheme require the Chief Minister, within three months of this report being laid before the States, to submit to the States proposals for disposing of the remaining surplus. The proposals may, with the agreement of the Committee of Management consist of the following:

If the surplus appears to be of a temporary nature, a recommendation that no action be taken;
The retention of a surplus no larger than the Actuary advises is a prudent reserve; or
An increase in the benefits under the Existing Members Regulations and the New Members Regulations.

In the Scheme Actuary’s opinion, the surplus at the valuation date should be considered temporary and based on the assumptions consistent with those adopted for this valuation and after allowing for the restoration of pension increases to the full Jersey RPI level, the Scheme would have a deficiency as at 30 September 2014 if a more up-to-date valuation were being carried out as at that date.

The Scheme Actuary therefore recommends the remaining surplus is retained as a buffer against future adverse experience. The Chief Minister is in agreement with this recommendation.

Notes on the Valuation

The overall approach adopted for the 2013 valuation was the same as for the 2010 valuation. In particular, the Actuary continued to use best estimate assumptions whereby the future outcome is just as likely to be better or worse than assumed. The rationale for using best estimate assumptions is covered in Appendix 4 of the valuation report. The assumptions adopted for the valuation are described in detail in Appendices 6 and 7 of the valuation report.

The Actuary has calculated that over the 3 years since the previous valuation the main factors affecting the past service funding position have been lower actual pension and salary increases than assumed at the previous valuation and changes to demographic assumptions.

At the 2010 valuation the Scheme Actuary determined that after the partial restoration of the pension increase the Scheme had a past service surplus of £30 million. The past service funding position has improved to £93.7 million over the last 3 years due to:-

Lower pension increases than expected: favourable impact £25 million;

Lower salary increases than expected: favourable impact £44 million;

Changes in demographic assumptions: favourable impact £29 million;

Other demographic experience and other factors: favourable impact £13 million;

Changes in financial assumptions: adverse impact £34 million;

Lower investment returns than expected: adverse impact £13 million.

Proposed Scheme Changes

The States Employment Board has proposed changes to the Scheme which include a move to a Career Average Revalued Earnings (CARE) benefit structure. The 2013 actuarial valuation has concluded that there continues to be a contribution shortfall. This shortfall is expected to increase over time. The proposed changes aim to ensure that the Scheme is sustainable, affordable and fair in the long term. The CARE proposals ensure that future service benefits are fully funded by future contributions from the planned implementation date.
For the purpose of the valuation the Scheme Actuary has assumed the changes will be implemented as planned. In particular, he has assumed that future service benefits will be fully funded by future contributions from the planned implementation date. If the proposed changes were not implemented on 1 January 2016, the surplus at the valuation date, based on the best estimate assumptions outlined in the valuation report, would be sufficient to restore pension increases as outlined above. However, the remaining surplus after the pension increase restoration would be reduced by over £30 million.

Employer’s Actuary review of the 2013 Valuation

Following receipt of the valuation report the Employer’s Actuary was requested to review the assumptions used by the Scheme Actuary and provide comments. Details of the Employer’s Actuary review are shown at Appendix A of this report. The Employer’s Actuary observations on the valuation results include:-

The demographic assumptions adopted in the 2013 actuarial valuation appear reasonable as they reflect local experience and the longevity improvement assumption reflects mainstream actuarial views in that area;
The assumptions as a whole are within an acceptable best estimate range;
The future service benefits cannot be afforded out of the Employer’s contribution rate and this highlights the need for reform of the Scheme;
Agreement with the Scheme Actuary’s view that, under the best estimate approach used it is expected the Scheme would be in a shortfall at 30 September 2014 if a valuation had been undertaken at that date based on full restoration of pension increases.
The fact that under the current Regulations a surplus that no longer exists at the date the valuation is signed must be used to reinstate pension increases is further evidence of a need for reform of the Scheme.

The Employer’s Actuary has highlighted that traditionally defined benefit pension schemes, such as PECRS, are costed using prudent rather than best estimate assumptions. All costings for the CARE Scheme have been prepared using prudent assumptions. The Employer’s Actuary has confirmed that these prudent assumptions were based on a similar level of prudence as used by the UK public sector schemes. This makes benchmarking with the UK easier and provides a comparable public service pension scheme required to attract workers from the UK to deliver key front-line services.
Importantly, the Employer’s Actuary’s report included the following conclusions:
- The case for reform is not undermined by the results of the 2013 valuation, or by the recently announced pension changes in the UK;
- The 2013 valuation has not changed the arguments for a move to a CARE Scheme;
- Caution is needed to ensure that the level of prudence used in the funding strategy for the CARE Scheme is not diminished to levels which put the stability of the CARE Scheme at risk;
- Any proposals to materially ratchet back on the proposed provisions of the new Scheme would cause benchmarking issues with the UK Schemes.

Summary

The 2013 Valuation report has determined that using best estimate assumptions the Scheme has a surplus of £92.7 million at 31st December 2013 and the Regulations therefore require the restoration of previous 0.15% reduction to pension increases.

The surplus after restoration of the pension increase was £54.6 million as at 31st December 2013. Since the valuation date the returns on assets have been below those assumed in the valuation and the funding position has worsened.

In the Scheme Actuary’s opinion, the surplus at the valuation date is temporary and therefore recommends the surplus is retained as a buffer against future adverse experience. The Chief minister is in agreement with this recommendation.

The future service deficiency as at the valuation date was £1 million. If the CARE Scheme is not implement on 1st January 2016 the future service liability at the valuation date would be £30 million higher.

The 2013 valuation confirms the case for reform of the Scheme. The Employers Actuary has reviewed the valuation assumptions and confirmed that the case for reform is not undermined by the results of the 2013 actuarial valuation and the arguments for a move to a CARE Scheme have not changed. The Employers Actuary has also highlighted the need to ensure the level of prudence in the CARE Scheme is not diminished to levels which would put the stability of the CARE Scheme at risk.

Actuarial Report

The 2013 actuarial valuation was signed by the Scheme Actuary on 31 October 2014. A copy of every report, signed by the Scheme Actuary, must be laid before the States by the Chief Minister as soon as possible.