Latest News -
NEWSFLASH - 2010
Trustee’s Feb 2010 Newsletter - Trafalgar House Pension Trust (THPT)
28 March 2010
The Feb Newsletter is designed to “accentuate the positive”. And why not?
The positives are:
- the deficit is down, if not by much, and not up, as might have been feared
- the valuation result is, I guess, unlikely to cause problems with the Pensions Regulator even though the Recovery Plan now stretches to 2024
- communication to members continues to improve with the early posting on the THPTs website of the full actuarial valuation as at 31 March 2009
- THPA has upgraded its administration systems to meet the Regulator’s
drive for general improvement of schemes’ data management
- THPT’s success in the Professional Pensions 2009 Awards (the UK pensions world’s Oscars) will boost the morale of THPA staff.
- payments under the October 2006 settlement are so far being made to time.
So can we “eliminate the negative”?
Not yet, in my opinion. Even as we enjoy the positives we should not overlook the negatives. The actuarial valuation is the prime source of information enabling members to see how a scheme is working. You could say it’s the equivalent of the vehicle MOT. It’s long and uses specialist phrases, but it tells us a lot. I have set out below my personal analysis of the March 2009 valuation. It aims to answer questions that you, as thinking members, probably ask yourselves. Do read it and see if it works for you.
Three negatives stand out:
- if the 2006 Recovery Plan had been met the deficit at March 2009 would have reduced to £170m not £276m. The difference of £106m is mainly due to investment returns not meeting the Trustee’s target
- the 2009 Recovery Plan is heavily dependent on that target being met if the elimination date of June 2024 is to be achieved. The actuary’s figures are very sensitive to variations in investment results and the target is challenging
- the Trustee seems to be relying heavily on the opinion of its investment adviser, Cardano, that the target return is achievable. Both the valuation and the Recovery Plan are based on the Cardano view. The strategy has withstood the pressures of three turbulent years on the downside. It now has to prove it can perform on the upside in more settled financial market conditions and over a long period. Only time will tell us how realistic it is.
Lastly, THPA’s aim for third party business is laudable and I hope successful. But its profit contribution is likely to be small compared with the substantial cost of administering the THPT. Pursuing this aim must not be allowed to divert attention from the essential of THPT’s investment performance.
Yours sincerely,
Alan Ford
Understanding the actuarial valuation – simple!
What does the actuarial valuation tell us?
The financial position of the THPT at the valuation date – 31 March 2009 – and what is projected under a Recovery Plan
What are the key figures in the valuation?
£m
Future liabilities to pay members’ benefits 1571
Market value of the assets 1295
Deficit 276
How do these figures compare with the previous valuation?
The previous valuation – at 31 March 2006 – showed
£m
Future liabilities to pay members’ benefits 1557
Market value of the assets 1259
Deficit 298
You can see that the THPT has virtually stood still between 2006 and 2009. This is a significant achievement, given the turbulence in financial markets following the credit crunch, and reflects the investment strategy initiated by the Trustee in 2006.
Has the 2006 Recovery Plan worked out as forecast?
No. If the assumptions on which it was based had materialised in practice the deficit of £298m at March 2006 would have fallen by March 2009 to £170m. The difference of £106m (ie £276m – 170m) is mainly due to higher inflation and lower investment returns than assumed
How will the £276m deficit be eliminated?
The March 2009 Recovery Plan is based on several assumptions, the most important of which is that THPT’s future investment returns will be 3.6% per annum above the yields on gilt edged securities based on the THPT’s liability profile. The valuation says “ this assumption was set by the Trustee having regard to advice from their investment consultant.”
This level of return is somewhat higher than that assumed by the actuary for the purpose of his valuation numbers and is related to the assets in the Returns part of the total investment portfolio (see more on this below) for which the target becomes 6% per annum.
This returns target looks ambitious and performance will need to improve significantly compared with the three years to March 2009.
The Recovery Plan expects that the deficit will be eliminated by 30 June 2024, compared with June 2014 in the 2006 Recovery Plan
Are the assumptions for the 2009 valuation different from 2006?
Yes. Compared with 2006, the 2009 assumptions on the longevity of members and the margin of gilt yields over the Retail Prices Index have moved to increase THPT’s liabilities. Reducing the amount of assets in the Liabilities part of the of the total investment portfolio (see more on this below) has offset this to produce a neutral effect overall
How important is the THPT’s investment strategy?
THPT’s investment portfolio is split into two parts. The Liabilities part (40% of total) has assets designed to match THPT liability commitments over a period of years following the valuation date. This period has been reduced to seven years compared with ten years in the 2006 valuation when the allocation to Liabilities was 50% of the total. The Returns part (now 60%) is designed to produce the investment returns which the THPT needs to eliminate the deficit.
The valuation points up the sensitivity of the numbers that flow from the assumption on future investment return.
The investment strategy is very important to the future of the THPT, since there is no contributing employer. So far it has protected the assets from downside risk, but has not delivered returns to reduce the deficit materially.
What is the THPT’s cash outgo on members’ benefits?
In the year to March 2009 it was £74m and the report estimates it will peak in about the year 2032 at around £115m
What is this “solvency” section in the valuation about?
The figures shown above assume that the THPT will carry on functioning into the future, but the actuary also has to consider what would have happened if it had ceased at the valuation date and give answers to two questions:
Would the assets have been sufficient to buy from an insurance company
(1) policies that would provide all the members with the benefits they were promised? No. There would have been a shortfall estimated at £675m
(2) policies that would provide benefits at least equal to the compensation which the Pension Protection Fund would pay if THPT was admitted to it? No. There would have been a shortfall estimated at £295m.
The declared intention of the Trustee is to keep the THPT out of the PPF by generating sufficient investment returns. These figures illustrate the importance of eliminating the deficit under the 2009 Recovery Plan.
Does the Pensions Regulator have to approve the valuation?
The Regulator does not “approve” valuations as such. It receives all the key information in the valuation after its adoption by trustees. It reviews that against a series of its yardsticks, especially the Recovery Plan. If it is unhappy it then normally deals with the trustees to resolve problems.
Alan Ford
Back to homepage |
