Home > News > 2003 > November 2003 > 2003 Solvency Levels FRS17/Funding
2003 Solvency Levels FRS17/Funding
Chris Chadwick, a partner in the Cheltenham office, looks at the recent history of local government pension scheme FRS17 and funding solvency levels.
These are difficult times for all pension schemes, and local government schemes are no exception. Barnett Waddingham have been looking at the recent development of the assets and liabilities of a typical local government fund with a solvency level of 90% at 31 March 2001. This "typical" fund has assets invested 50% in the FT - Actuaries All Share Index, 30% in the FTSE All World ex UK All Share Index and the remainder in the FT Actuaries UK Fixed Interest Index.
The initial position at 31 March 2001 is shown for the model scheme in table 1, together with the hypothetical FRS17 figures at that date on the public sector 3½% real discount rate basis.
The pensionable payroll in the model scheme was £210m, giving rise to a deficit contribution of 5% of payroll. By 31 March 2002 the position had deteriorated somewhat, as shown below, though this was actually the calm before the "storms" of Summer 2002 reflected to a degree in the July figures in Table 2.
The UK equity market reached its nadir (we hope!) on 12 March 2003 so the figures at 31 March 2003 in table 3 below are predictably dire. Matters had improved somewhat by the end of July 2003, much to the relief of the various academic institutions with financial years ending on that day.
By 31 October 2003, the position had improved somewhat, as can be seen from the figures hot off the press in Table 4 below, though by no means enough to relieve the pressure on employers' finances.
Outlook
The most striking feature of the above is the wide swings in the solvency ratios over such a short period, reflecting the equity bias of the asset portfolio as compared to the liabilities. Although the pre-retirement discount rate adopted in the funding basis takes account of the yield available on UK equities, falls in yields on corporate bonds over the period tended to reduce the funding level and so limit the range of the gap between the Funding and FRS17 solvency results to 7-11%. As can be seen from the graph below, bad things have happened since the last round of actuarial valuations in England in March 2001. However, the picture on both funding and FRS numbers is getting better.
In broad terms the main message is a fall of around 20% from 2001 to 2003 in solvency levels on either basis. If written off over 13 years, the additional contribution rate required over and above that already in payment might be around 7.5% of payroll, over 20 years it might be 5%, and over 40 years 3.5%. The corresponding increases in Council Tax would then be of the order of 20%, 12.5% and 10%. Even the lowest level of increase is unlikely to be easily swallowed by council taxpayers in view of the storm of publicity likely to attend the "early warning" FRS17 valuation results at 31 March 2004 that will be published in summer 2004 in Councils' accounts. It is to be hoped that the nationwide effect will be built into central government's standard spending assessments, though this is likely to turn out to be wishful thinking! A more likely saviour might be a further 10% rebound on the markets, without a change of yields, which may allow the continuation of existing contribution rates, albeit with an extended write-off period.
Chris Chadwick, November 2003.