Sunday 29 March 2009

MPs' second homes? This is where the big money is.

For some reason my mother used to think that I should become an actuary. I didn't, but this is really fascinating stuff. Ladies and Gentlemen, I present the Lothian Pension Fund actuarial valuation as at 31st March 2008!

Here's the Executive Summary:

The results are presented in this report and summarised below.

The Fund’s objective of holding sufficient assets to meet the estimated current cost of providing members’ past service benefits) was not met at the valuation date. The funding level was 85% (compared to 85% at 31 March 2005) and there was a funding shortfall of £524m.

Without anticipating an element of future equity out-performance, the ‘gilt-based’ funding level would be 65% at the valuation date, and there would be a shortfall of £1,579m. The Fund’s financial position at the valuation date is illustrated graphically in the chart below.

The employers’ average future service contribution rate as at 31 March 2008 (ignoring the past service shortfall) is 17.1% of pensionable pay. Assuming that a funding level of 100% is to be targeted over a period of 20 years, the common employers’ contribution rate is 22.5% of pensionable pay. These figures take advance credit from outperformance of the Fund’s assets relative to gilt yields on the valuation basis, as set out in the Funding Strategy Statement. Ignoring this credit for outperformance the funding position would be 64%, and the common contribution rate would be 42.0% of pay.

The actuary makes various assumptions. One is that mortality rates will probably improve - there'll be nae bevvying in the new Scotland. But on the other hand, "the increase in childhood obesity may result in a decline in longevity in future generations." Lose some; win some, as the actuary would put it.

So all of those local authority "non-jobs" that we read about in the press a week or so will ago actually cost the Lothian taxpayer 22.5% on top of the quoted salary. Plus employers' NI of course. The rate was 19% at the last valuation three years ago. But note also that the actuary assumes that the fund will make a future "outperformance" over the returns available from gilts. But should that not be achieved:

the common contribution rate would be 42.0% of pay. !!!
And this is all based on the fund valuation as at 31 March 2008. I see that the actuary says that employers' contribution rates would have to be 25.3% were he to use market data as at 13th February this year.

I conclude that the Lothian council taxpayer is screwed. Like the rest of the UK.

1 comment:

David Farrer said...

Comments made on previous template:

runescape gold
Two thumbs up, well done!

13 April 2009, 07:59:03 GMT+01:00
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Doog o' Doom
It ain't goin to happen. Stock market is going a long way down from here. We started this from a more bloated position than 1929 and the laws of gravity have not changed in the meantime. 

6 April 2009, 17:02:58 GMT+01:00
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Rab o' Ruglen
Hi Dave, 
Don't get me wrong, I'm sure the situation is serious, but I remember that while the employees maintained their contributions continuously, the Employers enjoyed pension contribution "holidays" for considerable portions of my 30 year career in Local Government, which cannot have helped the situation we find ourselves in now. 
As I recall a similar situation to that existing just now arose from the stock market/energy crisis in the early 70's but after a relatively short period of increased employer contributions the situation quickly resolved to a more normal level. 
Some analyists are already stating that the stock market is undervalued, and once stability is restored in the banking sector that a rise in share prices will follow quickly. If they are right, and lets hope they are, all pension funds' troubles will soon diminish.  
The current difficulties should not be used as a means of ditching employers' commitment to final salary pension schemes which have been a great benefit to employees over the past hasf century or more. 

30 March 2009, 14:15:44 GMT+01:00
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Wow, bit of a black hole going on here. That Executive Summary takes a few readings, the actuarial language is a tricky beast at times so I just hope those at Ed Council understand what they have to do. 
Of course, if it was me, the assets would be liquified and put in an investment fund and all final salary contracts would be ripped up. 
Don't see that happening anytime soon unless Ron Paul replaces Jenny Hawe!

29 March 2009, 21:21:47 GMT+01:00