3A - Pensions valuation - Kevin Barnes and Richard Soldan

DEMYSTIFYING PENSIONS FOR CHARITIES

Kevin Barnes Richard Soldan Director of Finance Partner

Agenda

Funding a pension scheme• Triennial actuarial funding valuation• Typical outcomes and solutions

Accounting for a pension scheme• FRS17• Flexibilities• Charity SORP• Reserves

Reducing risks• Investments and benefits• What steps can you take?

Top tips

Pension scheme funding

Providing funds to pay pensions

Actuarial valuations

• A budgeting exercise• Determines when you pay, not the ultimate cost• Pay more now = pay less later

• Value of pension scheme liabilities = “technical provisions”

• Plan to address deficit = “recovery plan”

• Results are highly sensitive to assumptions used• Are the assumptions and contributions reasonable?• Are there flexibilities?

• Current environment• Low gilt yields, large deficits

Agreeing future contributions

• Usual for the pension scheme trustees and employer to agree contributions

• What is “reasonably affordable”?

• How will your donors feel?

• Pensions Regulator guidance

Possible funding solutions

• Long recovery plans

• Contingent assets

• Contingent assets with pre-agreed triggers

• “Negative pledge”

• Extra returns assumed during recovery plan• Current financial conditions return to “normal”

Accounting for a pension scheme – FRS17

• FRS17 – UK pensions accounting standard

• Different measure of pension liabilities from that used for pension funding

• Different rules to follow

• Can be very different results

CASH!Charity Accountants Suffering Harassment

Key features of FRS17

• Assets at market value

• Value of liabilities based on financial conditions on the accounting date

• Value of liabilities based on AA corporate bond yields• normally different from funding

• Assumptions used are the charity’s assumptions• best estimates

AA Corporate Bond Yields – March 2011 to March 2012

Discount rates used by FTSE 100 companies

Charity SORP and the balance sheet

• Net assets / liabilities shown on the balance sheet

• If reserves < pension liability, does not immediately affect insolvency or ‘going concern’ test

• However can affect ability to raise funds

• Insolvency is not an issue unless the pension cashflows are unaffordable

Reserves "that part of a charity's income funds that is freely available for its general purposes."

• Charities SORP:

• Useful to separate out the pension liability and the pension reserve• Can consider reserves prior to the pension liability• Recommends explaining the cashflow effect

• Pension surplus can’t immediately be spent therefore deficit need not be included in ‘freely available funds’

• The exception is if reserves will be used to fund future pension contributions

• Pension payments must be budgeted and business plans adjusted to ensure they are affordable.

Pension scheme investments

• Investment policy set by pension trustees…

•…but risk rests with charity

Understand the risks!Investment

Benefits

Funding

A growing problem?

• Is your pension scheme growing?•Many defined benefit schemes could double in size over the next 10-15 years•Particularly those open to future accruals

•Will the risks become unmanageable without action?

•What can you do?

Reducing pension risks

Reducing pension risks

•Review benefits•Reduced future defined benefits•Close to accrual of defined benefits

•Investment risk•Diversify portfolio•Lower risk investments •Swaps

•Risk reduction journey•Need to balance desire to reduce risk with cost•Take active steps to set up a plan – don’t just react

An efficient structure to lock in gains

Reducing pension risks

• Mortality risk• Insuring mortality risk (eg “buy-in”)

• Buy outs• Remove the pension risk from the balance sheet

• Defined contribution schemes•Is your scheme fit for purpose?•Are most of your members using the “default” fund?•Is that up to scratch?•Are you ready for auto-enrolment?

Top Tips

•Actuarial valuations•Understand whether contributions are reasonable•There are solutions

•FRS 17•Remember there is flexibility

•Pension risks•Understand risks – both today and into the future•Aim to reduce risks to the extent affordable

•DC schemes•Ensure fit for purpose

•PPF levies•Monitor your Dun & Bradstreet failure score

Questions

• Richard Soldan• Partner, LCP• 020 7432 6631, [email protected]

• Kevin Barnes• Director of Finance, Barnardo’s• 020 8498 7496, [email protected]

This generic presentation should not be relied upon for detailed advice or taken as an authoritative statement of the law.

Advice should be sought for any pensions matters, including pension scheme funding and investments.