Our aim is to provide secure pensions, effectively and efficiently administered at a low stable cost to employers and employees. Hopefully, the position at the end of March 2003 will be the low point for funding levels, following three years of stock market falls compounded by very low interest rates which increases liabilities. Last year saw a major recovery in the Fund's value as equity markets delivered returns of 30%+ contributing towards an overall Fund return of over 26%.
Excellent Return
This is an excellent return and it leads the performance of other pension funds outperforming the local authority average by over 2%. Its also pleasing to report that the Fund delivered a positive return of 2% per annum over the last three years which whilst disappointing in terms of absolute return compares very favourably with other pension funds where the average fund fell in value during this period. The Fund's long term relative performance is excellent with the Fund being amongst the best performing local authority funds over 3, 5 and 10 years. Over the long term the Fund has outperformed by around 1% per annum. 1% outperformance equates to 5% of employer contributions.
Accountancy |
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| The accounting for pension costs standard FRS 17 has progressed onto "year 3" disclosures for many of our employers. For our local authority employers this necessitates incorporating FRS 17 assessed costs and funding positions into their accounts. The increase in Fund value has seen local authorities return to a funding level in the range 95% - 99%. |
Councillor Roy Oldham, CBE,
Chair, Pension Fund Management Panel |
For other employers, funding levels are generally lower, which is often because of the different bases of calculation. In producing these numbers, it is important that we remember that they represent a snapshot at a particular point in time and that as such there will be significant volatility between years. It is also worth remembering that employer contribution rates are determined from the Actuarial Valuation which is undertaken every three years and that FRS 17's only purpose is accounting for pension costs.
Valuation
During the course of 2004, the Actuary will be undertaking the Fund's valuation as at 31st March 2004. This will result in revised contribution rates with effect from 1st April 2005. It is always difficult forecasting the likely change in rates, because of the range of experience at individual employers on matters such as pay increases and retirements. The Actuary has indicated that he expects most employers will see a minimum increase in their contribution rate of 1% per annum, for the next 3 years, for example an employer currently paying 10% will increase to 11% from April 2005, 12% - April 2006 and 13% - April 2007. The Fund's overall funding position is expected to compare very favourably with other pension funds because of the Fund's investment performance and the strong starting position from 2001.
Regulation
Another factor which will have an impact on the Valuation is the Regulation changes to the Local Government Pension Scheme arising from the stocktake review undertaken by the Office of the Deputy Prime Minister. The changes are aimed at helping the sustainability of the Scheme and are introduced in two parts, the first stage took effect from 1st April 2004 and the Government is currently consulting on further changes to take effect from April 2005. The current proposals are aimed at extending working lives and including measures such as raising the minimum retirement age to 55 and future benefit accrued being based on a retirement age of 65. These measures will reduce employer costs.
The Regulation amendments also place a requirement on the Fund to produce and publish a "Funding Strategy Statement". We will be consulting with employers on the content of this statement which will focus on funding issues such as affordability, stability, transparency and prudence. In the medium to long term we expect equities to outperform other assets and this is reflected in our investment strategy. We believe that the high level of credit worthiness of our employers enables the Fund to take a long term view of its investments and thus maintaining our equity weighting at around current levels is a key component of controlling long term costs.
Future Changes
Looking forward, legislative and regulation change will be extensive as the Government progresses its Pensions Bill and we need to prepare for the new tax rules which take effect from April 2006. These changes will impact on the administration of the LGPS as will the Governments further review of the Scheme which is expected to commence next year. The Government continues to encourage pension saving and I am pleased to see the Government taking steps to ensure that those who save for their pensions reap the benefits in retirement although more remains to be done.
Membership
I am also pleased to report high levels of take up of the Scheme are continuing with approximately 92% of permanent full time employees and 72% of permanent part-timers joining the Scheme. For full time employees of Scheme employers, I believe there is a strong case for making membership compulsory and I shall continue to make this point at subsequent reviews.
Conclusion
In conclusion, the Fund's performance on both the investment and administrative fronts has continued to be excellent - simply the best! I thank the members of the Panel, the Advisors, Investment Managers and the staff for their work over the last 12 months.
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