Social Security Department- Minister's Report and Financial Statements – 2010

Social Security Department

Minister s Report & Financial Statements 2010

Social Security Department

CENTRE FOR WORK, PENSIONS AND BENEFITS

MINISTER

I. J. GORST

Deputy of St. Clement

ASSISTANT MINISTER

A. E. JEUNE

Deputy of St. Brelade

CHIEF OFFICER

R. W. BELL

Presented to the States by the Minister for Social Security.

Contents

Minister s Report  Page 5 Social Security Fund  Page 15

 Social Security (Reserve) Fund  Page 33 Health Insurance Fund  Page 51

Statistical Appendix  Page 69

Minister s Report

Introduction

These Financial Statements report on the Social Security Fund, Social Security (Reserve) Fund and the Health Insurance Fund (collectively the Funds ). In addition, the Social Security Department has responsibility for the distribution of a range of benefits funded by the States of Jersey tax revenues, these costs are reported separately and included with other States funded bodies in the States of Jersey Financial Report and Accounts. Statistical Appendix 1 on page 70 sets out the detailed income and expenditure of all of the Social Security Department s activities.

A high level summary of each Fund s results for 2010 are shown in the table below:

Social Security  Social Security  Health Insurance

 Fund  (Reserve) Fund  Fund £000  £000  £000

Income  217,485  80,928  31,369 Expenditure  186,963  41  25,657

Surplus   30,522  80,887  5,712

SOCIAL SECURITY FUND & SOCIAL SECURITY (RESERVE) FUND

The Social Security Fund generated a surplus of £30.5 million for the year (2009: £37.3 million). Considering that Jersey

is not immune to the impacts of the global downturn, it is pleasing to note that the Fund s contribution revenue has

fallen away only slightly at £150 million. The nature of the Fund means that for the foreseeable future it is going to have continued upward pressure on expenditure. 2010 saw pension and benefit increases of £6.4m, a result of a combination of

an increase in the number of pension benefit claimants which is consistent with demographic ageing and the legislatively driven increase in benefits and pension rates.

The Social Security (Reserve) Fund has continued 2009 s positive performance by achieving an 11.3% return on opening Net Assets. This has been achieved against the increased volatility in global markets which may be with us for some time to come.

To mitigate against some of these testing investment pressures, the Social Security (Reserve) Fund is now taking advantage of the States of Jersey Common Investment Fund (the CIF ), an administrative arrangement which gives its participants broader investment opportunities while minimising costs and fees through economies of scale. The Social Security (Reserve) Fund began migrating its investment assets to the CIF in October 2010.

The short time frame that the Social Security (Reserve) Fund s investment assets have been in the CIF has meant there has been little chance for the change to impact returns. I am expecting the benefits to become evident in 2011.

The Department utilises the UK Government Actuary s Department ( GAD ) to complete actuarial reviews of the combined Social Security Fund and Social Security (Reserve) Fund. The last review, published in September 2009, reviewing the combined funds at 31 December 2006, concluded that the combined funds were suitably funded in the short term but that over the longer term funds will have to be transferred back from the Social Security (Reserve) Fund to meet anticipated shortfalls between income and expenditure and that contribution levels will have to increase in the future in order to maintain the pension benefit.

Increasing the age at which a claimant becomes eligible for their pension would reduce the expenditure pressure on the Social Security Fund in the long term. I have recently lodged and had agreed by the States a proposition to increase the pension age to 67 by 2032 in 2011 to achieve this long term saving.

GAD have commenced their review of the combined funds as at 31 December 2009 which is expected to be finalised in the course of 2011 and it is expected that the above measure will have had a positive impact on the long term outlook for the fund.

SOCIAL SECURITY FUND PERFORMANCE OVERVIEW

The Social Security scheme is the means by which people insure themselves, through the payment of contributions, for their old age and for periods of ill-health or disability.

The table below is a summary of income and expenditure:

2010  2009 £000  £000

Income

Contributions  150,462  151,787 States contribution Supplementation  66,667  64,995 Other income  356  350

Contributions collected from employees and employers fell by £1.3 million from 2009 ending the year at £150 million (2009: £152 million). The net reduction is driven by a small increase in average earnings (1.1%), plus an earnings linked up-rating in the contribution ceiling (3.0%) offset by a reduction in the number of people working. In 2010 there were approximately 51,000 people working in respect of whom Contributions were paid, 1,000 less than 2009.

States Contribution reflects the funding provided by the States to top-up the contributions of the lower to medium

range of wage earners (those earning between £9,240 and £43,752 per annum) to protect their benefit and pension entitlement. The original budget was set prior to the decision to remove the eligibility to Supplementation of those under

18 years old with earnings below the Threshold. This decision saved an estimated £1.6 million. However, 2010 saw a growth in the numbers supplemented when compared with 2009; 33,223 (2009: 32,879), and that together with the ceiling uplift resulted in an increase in spend of £1.7 million.

The graph below shows contributor numbers and supplementation over the last 5 years:

CONTRIBUTIONS AND SUPPLEMENTATION (£ and numbers) 2006 2010

160 70,000 140 Contributions £m 60,000

120

Class I and 2 Contributors 50,000 100

40,000

£ m 80 Contributors receiving Supplementation

30,000 60

Supplementation £m 20,000 40

20 10,000

0 -

2006 2007 2008 2009 2010

Pension costs increased by 5% to £138.1 million (2009: £131.6 million). The increase was driven by two factors the increase in pensioner numbers from 2009 to 26,387 (2009: 25,467) and the annual earnings linked uprating.

Incapacity Allowances reduced by £0.5 million (1.3%) to £37.0 million (2009: £37.5 million). These consist of short term (STIA) and long term incapacity allowance (LTIA) and are payable when a person is either unable to work through injury, ill-health, disability or has a long term loss of faculty. The number of LTIA claims rose during the year but this was offset by a greater reduction in the annual number of STIA claims with the result that overall number of claims dropped during 2010.

Grants and Allowances include maternity allowance, maternity grant and death grant. These costs totalled £3.3 million for the year (2009: £3.0 million) and accounted for 1.8% of benefit expenditure in 2010. The increase in 2010 was a result of the annual benefit uprating and the rise in the number of annual claims for maternity allowance.

SOCIAL SECURITY (RESERVE) FUND PERFORMANCE OVERVIEW

The Social Security (Reserve) Fund is the mechanism by which contribution rate and ceiling changes are smoothed over time. Without this Fund, pensions and benefits would need to be paid entirely on a pay-as-you-go basis. At present and for the near future, benefits will be funded out of annual revenues. The Fund increases certainty and enables longer term planning by employers, employees and the States of Jersey.

The table below is a summary of the balance sheet as at 31 December:

2010  2009

£000  £000  £000  £000 Fixed assets

Investments  818,728  711,914 Current assets  19,165  166

Current Liabilities  (164)  (191)

Net Current Assets  19,001  (25) Net Assets  837,729  711,889

The net asset value of the Fund was £838 million at the end of 2010 an increase of £126 million on 2009. The Accounting Officer of the Fund is the Treasurer of the States and the Minister of Treasury and Resources is responsible for Investment Strategy in consultation with the Minister for Social Security. The Fund is performance managed by officers of the Treasury and Resources Department through the Minister s Treasury Sub-Committee. Investment advice is received from Hewitt Associates Limited.

The Social Security (Reserve) Fund is a long term investor that does not currently require its assets to be readily available. Liquidity is not therefore a key component of the investment strategy except that the holding of liquid assets enables portfolio changes to be made easily.

The Fund joined the States of Jersey Common Investment Fund (the CIF ) on 1 October 2010. The CIF, which came in force on the 10 May 2010, allows the pooling of States Funds for investment purposes. The graph below shows the performance achieved against the benchmark:

OVERALL FUND PERFORMANCE

20

18

16

14

12

% Return 10 Rates of Return % Benchmark %

8

6

4

2

0

2006 - 2008 (3 years) 2009 2010

The overall investment performance over three years is an increase of 3.22% compared with a benchmark increase of 4.18% . The performance against the benchmark over 2010 was an increase of 11.35% compared with a benchmark increase of 14.02% .

HEALTH INSURANCE FUND

The Health Insurance Fund generated a surplus of £5.7 million for the year (2009: £5.4 million). Contribution income has fallen slightly in a similar fashion as noted with the Social Security Fund, but income and gains from investments have more than compensated.

The expenditure of the Fund can be somewhat volatile as there are a number of drivers which may not remain consistent from year-to-year. There has, however been a continued increase in costs, some of which have been initiated by the Department such as increasing the GP subsidy per visit from £15 to £19 reflecting the GMC requirements for GP s to revalidate and in anticipation of moving to the delivery of quality standards in primary care.

The Health Insurance Fund until 2010 had employed a very low risk investment strategy by investing any funds in cash based deposits. This strategy was successful at providing a healthy return when interest rates were high but the extremely low interest rates experienced since the banking crisis and recession have resulted in the Fund s income being drastically reduced. Consequently the Fund has migrated its investment assets into the CIF from 1 July 2010 with the objective of improving investment returns. The Minister for Treasury and Resources is responsible for the Investment Strategy with investment advice provided by Hewitt Associates Limited.

GAD are finalising their report on the Health Insurance Fund as at 31 December 2007. The report is important

in determining the adequacy in future years of legislated contribution rates and the need to accommodate the recent proposition to transfer £6.1 million to the Health & Social Services Department in 2011 and a similar amount in 2012.

The outcome of the Health & Social Services healthcare review currently being undertaken may have significant implications for the future structure and application of the fund.

HEALTH INSURANCE FUND PERFORMANCE OVERVIEW

The Health Insurance Fund levies contributions on earnings to subsidise GP visits and prescriptions for island residents.

The table below is a summary of income and expenditure:

2010  2009 £000  £000

Income

Contributions  28,660  28,912 Net Gains on investments  2,323

Investment income  386  379

Contributions collected from employees and employers fell by £0.2 million to £28.7 million, a reduction of 0.9% against the 2009 figure of £28.9 million. The net reduction is driven by a small increase in average earnings (1.1%) offset by an earnings initial uprating in the ceiling (3.0%) and a reduction in the number of people working.

During 2010, the number of subsidised visits to General Practitioners was in excess of 344,000; this was a reduction on 2009 of nearly 23,000. However, medical benefit rose to £7.1 million, £1.3 million more than 2009. This increase was primarily from two sources; the costs of pathology tests introduced from 1 January 2010 and the increase in the rate of subsidy paid to GP s on the island from £15 to £19 per visit from mid-May 2010 in order to achieve revalidation and meet GMC quality standards.

The number of prescriptions rose by 3.8% during the year from 1,590,227 in 2009 to 1,651,335 in 2010, however,

the total cost only rose by 1.2% at a cost of £16.7 million (2009: £16.5 million). This is made up of two components: being the cost of drugs supplied of £11.4 million and the pharmaceutical dispensing fee of £5.1 million. A review of dispensing costs is currently underway and the Department continues to work with General Practitioners on prescribing protocols and the selection of cost effective products.

The graph below shows the number and cost of prescriptions and number of GP visits over the last five years: NUMBER AND COST OF PRESCRIPTIONS AND NUMBER OF GP VISITS

£000 1,800,000 £18,000

1,600,000 £16,000 No. of Prescriptions

1,400,000 £14,000 1,200,000 £12,000 1,000,000 £10,000

Cost of Prescriptions £000

800,000 £8,000 600,000 £6,000 400,000 £4,000

No. of GP visits

200,000 £2,000

0 £0

The Net Assets of the Health Insurance Fund reached £83.2 million at the end of 2010 (2009: £77.5 million). The Fund joined the CIF in July 2010 and continues to perform well, however this should not be cause for complacency but will assist in providing against the financial impact of developments in technology, medicine and the ageing demography.

The UK Government Actuary s Department (GAD) last carried out their review of the Fund as at 31 December 2002 and reported that it had grown strongly over the previous 5 years. The next report which is for the period ending 31 December 2007, has been completed and is currently being finalised.

LONG TERM CARE FUNDING

The draft Long-term Care (Jersey) Law was lodged on 7 June 2011 and is to be debated in the States session commencing 18 July 2011. It establishes the legal framework for a new long-term care benefit and follows extensive public consultation in 2010 through Green and White Papers. Subject to States approval, the intention is that the benefit will be introduced

in 2013

TEMPORARY INSOLVENCY SCHEME

The Temporary Insolvency Scheme, set up during 2009, was followed by a White Paper published later that year setting out proposals for a permanent scheme. The States has approved draft legislation that will introduce a new Insolvency benefit via the Social Security (Jersey) Law, 1974 that includes components for unpaid wages, holiday pay, statutory notice pay and statutory redundancy pay.

EMPLOYMENT LAW AND SERVICES

Employment Services continue to support the unemployed workers through the recession. Working closely with Economic Development and Education, Sport & Culture, the Department has improved the information and analysis available

in respect of individuals actively seeking work and enhanced its services to increase the level of support available to jobseekers. The enhanced service provides jobseekers with their own personal adviser, who meets them regularly and supports them in finding a job. This includes intensive job search assistance, CV support and interview preparation.

In October 2010 an act was lodged to introduce protection for employees who are made redundant from 1 January 2011, qualifying employees now have a statutory right to redundancy pay.

ADMINISTRATION

The Social Security Department administers the Social Security Fund and the Health Insurance Fund. The Social Security (Reserve) Fund is administered by the Treasury and Resources Department. Expenditure on collection of the income

of administering benefits from these funds amounted to £8.4 million (2009: £7.3 million). This is equivalent to 2.2% (2009: 1.9%) of the value of contributions collected and benefits administered.

The pie chart below shows the categories of expenditure within the total administration cost of £8.4 million:

ADMINISTRATION COSTS £8.4 MILLION EXPENDITURE ANALYSIS

Investment

Management and

Administration

Prescription Pricing 8.2% Premises and Equipment

2.7% 3.4%

Postal Services 4.7%

Stationery 1.7%

Professional Fees,  Staffing including Doctors 43.4%

13.5%

Computer Costs  Central Services 18.6% & Other Costs

3.8%

Statement Of The Responsibilities Of The Minister for Social Security Of The States Of Jersey In Respect Of The Financial Statements

The Social Security (Jersey) Law, 1974, requires that financial statements of the Social Security Fund and Social Security (Reserve) Fund shall be prepared in such form, manner and at such times as the Minister for Social Security may determine. The Minister is responsible for preparing the financial statements.

In preparing the financial statements the Minister is required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state whether applicable United Kingdom accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;

• prepare the financial statements on a going concern basis unless it is inappropriate .

The Minister is responsible for keeping proper accounting records which disclose with reasonable accuracy, at any time, the financial position of the Funds.

The Minister is responsible for safeguarding the assets of the Fund and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

ANNUAL REPORT

The Annual Report is available as a publication and on a website maintained by the States of Jersey. The maintenance and integrity of the website is the responsibility of the States of Jersey. The work carried out by the auditors does not involve consideration of the maintenance and integrity of this website and accordingly, the auditors accept no responsibility for any changes that have occurred to the Annual Report since they were initially presented on the website. Visitors to the website need to be aware that legislation in Jersey governing the preparation and dissemination of financial statements may differ from legislation in their own jurisdiction.

Independent Auditor s Report To The Minister For Social Security

I have audited the financial statements of the Social Security Fund and the Social Security (Reserve) Fund ( the Funds )

for the year ended 31 December 2010 in accordance with the Social Security (Jersey) Law 1974. The financial statements comprise the Income and Expenditure Account, the Statement of Total Recognised Gains and Losses, the Balance Sheet, the Cash Flow Statement and the related notes. These financial statements have been prepared under the accounting policies

set out therein.

RESPECTIVE RESPONSIBILITIES OF THE MINISTER AND THE COMPTROLLER AND AUDITOR GENERAL OF THE STATES As explained more fully in the Statement of the Responsibilities of the Minister for Social Security of the States of Jersey in respect of the Financial Statements, the Minister is responsible for the preparation of the financial statements in accordance

with the Social Security (Jersey) Law 1974.

My responsibility is to ensure that the financial statements are audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). Those standards require that I comply with the

Auditing Practices Board s Ethical Standards for Auditors.

This report, including the opinion, has been prepared for and only for the Minister for Social Security of the States of

Jersey in accordance with the Social Security (Jersey) Law 1974 and for no other purpose. I do not, in giving this opinion,

accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose

hands it may come save where expressly agreed by my prior consent in writing.

SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Funds circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Minister; and the overall presentation of the financial statements.

OPINION ON THE FINANCIAL STATEMENTS In my opinion, the Financial Statements:

• give a true and fair view, in accordance with the Social Security (Jersey) Law 1974, of the state of the Funds affairs as at 31 December 2010 and of the income and expenditure and cash flows for the year then ended; and

• have been prepared in accordance with the requirements of the Social Security (Jersey) Law 1974.

OPINION ON OTHER MATTER

 In my opinion, the information given in the Minister s Report and the Statistical Appendix is consistent with the Accounts.

MATTERS ON WHICH I AM REQUIRED TO REPORT BY EXCEPTION

I have nothing to report in respect of the following matters where the Social Security (Jersey) Law 1974 requires me to report to you if, in my opinion:

• Proper accounting records have not been kept by the Funds; or

• The financial statements are not in agreement with the accounting records; or

• I have not received all the information and explanations required for my audit; or

• Information specified by the Social Security (Jersey) Law 1974 has not been disclosed.

C Swinson OBE

Comptroller and Auditor General

Morier House, Halkett Place, St Helier, JE1 1DD 26 July 2011

Social Security Fund

Income and expenditure account  Page 17 Statement of Total Recognised Gains and Losses  Page 18 Balance Sheet  Page 19

Cash Flow Statement  Page 20 Notes to the Financial Statements  Page 21

INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2010

INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2010

Income and expenditure account for the year ended 31 December 2010

2010  2009

Notes  £000  £000  £000  £000 Income  1

Contributions  150,462  151,787 States contribution  66,667  64,995 Bank interest  188  158 Other income  168  192

Continuing Operations

All of the fund s income and expenditure is derived from continuing activities.

The notes on pages 21 to 31 form part of these accounts.

STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 2010

Statement of Total Recognised Gains and Losses for the year ended 31 December 2010

2010  2009 £000  £000

Surplus for the financial year  30,522  37,354 Transferred to Social Security (Reserve) Fund  (45,598)  (38,585)

Total recognised (losses)  (15,076)  (1,231)

The notes on pages 21 to 31 form part of these accounts.

BALANCE SHEET AS AT 31 DECEMBER 2010

Balance Sheet as at 31 December 2010

2010  2009

Notes  £000  £000  £000  £000 Fixed Assets

  Tangible fixed assets  6  6,803  8,477 Current Assets

  Debtors  7  52,155  44,231

  Cash at Bank and in hand  8,624  21,576

Signed:  Signed:

Date: 25 July 2011  Date: 25 July 2011

(Chief Officer Social Security Department)  (Minister for Social Security)

The notes on pages 21 to 31 form part of these accounts.

CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2010

Cash flow statement for the year ended 31 December 2010

Notes  2010  2009 £000  £000  £000  £000

Operating Activities

Net cash inflow from

  operating activities  12  31,614  36,418 Returns on Investments and

  Servicing of Finance

Bank interest received  189  168

Rent received  163  170

The notes on pages 21 to 31 form part of these accounts.

Notes to the Financial Statements for the year ended 31 December 2010

1. Accounting Policies

1. Basis of Preparation

The financial statements are prepared on the historical cost convention, as modified by the revaluation of certain tangible fixed assets, in accordance with UK GAAP, so far as it is applicable to these financial statements. The Minister considers that the formats adopted within these financial statements are the most appropriate to the circumstances of the Social Security Fund (the Fund ) and in accordance with the Social Security (Jersey) Law 1974.

The preparation of financial statements in conformity with UK GAAP requires the use of certain critical accounting estimates. It also requires the Minister to exercise his judgement in the process of applying the Fund s accounting policies.

A summary of the more important accounting policies are set out below together with an explanation of any changes which have been made to previous policies on adoption of new accounting standards.

The Department has considered the disclosure requirements under UK GAAP and has adopted FRS26, Financial Instruments: Recognition and Measurement and FRS29, Financial Instruments Disclosure . FRS26 requires the investments to be carried using bid price. FRS29 requires disclosure as to the nature and risks arising from financial instruments to which the Fund is exposed and how these are managed.

2. Foreign Currency

1. Functional and Presentation Currency

The performance of the Fund is measured and reported to the Minister in pound sterling. The Minister considers pound sterling as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in pound sterling, which is the Fund s functional and presentation currency.

2. Transaction and Balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income and expenditure accounts.

3. Income

Income is accounted for on an accruals basis and includes the following categories:

1. Contributions

Contributions represent payments made by employers, employees and the self employed.

Social Security contributions are set at the rate of 10.5% of earnings (Employees, 5.2%; Employers, 5.3%). The financial statements include an estimation in respect of the contributions from insured persons, employers and the States of Jersey for the year ended 31 December 2010.

2. States Contribution

States contribution is the sum paid by the States of Jersey to supplement the contributions of individuals with monthly earnings between the lower earnings threshold (2010: £770 per month) and the upper earnings limit (2010: £3,646 per month), to ensure that all individuals contributions are made at the standard contribution level.

3. Bank Interest Received

Interest income is recognised on an accrual basis, by reference to the principal outstanding and the interest rate.

4. Other Income

Other income includes rental income which is received from sub-letting office space within the building.

4. Benefits and administrative expenses

BENEFITS

Benefits are paid to claimants who qualify for a benefit within the Social Security (Jersey) Law 1974 and meet the required conditions. Benefits are recognised over the period when they are due and consist of the following:

1. Pensions

Pensions and survivors benefits are paid to those claimants and their surviving spouse who are entitled to receive a State pension based on the contributions made during the claimant s working life.

2. Short Term Incapacity Allowance

Short Term Incapacity Allowance is a daily benefit which is payable to claimants in possession of a medical certificate who are unfit for work due to illness or injury and who meet certain contribution conditions and is payable for a minimum of two days and a maximum of 364 days. After this period claimants, subject to certain conditions, may claim Long Term Incapacity Allowance.

3. Long Term Incapacity Allowance

Long Term Incapacity Allowance is a weekly benefit, payable as a compensation for a loss of faculty. As with Short Term Incapacity Allowance certain contribution conditions must be met before payment is awarded.

4. Grants and Allowances

These include payments for Maternity Grant and Maternity Allowance as well as grants paid on the death of a person who has contributed to the Social Security Scheme.

ADMINISTRATIVE EXPENSES

Administrative expenses are accounted for on an accruals basis, with the exception of bad debts which are accounted for as set out in paragraph 1.8, and consist of the following:

1. Staff Costs

Staff who work on the Fund are employed by the States Employment Board. Their costs are reflected in the States accounts gross of salaries, wages and pension, with a charge made to the Funds for work done. The staff costs charged to the Fund are shown separately under administrative expenses.

2. Other Administrative Expenses

Other administrative expenses include service costs, operating costs and bad debts.

5. Tangible Fixed Assets

Tangible assets are capitalised if they are capable of being used for a period which exceeds one year and they:

• individually have a cost of at least £10,000, or

• form part of a project with an overall final cost of at least £10,000.

Tangible fixed assets are stated at cost less accumulated depreciation.

Depreciation has been provided on all tangible fixed assets, other than freehold land, so as to write off the cost of these assets less their estimated residual values, on a straight line basis over their expected useful economic lives. The principal useful lives used for this purpose are:

Buildings 50 years Building Improvements 5 to 20 years

Fixtures, Fittings & Equipment 5 years Computer Development 8 years Computer Network 3 years

The carrying values of tangible fixed assets are reviewed for impairment in periods if events or changes in circumstances indicate the carrying value may not be recoverable.

6. Cash at BankandinHand

Cash at bank and in hand includes cash, demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

7. Debtors

Debtors are measured at initial recognition at fair value. Contributions outstanding at 31 December 2010 represent accrued contributions for the last quarter, together with billed contributions due from earlier periods. Benefits paid in 2010 but in respect of periods extending into 2011 are treated as prepayments.

8. Bad Debts

Provisions

Instalment arrangements are made with Contributors to reimburse outstanding contributions due from earlier periods. A provision for bad debts is only made when an instalment is not received from a contributor.

Write-offs

Class 1 contributions are written off when the employer cannot contribute on behalf of their employee by virtue of being declared en dØsastre or bankrupt. Class 2 contributions are written off when the individual has defaulted on an instalment arrangement and died.

9. Provision for Liabilities and Charges

Provision is made in the financial statements in respect of obligations arising from past events where the predicted outcome of the event is considered probable and there is a reliable estimate of the amount of the liability.

10. Funds Uncleared at Bank

The Fund does not have a facility for a bank overdraft. Funds uncleared at bank represent cheques issued not yet cashed on the benefit payment bank accounts.

11. Loans Payable

The Health Insurance Fund does not operate a bank account, consequently all receipts and payments in relation to the Health Insurance Fund are made through nominated Social Security Fund bank accounts and accounted for as a loan.

12. Creditors

Creditors are measured at initial recognition at fair value.

13. Taxation

The Fund is exempt from Jersey Income Tax by virtue of Article 131 of the Income Tax (Jersey) Law 1961.

2. Financial Assets and Financial Liabilities

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets and financial liabilities are recognised on the Fund s balance sheet when the Fund becomes a party to the contractual provisions of the instrument. The Fund derecognises its financial assets when the contractual rights to the cash flows from the financial asset expire. The Fund derecognises its financial liabilities when the obligation specified in the contract is discharged, cancelled or expires.

1. Classification

The financial assets are classified as loans and receivables . The financial liabilities are classified as Other financial liabilities .

2. Debtors

Debtors are measured at initial recognition at fair value.

3. Cash at Bank

Cash at bank and in hand includes cash, demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

4. Creditors

Creditors are measured at initial recognition at fair value.

3. Financial Risk Management

The Fund s activities expose it to liquidity and credit risk. The Social Security Department undertakes regular risk reviews which involve identifying key risks, scoring them and documenting their mitigation.

1. Market Risk

No investments are held by the Fund. However, short-term bank deposits are held at fixed rates and therefore these are not subject to market price risk. These cash flows are primarily fixed in nature and are received from short-term highly liquid investments that are readily convertible and subject to an insignificant risk of changes in value.

2. Credit Risk

The Fund s principal financial assets are debtors and bank balances.

The Fund s credit risk is primarily attributable to its debtors. The Fund s objectives for managing the risk are to ensure that the contribution debtors are recovered promptly and that the cash at bank is secure. Where monies are not received within their payment terms they are transferred and followed up by the Department s Contribution and Enforcement team for recovery. In these instances instalment arrangements are made for repayment of monies owed or court action progressed. Contribution debtor credit risk is limited as monies are due from a large number of debtors, none of whom are significant in isolation.

The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies with a minimum rating of A only accepted for short term deposits and AA for longer term deposits (+3 months).

3. Liquidity Risk

The Social Security Fund s exposure to liquidity risk is low due to the volume of cash available to meet its short-term obligations. The Fund s objectives for managing this risk are to ensure that there are enough liquid resources to meet short-term liabilities.

Daily cash flow forecasts are undertaken and any liquidity risk identified as part of this process is addressed by managing the amounts placed on short-term deposit with Royal London Asset Management CI Limited (RLAM). The Fund manages its exposure to liquidity risk by monitoring the rolling forecast of the Fund s liquidity reserves on the basis of the expected cash in and out flows.

All liabilities are payable upon demand or in less than one year.

4. Fair value interest rate Risk

During the year, the Fund received income from its fixed bank deposits. These cash flows were primarily fixed in nature and therefore there was a potential risk of market rate movement during the fixed period. From March 2010, the Department manages its banking arrangements and fund deposits through the States of Jersey Cash Managers RLAM .

4. Staff Costs

Staff costs represent a Departmental charge to the Social Security Fund. During the year ending 31 December 2010, the Fund had no direct employees.

5. Surplus of Income over Expenditure

Surplus of Income is stated after charging/(crediting):

2010  2009 £000  £000

Auditors fees  66  60 Depreciation  1,906  1,906 Rental income from third parties  (63)  (70) Rental income from related parties  (100)  (100)

6. Tangible Fixed Assets

Land,  Computer

buildings  Fixtures  development

and  and  and

improvements  fittings  network  Total

£000  £000  £000  £000

Cost

At 1 January 2010  8,952  87  12,736  21,775 Additions  232  232

Land and buildings consists of 28 to 32 La Motte Street, known as Philip Le Feuvre House and Huguenot House, St Helier. Title to Philip Le Feuvre House and Huguenot House are registered in the names of the Attorney General and Greffier of the States on behalf of the Public of the Island .

7. Debtors

2010  2009 £000  £000

Debtors:

  Contributors - individuals and employers  19,203  14,406  Inter fund balance: States of Jersey  628  Goods and Services Tax  46  16  Other debtors  228  317

19,477  15,367

Prepayments and accrued income:

  Contributors individuals and employers  23,394  22,109  Benefits paid in advance  9,103  6,620  Jersey Post funds held for the payment of

  Pension Order books  181  134  Bank interest and other income  1

52,155  44,231 The Minister considers that the carrying amount of the debtors approximates to their fair value.

As at 31 December, debtors of carrying value £19.5 million (2009: £14.7 million) were past their due date but not impaired. The ageing is shown below:

2010  2009 £000  £000

Up to 3 months past due  19,351  14,619

3 to 6 months past due  29  20 6 to 12 months past due  44  48 Over 12 months past due  53  52

19,477  14,739

BAD DEBT PROVISION

Debtors are shown net of a bad debt provision £49,296 (2009: £61,011), as analysed below.

2010  2009 £000  £000

Up to 3 months past due  35 3 to 6 months past due  9  5 6 to 12 months past due  5 Over 12 months past due  40  16

49  61

During the year, bad debts of £16,498 (2009: £10,098) were written off.

8. Creditors

2010  2009 £000  £000

Funds uncleared at bank and cash floats  2,690  1,750 Inter fund balances

  Health Insurance Fund  4,126  2,089  States Of Jersey  4,376  19 Accrued benefits payable  382  281 Creditors  506  212

12,080  4,351

The Minister considers that the carrying amount of the creditors approximates to their fair value.

The loan payable to the Health Insurance Fund and the States of Jersey is unsecured, interest free and repayable on demand.

MATURITY OF FINANCIAL LIABILITIES:

The maturity profile of the carrying amount of the Fund s liabilities, as at 31 December was as follows:

2010  2009 £000  £000

Up to 3 months past due  506  212

9. Revaluation Reserves

This relates to the revaluation of Huguenot House, an investment property, in 2002 by professional valuers in accordance with the Royal Institute of Chartered Surveyors (RICS) appraisal and valuation manual (the red book ). During 2006, this property was vacated, allowing the Department to utilise the property for its own operations. The property is no longer an investment property under Statement of Standard Accounting Practice 19 and is recorded as an asset held for use for Departmental operations and depreciated accordingly.

2010  2009 £000  £000

As at 1 January and 31 December  719  719

10. Revenue Reserves

2010  2009 £000  £000

As at 1 January  69,214  69,907 Surplus funds transferred to Social Security (Reserve) Fund  (45,598)  (38,585) Retained surplus for the year  30,522  37,354 Reimbursement of expenses due to Social Security (Reserve) Fund   645   538  

As at 31 December  54,783  69,214

11. Related Party Transactions

JERSEY POST INTERNATIONAL LIMITED

The Fund has the following commercial, arm s length relationships with Jersey Post International Limited, which is a strategic investment of the States:

• The States of Jersey hold all the ordinary shares in Jersey Post International Limited which became incorporated on

1 July 2006.

• The Fund pays Jersey Post International Limited for the pension recipients who hold a pension order book or cash open cheque benefit payments. For this service Jersey Post International Limited receives an administration fee as noted in the table below.

From January 2010, the States of Jersey, Treasury and Resources has invoiced for all Jersey Post International Limited charges.

STATES OF JERSEY TREASURY AND RESOURCES AND OTHER STATES DEPARTMENTS

The Fund also undertakes a number of transactions and joint undertakings with States of Jersey Treasury and Resources and other States Departments as noted in the table below.

Payments made during the year to the States of Jersey directly controlled (strategic investments) entities:

2010  2009 £000  £000

Jersey Post International Limited  47  272 Jersey Telecom Group Limited  6  6 Jersey Electricity Company Limited  67  50

Full details of all States Funded benefits and services administered by the Social Security Department can be found in the States of Jersey Financial Report and Accounts 2010 . Copies of the report will be available from the States Greffe.

RELATED PARTY BALANCES AT THE YEAR END:

2010  2009 £000  £000

Amounts due to related parties:

Treasurer of the States  4,376  19 Jersey Post International Limited  56  14 Jersey Telecom Group Limited  4  1 Jersey Electricity Company Limited  12  6

4,448  40

Amounts due from related parties:

Treasurer of the States  628 Jersey Post International Limited  181  134

181  762

The Health Insurance Fund does not operate a bank account. Consequently all receipts and payments in relation to the Health Insurance Fund are made through nominated Social Security Fund bank accounts (due to their relationship in respect of social security contributions) and then accounted for as loans.

During the year the Social Security Department made net payments from its bank accounts, of which the Social Security Fund is part, to the Health Insurance Fund, which in 2010 amounted to £4.087m (2009: £2.716m). At the year end the Health Insurance Fund was owed £4.126m (2009: £2.089m).

The Social Security (Reserve) Fund is the investment vehicle by which contribution rate and ceiling changes are smoothed over time. The accounting officer of the Social Security (Reserve) Fund is the Treasurer of the States. Payments made in the year from the Fund were £45.6m (2009: £38.6m); additionally the Social Security (Reserve) Fund appropriated from the Fund £0.645m (2009: £0.538m).

12. Reconciliation of Surplus to Net Cash Flow

2010  2009 £000  £000

Surplus of income over expenditure for the year   30,522  37,354 Net expenditure appropriated from Social Security (Reserve) Fund   645  537  Depreciation  1,906  1,906 Increase in debtors  (7,896)  (2,330) Decrease/(increase) in creditors  6,788  (721) Bank interest  (188)  (158) Rent  (163)  (170)

31,614  36,418

13. Analysis of Changes in Net Funds

At 31 December  At 31 December

2009  Cash Flows  2010 £000  £000  £000

Cash at bank  2,076  (242)  1,834 Funds uncleared at bank  (1,727)  (913)  (2,640)

14. Ultimate Controlling Party

Under the Social Security (Jersey) Law, 1974 the Minister of Social Security is the ultimate controlling party of the Fund. The Minister of Social Security is a member of the Council of Ministers of the States of Jersey and is responsible for safeguarding the assets of the Fund and for preparing the financial statements.

Social Security (Reserve) Fund

Statement of Total Return  Page 35 Portfolio Statement  Page 36

Balance Sheet  Page 37 Summary of material portfolio changes  Page 38 Notes to the Financial Statements  Page 40

STATEMENT OF TOTAL RETURN FOR THE YEAR ENDED 31 DECEMBER 2010

Social Security (Reserve) Fund

Statement of Total Return for the year ended 31 December 2010

Note  2010  2009

£000  £000  £000  £000 Income

Net gains on investments during the year  6  80,887  107,294 Investment income  7  39  (11)

Bank interest  7  2

41  (11)

The notes on pages 40 to 49 form an integral part of these financial statements

PORTFOLIO STATEMENT AS AT 31 D ECEMBER 2010

Portfolio Statement as at 31 December 2010

Percentage Market Value  of Total

Note  Holding  31 December 10  Portfolio

Units  £000  %

Legal & General

Unit Trust Bonds

All stock gilts index  9,000,878  35,641  4.35

Comparatives are not disclosed in accordance with the Statement of Recommended Practice - Financial Statements of Authorised Funds.

The notes on pages 40 to 49 form an integral part of these financial statements

BALANCE SHEET AS AT 31 DECEMBER 2010

Balance Sheet as at 31 December 2010

Notes  2010  2009

£000  £000  £000  £000 Fixed Assets

Financial assets at fair value  9  818,728  711,914 Current Assets

Debtors  10  2

Cash at bank and in hand  19,163  166

Signed:  Signed:

Date: 25 July 2011  Date: 25 July 2011 (Treasurer of the States)  (Minister for Social Security)

The notes on pages 40 to 49 form an integral part of these financial statements

SUMMARY OF MATERIAL PORTFOLIO CHANGES FOR THE YEAR ENDED 31 DECEMBER 2010

Summary of material portfolio changes for the year ended 31 December 2010

MAJOR PURCHASES

Name

Legal & General

Legal & General TA Liquidity Fund

Legal & General TA Liquidity Fund

Legal & General TA Liquidity Fund

Legal & General TA Liquidity Fund

Legal & General TA Liquidity Fund

Legal & General Europe Equity Index

Legal & General Europe (Ex-UK) Equity index Legal & General Europe Equity Index

Legal & General N America Equity

Legal & General TA Liquidity Fund

Legal & General TA Liquidity Fund

Legal & General TA Liquidity Fund

Legal & General Europe Equity Index

Legal & General N America Equity

Legal & General TA Liquidity Fund

Legal & General TA Liquidity Fund

Legal & General TA Liquidity Fund

Legal & General TA Liquidity Fund

Legal & General TA Liquidity Fund

Legal & General TA Liquidity Fund

Holding  Cost

Units  £000

 20,538,231  21,631 19,701,861  20,750 14,190,838  15,000 9,498,210  10,000

 9,488,566  10,000 1,380,180  8,630 784,566  5,546

 738,334  5,000 694,589  4,669

 2,710,572  2,868 2,482,856  2,625 2,377,659  2,505 364,216  2,295

 326,679  2,257 1,784,301  1,883 1,708,778  1,800 1,350,195  1,426 1,303,462  1,373 1,281,808  1,350 1,228,084  1,294

The notes on pages 40 to 49 form an integral part of these financial statements

SUMMARY OF MATERIAL PORTFOLIO CHANGES FOR THE YEAR ENDED 31 DECEMBER 2010

MAJOR SALES

Name

Legal & General N UK Equity Index

Legal & General North America Equity (Net US) Legal & General TA Liquidity Fund

Legal & General Europe (Ex-UK) Equity Index Legal & General TA Liquidity Fund

Legal & General TA Liquidity Fund

Legal & General TA Liquidity Fund

Legal & General WR-Money Market Maturity II Legal & General WR-Money Market Maturity II

Legal & General WR-Money Market Maturity II

Legal & General TA Liquidity Fund

Legal & General WR-Money Market Maturity II

Legal & General Asia Pacific ex Japan Dev Equity Index Legal & General WR-Money Market Maturity II

Legal & General Europe (Ex-UK) Equity Index

Legal & General Japan Equity (Net WHT)

Legal & General WR-Money Market Maturity II

Legal & General Japan Equity (Net WHT)

Legal & General Europe (Ex-UK) Equity Index

Legal & General WR-Money Market Maturity II

Holding  Proceeds Units  £000

3,119,892  21,631 2,817,135  20,750

17,954,678  19,000

2,150,063  16,642 8,181,136  8,630 5,256,960  5,546 339,757  4,669 2,088,359  2,868 1,909,168  2,625 1,844,655  2,505 2,175,100  2,295 1,377,787  1,883 195,762  1,800 1,040,224  1,427 171,768  1,373 1,386,148  1,350 950,714  1,294 1,278,979  1,250 122,574  977

717,802  967

The notes on pages 40 to 49 form an integral part of these financial statements

Notes to the Financial Statements for the year ended 31 December 2010

1. General Introduction

FUND PURPOSE

The number of recipients of a State pension as a percentage of the working population is expected to increase over time. The purpose of the Social Security (Reserve) Fund (the Reserve Fund ) is to set aside funds for the future provision of pension benefits for those in employment so as to reduce the impact of pensions in future generations, as well as to smooth contributions for social security benefits over time. To achieve these objectives, the Reserve Fund s assets and liabilities comprise financial instruments held in accordance with its investment objectives and policies. These include cash, liquid resources and short term debtors and creditors that arise directly from the investment activities.

STRATEGY

Excess funds held in the Social Security Fund are transferred to the Reserve Fund for investment on a quarterly basis as determined by the Minister.

Long term growth is one of the main aims for the Social Security (Reserve) Fund and therefore any income generated is reinvested back into the Fund. It is expected that there will be no requirement to draw on the assets of the Fund in the near term and during this period there will continue to be net cash inflows to the Fund.

In order to ensure that the Fund can work towards its objective of longer term growth its strategy is to place a high proportion of its assets in return seeking investments.

The longer term strategic aim for the fund is to invest within the parameters indicated below:

Strategic Aim  Range Asset Class  %  %

Equities  80  65 90 Property  10  0 15 Bonds / Cash  10  5 35

Investment conditions are not suitable to move to this strategy at the current time, however, as the financial climate changes the composition of the Fund s investments will change to reflect a move towards the strategic aim.

As the Reserve Fund is subject to three yearly actuarial reviews the outcomes may result in a need to redefine the Fund s investment strategy. All strategy revisions are brought to the attention of the States.

The Reserve Fund began investing in the States of Jersey Common Investment Fund (the CIF ) on 1 October 2010. The CIF was established by the Public Finances (Transitional Provisions) (No.2) (Amendment) (Jersey) Regulations 2010 which came in force on the 10 May 2010 and allows the pooling of States Funds for investment purposes. The CIF is

an administrative arrangement and not a separate fund, providing a cost effective way of pooling funds for investment purposes. The aim of the CIF is to provide greater investment opportunities, economies of scale and minimise fees and costs. The Reserve Fund still maintains its own investment strategy and is able to invest in its chosen range of investment categories in line with its strategic aim and ranges.

All participants account for their investment in the CIF as an asset on the basis of units held with any increases in the value of units held in the CIF recognised in the Statement of Total Return.

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010

INVESTMENT STRUCTURE

As a pension fund, the Social Security (Reserve) Fund can enter the insurance products restricted to the pension funds market which are designed to follow general market movements. This enables the Fund to participate in large pools

of indexed assets available in the UK, at very low management costs and provides the flexibility to easily change asset allocation by increases or decreases to the indexed holdings in each market.

Those indexed funds are provided by an insurance company using a policy of assurance, but operate in a broadly similar way to a series of unit trusts.

The CIF provides an opportunity for the Social Security (Reserve) Fund to invest around half of its equity assets in the States of Jersey Common Investment Fund equity pools; therefore carrying out investment under active management.

Investments are not made in Jersey except where a Jersey company is part of an established index. This is to ensure

that as far as possible, the assets are diversified away from the effects of Jersey s economy.

No investments in property had taken place by the end of 2010.

PERFORMANCE MANAGEMENT

The Accounting Officer of the Reserve Fund is the Treasurer of the States. The Minister for Treasury and Resources oversees the performance of the Reserve Fund, supported by a Committee chaired by the Minister and which is attended by the Minister for Social Security. The Committee meets every three months and Legal and General Investment Management Limited (L&G) (the Investment Manager ) presents to the Minister half yearly. Investment Strategy is reviewed annually. Hewitt Associates Limited, investment adviser, attend the performance meetings and provide advice where appropriate. The Minister for Treasury and Resource consults with the Minister for Social Security for decisions affecting matters such as changes to investment strategies.

The assets of the Reserve Fund are held with a global custodian, Northern Trust. This results in a complete separation of the custody of the invested assets and the investment management arrangements.

2. Accounting policies

1. Basis of Preparation

The accounts are prepared on the historical cost convention, in accordance with UK GAAP and in accordance with the Statement of Recommended Practice - Financial Statements of Authorised Funds issued by the Investment Management Association dated December 2005 (the SORP ), so far as they are applicable to these accounts. In the absence of any detailed guidance on the required format of accounts we have referred to the UK Government s Financial Reporting Manual for Government entities. The Manual considers the question of accounting for specialised funds and requires that their presentation is agreed on a case by case basis with the relevant authority, which under the Social Security (Jersey) Law 1974 is the Minister for Social Security. The Minister considers that the format contained within these accounts is the most appropriate to the circumstances of the Reserve Fund.

The preparation of accounts in conformity with UK GAAP requires the use of certain critical accounting estimates. It also requires the Minister to exercise his judgement in the process of applying the Reserve Fund s accounting policies.

A summary of the more important policies are set out below together with an explanation of the changes which have been made to previous policies on adoption of new accounting standards.

Certain assets were transferred in specie from Legal & General Assurance (Pensions Management) Limited to units in the CIF. Such transfers are shown in the accounts as a sale of securities and a purchase of units, without the payment of stamp duty or any transaction costs.

2. Foreign currency translation

1. Functional and presentation currency

The primary activity of the Reserve Fund is to invest for the long-term to accumulate funds for the future provision of pension benefits for those currently in employment. The performance of the Reserve Fund is measured and reported to the Minister for Treasury and Resources in sterling. The Minister considers sterling as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in sterling, which is the Reserve Fund s functional and presentation currency.

2. Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies

are recognised in the Statement of Total Return. Translation differences on non-monetary financial assets and liabilities such as equities at fair value through profit or loss are recognised in the income statement within the fair value net gain or loss.

3. Income

1. Investment income

Since both the L&G units and the CIF units are of the accumulation type which do not distribute income, investment income shown consists mainly of income from bank interest and dividends. Income from fixed interest securities and bank interest generated by assets within the L&G or CIF portfolios are accrued to the year end within unit prices of L&G and the CIF. Dividends from other quoted securities are accrued within unit prices when the securities are quoted ex-dividend.

Investment income is reported net of attributable tax credits but gross of withholding taxes which are accrued in line with the associated investment income.

2. Bank Interest Received

Interest income is recognised on an accrual basis, by reference to the principal outstanding and the interest rate.

4. Accrued interest

Accrued interest is recognised initially at fair value.

5. Investments

The investments of the Reserve Fund are held under a pooled fund policy of L&G and in units in the CIF. The terms of

the L&G policy and the CIF allow the units within the portfolio (as set out under note 9) to be realised on any dealing day through transfer of cash to the Reserve Fund or liquidated in whole and the surrender value returned in specie. The Minister has considered the substance of these investments and given the nature of the policy, considers it appropriate that these

are recognised as an investment within the financial statements. Sales, purchases and switches in the units of the pooled fund have been disclosed within these accounts.

Sales and Purchases of investments held by L&G are recognised on their trade date, the date on which the Reserve Fund commits to purchase or sell the investment. Purchases are recognised at the market value of the consideration paid. Sales are

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010

recognised on the settlement date and proceeds are calculated using the market value of the investment on that date. The

profit or loss of units sold is calculated based on the market value of the consideration on the trade date compared with the average cost of the units, which is calculated by aggregating the historic transactions within the L&G pooled funds or the CIF. Any profit or loss resulting from this transaction is recognised within the Statement of Total Return.

The valuation of the investment units held in the L&G pooled funds is based on the closing bid market prices of the units as confirmed by valuations received from the Investment Manager. The determination of bid prices for the CIF units is made by the States of Jersey, Treasury Department.

The CIF operates only accumulated units, due to limitations on frequency of trading of units by the Custodian. All Pools operating accumulation units reinvest all income receipts, accruals and growth in investments back in the Pool. Similarly, all expense payments, accruals and investment losses are directly paid out of the investment Pool. This results in an overall net increase or decrease in the valuation of the Pool monthly and an increase or decrease in the unit value of the Pool monthly.

Any cash and cash equivalent held balances in Pools, as well as debtors and creditors (whether actual or accrued) are taken into account when calculating the monthly unit valuation for each of the CIF s Pools.

For all asset Pools within the CIF the Custodian strikes a valuation on a monthly basis, at the close of business on the last calendar day of each calendar month. The Reserve Fund may trade units on a monthly basis with the actual trade taking place on the first business day of each calendar month.

6. Cash at BankandinHand

Cash at bank and in hand includes cash, demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

7. Accrued expenses

Accrued expenses are recognised initially at fair value.

8. Expenses

1. Investment management and custodian fees

L&G investment management and custodian fees include brokers commission, registration fees, stamp duties, security exchange fees and levies from regulatory agencies and commissions to advisers.

Costs due but not paid by the end of the financial year are accrued.

2. Irrecoverable withholding tax

Irrecoverable withholding taxes from overseas dividends are treated as an expense within the calculation of unit prices.

3. Other expenses

Other expenses include service and operating costs and consist of audit fees, custodian fees, recharges from the States of Jersey, Treasury and Resources Department and costs of exchange rate transfers. Some of these are shown explicitly whilst costs directly relating to the operation of the CIF are treated as an expense within the calculation of unit prices.

9. Taxation

The Reserve Fund is exempt from Jersey income tax by virtue of Article 131 of the Income Tax (Jersey) Law 1961.

10. Cash flow statement

The Reserve Fund satisfies the criteria of an open ended investment fund and is therefore exempt from producing a cash flow statement as required by FRS 1, Cash flow statements (revised 1996) .

3. Financial Assets and Financial Liabilities

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets and financial liabilities are recognised on the Reserve Fund s balance sheet when the Reserve Fund becomes a party to the contractual provision of the instrument. The Reserve Fund derecognises its financial assets when the contractual rights to the cash flows from the financial asset expire. The Reserve Fund derecognises its financial liabilities when the obligation specified in the contract is discharged or cancelled or expires.

INVESTMENTS

1. Classification

The Reserve Fund classifies its investments in equity securities as financial assets at fair value. On adoption of FRS 26, the Minister, designated the financial assets at fair value ( Financial Assets ) at inception, as the portfolio is managed and its performance is evaluated on a fair value basis, in accordance with the Reserve Fund s documented investment strategy. The Reserve Fund s policy is for the Investment Manager and the Minister to evaluate the information and performance about these financial assets on a fair value basis together with other related financial information.

2. Recognition

Purchases and sales of investments are recognised on the trade date, the date on which the Reserve Fund commits to purchase or sell the investment.

3. Measurement

All financial assets and financial liabilities are initially recognised at fair value. Transaction costs are expensed with the unit prices. Dividend income is accrued on securities when they are quoted ex-dividend and are recognised within the unit prices. Gains and losses arising from changes in the fair value of financial assets or financial liabilities are recorded in the statement of total return, with annual movements summarised and reported under Note 6.

4. Fair value estimation

The valuation of investments held at the year end is based on bid-price.

The valuation of the investments in the L&G pooled funds is based on the closing bid market prices of the units as confirmed by valuations received from the Investment Manager. These valuations are based on the bid prices of the underlying investments held by the Investment Manager in the pooled funds. The valuation of investments in the CIF is based on bid values of the underlying investments and is determined by the States of Jersey, Treasury and Resources Department.

Transaction costs, being incremental costs that are directly attributable to the acquisition or disposal of an investment, are added to purchase costs and netted against sale proceeds as appropriate.

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010

Accrued interest

Accrued interest is measured at initial recognition at fair value.

Cash at Bank and in Hand

Cash at bank and in hand includes cash, demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Accrued expenses

Accrued expenses are measured at initial recognition at fair value.

4. Financial Risk Management

FINANCIAL RISK FACTORS

The Reserve Fund s activities expose it to a variety of financial risks: market risk (including currency risk; fair value interest rate risk; cash flow interest risk and price risk), credit risk and liquidity risk. The Reserve Fund s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Reserve Fund s financial performance.

Risk management is carried out by the Minister for Treasury and Resources, supported by a Committee, independently chaired, which is attended by the Minister for Social Security. The Committee meets every three months and L&G presents to the Minister half yearly to oversee the performance of the Reserve Fund. Hewitt Limited, investment adviser, attends the performance meetings and provides advice where appropriate.

The assets of the Reserve Fund consist of policies of assurance directly held by the States of Jersey and units in the CIF. The CIF assets are held with a global custodian, Northern Trust.

1. Market Risk

The underlying investments of the L&G pooled funds and the CIF units are principally equities, fixed interest securities and bank deposits. The value of these is not fixed (other than bank deposits) and may go down as well as up. This may be the result of a specific factor affecting the value of an individual stock or may be caused by general market factors (such as interest rates, government policy or the health of the underlying economy) which could affect the entire portfolio of

a fund. The Reserve Fund and CIF investment managers monitor the portfolios to minimise fluctuation in the fair value of the financial assets held and ensure the necessary policies and procedures are in place to manage the risk.

1. Foreign exchange risk

The Reserve Fund purchases units, some of which contain securities denominated in a currency other than

sterling and hence takes a position in other currencies. A substantial portion of the underlying financial assets of the pooled funds is denominated in currencies other than sterling with the effect that the balance sheet and total return can be significantly affected by currency movements. The Reserve Fund and CIF investment managers monitor the exchange rate risk to limit the level of foreign exchange exposure and ensure the necessary policies and procedures are in place to manage it.

2. Fair value interest rate risk

The pooled fund units accumulate income within their unit price and do not distribute the income. This is negligible risk to the Reserve Fund in terms of fair value interest rate risk.

3. Price risk

The Reserve Fund is exposed to equity securities price risk as a result of pooled fund units held and classified on its balance sheet at fair value through profit or loss. To manage its price risk arising from investments in equity securities, it diversifies its portfolio between various different unit funds.

The setting of the investment strategy has regard to the relative pricing of asset classes and the available investment opportunities. The relative prices of asset classes can vary substantially within each year and therefore the strategy has been designed to be flexible to adapt to changing market conditions. The investment in equities contains a high proportion of global equities in the Reserve Fund so as to not be too highly dependent on the UK economy.

There is no direct exposure to commodity price risk.

2. Credit risk

Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions. For banks and financial institutions, only independently rated parties with a minimum rating of A- are accepted.

Separate risk assessment has been undertaken in respect of the assets which are under the control of L&G. L&G is the largest manager of UK pension fund assets with a total of £228 billion invested in indexed assets and £194 billion in indexed corporate pension assets. In total they manage 2,950 pension fund clients. The ultimate holding company of L&G is Legal & General Group plc. The Minister therefore considers the exposure to credit risk is minimal.