Jersey Teachers’ Superannuation Fund – Actuarial Valuation Report as at 31st December 2010.

STATES OF JERSEY

JERSEY TEACHERS' SUPERANNUATION FUND – ACTUARIAL VALUATION REPORT AS AT 31ST DECEMBER 2010

Presented to the States on 4th June 2013 by the Chief Minister

STATES GREFFE

2013   Price code: D  R.54

Jersey Teachers' Superannuation Fund Actuarial review as at 31 December 2010 Report by the actuary

Date:   10 January 2013 Author:  Ken Kneller FFA

To the Management Board of the Jersey Teachers' Superannuation Fund

In accordance with regulations 3(12) and 3(13) of the Teachers Superannuation (Jersey) Law 1979 and regulation 16 of the Teachers' Superannuation (Administration) (Jersey) Order 2007, I have carried out an actuarial review (or valuation) of the Fund as at 31 December 2010. The previous valuation was carried out as at 31 December 2006 and the report was signed by Eddy Battersby (the Fund's Actuary at the time) on 12 November 2008.

I now submit my report on the actuarial review, which should assist the Management Board of the Jersey Teachers' Superannuation Fund to set the employer contribution rate.

Appendix N sets out the limitations of this report.

Ken Kneller

Fellow of the Institute and Faculty of Actuaries Government Actuary's Department

Edinburgh

10 January 2013

Room T18, 44 Drumsheugh Gardens, Edinburgh EH3 7SW www.gad.gov.uk

Direct line: +44 (0)131 467 0324 GAD switchboard: +44 (0)20 7211 2600 Email: ken.kneller@gad.gov.uk

GAD seeks to achieve a high standard in all our work. Please go to our website for details of the standards we apply.

Contents

Report  ...............................................................................................................1

EXTERNAL INFORMATION

Appendix A  Regulations and actuarial standards relating to this review ............8 Appendix B  Summary of existing members' provisions .......................................9 Appendix C  Summary of new members' provisions ........................................... 11 Appendix D  Membership data ............................................................................... 13

ACTUARIAL MATTERS

Appendix E  The Fund's Account 31 December 2006 to 31 December 2010 ...... 19 Appendix F  Valuation and funding methodology ................................................ 21 Appendix G  Financial assumptions ...................................................................... 23 Appendix H  Demographic assumptions ............................................................... 26 Appendix I  Results ............................................................................................... 36 Appendix J  Solvency ............................................................................................. 41 Appendix K  Developments since the 2006 Review .............................................. 42 Appendix L  Investment issues.............................................................................. 45 Appendix M  Risks and uncertainties..................................................................... 47 Appendix N  Limitations ......................................................................................... 48

GAD seeks to achieve a high standard in all our work. Please go to our website for details of the standards we apply.

Report

Introduction

1  The two main purposes of the review are

to recommend an appropriate employers' contribution rate, and

to assess the level of assets and liabilities in the Fund.

2  Membership of the scheme is open to teachers in schools and other educational

establishments in Jersey.

3  Since 31 March 2007, pension increases should be funded in advance within the

scheme. Before that time increases were paid for as they arose. The change caused an immediate funding shortfall (the so-called pension increase debt') to arise in 2007. The Management Board has proposed that the States of Jersey should pay additional contributions to pay off the pension increase debt. The details of the timing of these contributions are being discussed with the States. The Management Board has instructed me to finalise this report on the basis that a satisfactory agreement on these contributions will be achieved in due course. If agreement is not ultimately reached, then the conclusions of this report would be invalid and would have to be revised.

Summary

4  I recommend that the employer contribution rate should be 12.8% of pensionable

salaries in respect of future service. This figure is 3.3% lower than the corresponding figure of 16.1% derived at the 2006 review, which is largely because of the changes to the way the pension increase debt will be paid for. The States of Jersey's expected additional contributions to meet the debt will be payable in addition to the 12.8% employer contribution rate. I understand that Accepted Schools are likely to have to pay a supplementary employer contribution as a condition of their participation in the scheme.

5  The timing of the change of employer contribution rate should be agreed between the

Management Board and the States of Jersey. The new contribution rate is higher than the existing contribution rate, once allowance is made for the different treatment of the pension increase debt, so delay leads to a gradual worsening of the scheme's financial position.

6  The average employee contribution rate is 5.8% as at the time of this review.

7  Taking into account the States of Jersey's expected future payments to cover the

pension increase debt there is no surplus or deficit in the Fund on 31 December 2010. The deficit at the previous review as at 31 December 2006 was £87.4 million.

Scheme membership

8  At the review date, there were 1,091 contributors to the Scheme with a total salary roll

in payment of £51 million and 765 pensions in payment with total annual pensions amounting to £11.5 million. There are a further 406 ex-contributors who have not yet started to receive their pension, whose deferred pensions total £2.4 million. For further details of the membership see Appendix D.

Treatment of the pension increase debt

9  It has been proposed by the Management Board to the States of Jersey that:

the States of Jersey will establish a contribution schedule for payments to the scheme with a value of £91.6 million as at the valuation date,

Accepted Schools will pay a supplementary contribution rate for the time being, as a condition of their participation in the Scheme,

the States of Jersey may make additional contributions from time to time, to reduce the pension increase debt faster than envisioned in the contribution schedule, and

the States of Jersey's contribution schedule will be reviewed annually, to allow for the Accepted Schools' contributions and any ad-hoc States' contributions. It is intended that the review will lead to adjustments (that is, reductions) to the term of the States' contributions, not to the amount paid each year.

10  The Management Board has instructed me to complete this valuation report on the

basis that the States of Jersey will agree to this structure. These proposals would mean that, taking into account future pension increase debt contributions as an asset of the Fund, there is no surplus of deficit at this review.

Contributions

11  The cost of accruing benefits is set out in table 1 below. Given that there is no surplus

or deficit, I recommend that the employers' base contribution should be 12.8% of pensionable pay, consistent with the costs in table 1. The contributions to cover the pension increase debt are payable in addition, once they have been finalised. The result derived in 2006 is shown for comparison. This included an employer's contribution rate of 10.5%, plus 5.6% in respect of the pension increase debt. This gave a total rate of 16.1%, though I note that in practice employers have been contributing at a rate of 16.4%.

Table 1 – contribution rates

* The States of Jersey's payments towards the pension debt have not been agreed at the time of signing this report, and so the total employer's contribution rate is not yet know.

Scheme finances

12  I have compared the assets of the Fund with the liabilities of the Fund on the basis that

the Fund will continue to operate and accept new members for the foreseeable future.

13  The assets include:

the invested assets, and

the present value of future contributions in respect of current members, and

the present value of expected future pension increase debt payments from the States of Jersey.

14  The liabilities include:

accrued liabilities for all members including pension increases accrued before and after April 2007, and

liabilities expected to be accrued to current active members including pension increases.

15  The proposed treatment of the pension increase debt would mean that future

contributions from the States of Jersey would be precisely sufficient to eliminate any deficit on the assumptions of the current review. Therefore there is no surplus or deficit at this review. The valuation balance sheet is shown in table 2 on the following page.

Table 2 - valuation results

Method and approach

16  Assets are taken at market value and market consistent assumptions have been used

to value the liabilities. This valuation uses the actuarial method known as the Entry Age Method'. For more details see Appendix F.

Assumptions

17  The results of an actuarial valuation depend on assumptions made about future

investment returns and the future demographic experience of the membership. The key assumptions are summarised in table 3:

Table 3 - key valuation assumptions

18  More details of these and the other assumptions can be found in Appendices G

(financial assumptions) and H (demographic assumptions).

Sensitivity of results

19  The results of this review are sensitive to the choice of assumption made. Changing

the key valuation assumptions has an impact on the calculated contribution rate and surplus/deficit as shown below.

Table 4 - sensitivity of valuation results to assumptions

Notes:

1 Employers' standard contribution rate

2 For total service, reflecting the current plan for future pension increase debt payments 3 Employers' total contribution rate, includes expense allowance and spreading of

surplus/deficit over 15 years (for the purposes of illustration)

20  For further details of the all of these results, see Appendix I.

Solvency

21  Solvency is a measure of what level of the schemes current liabilities would be covered

by its assets were the scheme to wind up on the assessment date, here 31 December 2010, and the liabilities insured with an insurance company. In practice it would be very difficult to insure the current benefits of the scheme with an insurer, particularly pension increases in line with the Jersey Cost of Living Index (Jersey CLI).

22  If the Fund were to wind up the Management Board may be able to recover some or all

of the pension increase debt from the States of Jersey immediately. I have therefore presented the solvency position with and without the States paying the pension increase debt immediately in full.

Table 5: solvency position (nearest 5%)

23  The solvency level, assuming the PI Debt is not paid immediately has worsened since

the 2006 valuation. This is largely due to the change in the terms offered by insurance companies, which is reflected in my assumptions. For more detail see Appendix J.

Developments since the last valuation

24  The last actuarial valuation was carried out by Eddy Battersby (the Fund's Actuary at

the time) as at 31 December 2006. His report was signed on 12 November 2008.

25  The changes to benefits that came into effect on 1 April 2007 were taken into account

in the last valuation. For more detail see Appendix K.

Investment issues

26  Investment markets have been volatile over the period from 31 December 2006 to

31 December 2010 (and continue to be so). Overall yields on corporate and UK Government bonds (both fixed interest and index-linked) are slightly lower at this review compared to 2006. Equity markets have also fallen over the period.

27  The Fund continues to invest around 80% in equities. This is expected to give higher

returns over the long run than investing in bonds. Investing in bonds would better match the liabilities of the Fund and so reduce the variability of the funding position from review to review and reduce the risk of unexpected underfunding in the future. However, this would be at the expense of lower expected investment returns.

Additional information

28  This report should be read in full with its Appendices, which contain details of the data,

method, assumptions and results of the valuation.

Compliance

29 For the avoidance of doubt, the JTSF is not subject to UK pensions legislation.

Therefore, there is no requirement on me from the Institute and Faculty of Actuaries to comply with the Financial Reporting Council's (FRC) Technical Actuarial Standards in carrying out this review. However I have complied with GAD's own standards and guidance, including GAD's Statement of Understanding[1] for public sector pensions work, which interprets the FRC standards in a public sector context and contains additional best practice guidelines. See Appendix A for more details.

Appendix A  Regulations and actuarial standards relating to this review Regulations

A.1  This report is issued in accordance with regulations 3(12) and 3(13) of the Teachers

Superannuation (Jersey) Law 1979 and regulation 16 of the Teachers' Superannuation (Administration) (Jersey) Order 2007.

GAD standards and guidance

A.2  The JTSF is not subject to UK pensions legislation. There is technically no requirement

on me to comply with UK specific guidance issued by the Financial Reporting Council (FRC).

A.3  However I have complied with GAD's own standards and guidance which interpret FRC

standards in a public sector context and contain additional best practice guidelines as described in the following paragraphs.

A.4  The Government Actuary's Department (GAD) strives to work to a high quality at all

times. In order to do this we adopt the following.

Our Aims and Values which are our client relationship standard.

The Actuaries' Code which sets overriding principles for all members of the Actuarial Profession.

GAD Principles for Actuarial Quality which provides a set of overarching principles that are applied to all work carried out by actuarial staff in a professional capacity within GAD.

The Civil Service Code which sets out the standards of behaviour expected of civil servants.

The requirements of the UK Actuarial Profession relating to conflicts of interest.

GAD internal guidance which is available on request.

The GAD Statement of Understanding which includes material designed to ensure that the applicable provisions of the Technical Actuarial Standards (TASs) produced by the Financial Reporting Council (FRC) will be met in relation to all pensions work within GAD. For the avoidance of doubt these TASs are:

• TAS-R: Reporting
• TAS-M: Models
• TAS-D: Data
• TAS –P: Pensions

A.5  In addition all work will comply with any other relevant standards including those issued

by the Institute and Faculty of Actuaries.

Appendix B  Summary of existing members' provisions

B.1  This Appendix summarises the main provisions applying to existing members (as at

31 March 2007) with effect from 1 April 2007. Different provisions apply to new members joining after 1 April 2007 (see Appendix C).

Membership

B.2  All pensioner, deferred and active members as at 31 March 2007 are existing

members' of the Scheme.

Contributions

B.3  Active members contribute at the rate of 6% of salary. Within certain limits, members

may opt to pay additional contributions for the purchase of added years of service.

Retirement age

B.4  Pensions are normally payable from age 60 although members may continue to work

after this age.

Benefits on retirement at or after age 60

B.5  Subject to a qualifying period of two years, the pension is 1/80th of pensionable salary

per year of service. Pensionable salary is the highest salary paid in any period of 365 consecutive days within the last three years of service. This pension is payable monthly for the rest of the member's life.

B.6  A lump sum of three times the annual pension is also payable on retirement. Benefits on retirement due to ill-health

B.7  On retirement due to ill-health with more than two years' service, an immediate pension

and lump sum are payable, calculated on the same basis as benefits on retirement at or after age 60, but based on enhanced service (5-10 year's actual service – service doubled; 10-13 years' actual service – service increased to 20 years; over 13 years' actual service – service increased by 6 years).

B.8  For members with less than two years' service, a grant is payable of 1/12th of average

salary for each year of service.

Benefits on death in service

B.9  When a married member dies in service, a spouse's pension is payable at the rate of

one half the pension that would have been received if the member had retired due to ill- health at the date of death. Spouse's pensions are only payable to male spouses in respect of service after 6 April 1988. An increased spouse's pension is payable for the first three months after a teacher's death.

B.10  Children's pensions are payable to dependent children until they leave full-time

education. An increased pension is payable to children in the absence of a spouse.

B.11  A lump sum is also payable equal to two times annual salary.

Benefits on withdrawal

B.12 A member who leaves service with less than two years' service may take a refund of

contributions paid, accumulated with compound interest at 3%.

B.13 A member who leaves with two or more years' service is entitled to a preserved

pension and lump sum payable at age 60.

B.14 On future re-entry to the Scheme, earlier service may be aggregated with the new

period of service for the purpose of calculating benefits at retirement, provided that the member has not taken a refund of contributions or a transfer value.

Benefits on death after retirement

B.15 When a married member dies after retirement, a spouse's pension is payable at the

rate of one half of the member's pension. Spouse's pensions are only payable to male spouses in respect of service after 6 April 1988. An increased spouse's pension is payable for the first three months after a member's death.

B.16 Children's pensions are payable to dependent children until they leave full-time

education. An increased pension is payable to children in the absence of a spouse.

B.17 On the death of a pensioner with less than 10 years' service, a lump sum is payable

equal to five times the annual pension in payment at the date of death, less the pension and lump sum already received before death. On death of a pensioner with 10 or more years' service, a lump sum is payable equal to average salary less the pension and lump sum already received before death.

Pension increases

B.18 Pensions in payment and preserved benefits are increased each January in line with the Jersey Cost of Living Index over the 12 months to the previous December.

Impact of future valuations

B.19 Section 18 of the regulations[1] provides that if a future actuarial valuation reveals a

surplus or deficit in the pension fund, then the members' benefits may be adjusted to bring the fund back into balance, unless the Management Board and the Minister arrange otherwise.

Appendix C  Summary of new members' provisions

C.1  This Appendix summarises the main provisions applying to new members joining after

1 April 2007. Different provisions apply to existing members as at 31 March 2007 (see Appendix B).

Membership

C.2  All full-time and part-time teachers in state schools, accepted independent schools

and further education colleges who first joined service on or after 1 April 2007 are eligible for membership of the Scheme.

Contributions

C.3  Members contribute at the rate of 5% of salary. Within certain limits, members may opt

to pay additional contributions for the purchase of added years of service.

Retirement age

C.4  Pensions are normally payable from age 65 although members may continue to work

after this age. Members may opt to take an actuarially reduced pension from age 60 with the pension reduced by 2.4% for each year retired early.

Benefits on retirement at or after age 65

C.5  Subject to a qualifying period of two years, the pension is 1/80th of pensionable salary

per year of service. Pensionable salary is the highest salary paid in any period of 365 consecutive days within the last three years of service. This pension is payable monthly for the rest of the member's life.

C.6  Up to 25% of the pension may be commuted for a lump sum at retirement, at a rate of

£13.50 of lump sum for each £1 pa pension.

Benefits on retirement due to ill-health

C.7  On retirement due to ill-health with more than two years' service, an immediate pension

and lump sum are payable, calculated on the same basis as benefits on retirement at or after age 65, but based on enhanced service (5-10 year's actual service – service doubled; 10-13 years' actual service – service increased to 20 years; over 13 years' actual service – service increased by 6 years).

Benefits on death in service

C.8  When a married member dies in service, a spouse's pension is payable at the rate of

one half the pension that would have been received if the member had continued in service until normal retirement age. An increased spouse's pension is payable for the first three months after a member's death.

C.9  Children's pensions are payable to dependent children until the age of 17 or until they

leave full-time education. An increased pension is payable to children in the absence of a spouse.

C.10 For members with at least 5 years' service, a lump sum is payable equal to two times

annual salary. For members with less than 5 years' service, a lump sum is payable equal to 2/5ths of annual salary for each year and part year of service.

Benefits on withdrawal

C.11 A member who leaves with less than two years' service may take a refund of

contributions paid, accumulated with compound interest at 3%.

C.12 A member who leaves with two or more years' service is entitled to a preserved

pension and lump sum payable at age 65.

C.13 On future re-entry to the Scheme, earlier service may be aggregated with the new

period of service for the purpose of calculating benefits at retirement, provided that the member has not taken a refund of contributions or a transfer value.

Benefits on death after retirement

C.14 When a married member dies after retirement, a spouse's pension is payable at the

rate of one half of the member's pension payable (before any deduction in respect of any commutation for a lump sum). An increased spouse's pension is payable for the first three months after a member's death.

C.15 Children's pensions are payable to dependent children until the age of 17 or until they

leave full-time education. An increased pension is payable to children in the absence of a spouse.

Pension increases

C.16 Pensions in payment and preserved benefits are increased each January in line with the Jersey Cost of Living Index over the 12 months to the previous December.

Impact of future valuations

C.17 Section 18 of the regulations[2] provides that if a future actuarial valuation reveals a

surplus or deficit in the pension fund, then the members' benefits may be adjusted to bring the fund back into balance, unless the Management Board and the Minister arrange otherwise.

Appendix D  Membership data

D.1  The following tables provide a summary of the data used for this actuarial review. The results and conclusions of the review depend on the accuracy and quality of this data.

D.2  We have relied on the accuracy of the information provided by the Dedicated Pensions

Unit (DPU), the Fund's administrators. They provided data on the individual membership as at 31 December 2010 and membership movements for the period since 31 December 2006. After some clarification with DPU, we are satisfied that the data is internally consistent and broadly consistent with that provided for the 2006 review, such that any further work on the data is unlikely to make a material difference to the results of the valuation.

Jersey Teachers' Superannuation Fund: actuarial review as at 31 December 2010

Deferred Members

Table D.3: Deferred members

16

Appendix E  The Fund's Account 31 December 2006 to 31 December 2010

E.1  We have been provided with audited annual Fund accounts for the years 2006 to 2010.

Over the four year period ended 31 December 2010, the Fund earned a rate of return of about 6¼% a year on market values, or a real rate of return of about 3¼% a year (in excess of (CLI) price increases).

Table E.1: consolidated revenue account to 31 December 2010

Income

Contributions  43.2

TVs-in  1.6 Investment income  14.4 Investment gains/losses  55.4 Total income  114.6

Outgo

Benefits  47.4 Administration  1.8 Other  1.9 Total outgo  51.1 Fund as at 31 December 2010  320.1

E.2  Contribution income was lower than benefits paid out by around £4 million. Including

investment income (but not including investment capital gains and losses) the total income over the period exceeded the benefits paid out net of expenses by around £6½ million.

E.3  Table E.2 summarises the revenue accounts for each of the five years ending 31

December 2006 to 31 December 2010.

Table E.2: Fund revenue accounts, years ended 31 December 2006 to 2010

Income

Contributions   7.1  9.8  10.9  11.1  11.4

TVs-in  0.5  1.2  -  0.2  0.2 Investment income  2.8  3.5  3.9  3.3  3.7 Investment gains/losses  18.7  16.1  (56.6)  49.7  46.2 Total income  29.1  30.6  (41.8)  64.3  61.5

Outgo

Benefits *  7.9 *  9.8  12  12.2  13.4 Administration  0.1  0.4  0.5  0.4  0.5

Other  1.1  0.2  0.3  0.3  1.1 Total outgo  9.1  10.4  12.8  12.9  15 Fund at end of period  256.5  276.7  222.0  273.4  320.1

* excluding the cost of pension increases

E.4  Table E.3 summarises the proportion of the Funds assets held in different asset

classes at 31 December 2006 and 31 December 2010.

Table E.3: Distribution of assets as at 31 December 2010 (and 2006)

Investment class  31 December 2006  31 December 2010

£ million  %  £ million  %

Appendix F   Valuation and funding methodology Valuation methodology

F.1  In this review I have used a market-based approach. This is the same approach as was

used in 2006.

F.2  Under a market-based approach, the assets are taken at market value and the (past

service) liabilities are discounted at interest rates derived from current market conditions. The market based discount rates and will vary over time and therefore the level of liabilities would be expected to change at each review even if all other things were equal.

F.3  The standard contribution rate (payable in respect of accruing benefits) can be

assessed using the same market-based rates as the past service liabilities, or using rates that are considered to be appropriate for new investment in respect of future contributions.

F.4  The three main choices for deriving the market-based discount rate are:

1. the current yield on gilts;
2. the current yield on corporate bonds; and
3. the current yield on gilts plus an equity risk premium (fixed or variable).

F.5  If a Fund's assets are invested predominantly in bonds (government or corporate), then

it would be reasonable to adopt a bond-based market value approach. However, where a Fund's investment strategy includes a significant equity content (as the Fund does), a bond-based market value approach is likely to lead to a higher level of volatility in the results from one actuarial review to the next.

F.6  The inclusion of an "equity risk premium" explicitly recognises the equity content within

a Fund's investment strategy so that the valuation of the liabilities reflects the expected higher returns from return-seeking assets. However, whereas gilt yields are readily available, there is not an objective market rate of (total) return on equities which can be compared to the market yield on gilts.

F.7  The equity risk premium could be set as a fixed margin above gilt yields, reflecting the

long term average outperformance of return-seeking assets, irrespective of the relationship between gilt and equity markets on a given day (for example, it might be assumed that equities will yield a higher return than gilts by a margin of, say, 2% a year). This approach was adopted at the 2006 review. Alternatively, the equity risk premium could be chosen to reflect the differences between equity and gilt markets at the relevant date.

F.8  Discussion about the equity risk premium assumption in the valuation and how this was

set can be found in Appendix G.

Funding methodology – Entry age method

F.9  In this review I have used a funding method known as the Entry Age Method' (EAM).

The 2006 review was carried out using the same funding method.

F.10  Under the EAM, the standard contribution rate, expressed as a percentage of salary, is

determined so as to be sufficient to meet the cost of all future benefits for a typical new entrant (at the assumed normal entry age) provided that the actuarial assumptions are borne out in practice. The new entrant standard contribution rate should remain reasonably stable provided that the distribution of new entrants by age and sex does not change significantly.

F.11  The valuation then compares the value of the liabilities (in respect of both the past and

future service of existing members) with the combined value of the existing assets and the future contributions (in respect of existing members) at the standard contribution rate. This determines whether the Fund is in surplus or deficit.

F.12  The recommended employers' contribution rate is then determined by adjusting the

employers' share of the standard contribution rate (that is, excluding the members' contribution rate) to allow for administrative expenses expected to be charged to the Fund, and to take account of any surplus or deficit.

F.13  At the 2006 review it was decided to use derive the standard contribution rate by

reference to the cost of new members' benefits. This was to ensure that the standard contribution rate would remain stable as the relative mix of new members and existing members changes in the future.

F.14  However the employers contribution rate takes account of the total service liabilities

(that is, past and future service) of both new members and existing members as it includes the spreading of surplus or deficit over the future working lifetime of the active members.

Funding methodology – other possible approaches

F.15  In addition to the Entry Age Method, there are two main alternative funding approaches

that could be adopted for the current review: the Attained Age Method and the Projected Unit Method.

F.16  Under the Attained Age Method (AAM), the standard contribution rate would be

determined for all current active members so as to be sufficient to meet all (projected) future benefits. Any deficit in respect of past service liabilities (taking into account the assets held) would be met by a contribution spread over the chosen period.

F.17  Under the Projected Unit Method (PUM), the standard contribution rate would be

determined by reference to the cost of benefits accruing to all members over the period to the next actuarial review (the "control period"). In effect, this would be a weighted average of the separate PUM rates for existing members and new members. If the overall average age of active members remained constant then the PUM SCR would fall over time as the proportion of new members in the scheme increased. (New member benefits cost less to provide). Any deficit in respect of past service liabilities (taking into account the assets held) would be met by a contribution spread over the chosen period.

F.18  The total contribution rates payable by employers under the existing and alternative

approaches would differ since they each meet the cost of accruing benefits and past service liabilities at a different rate (the "pace of funding"). In particular the alternative approaches would lead to a higher standard contribution rate.

Appendix G  Financial assumptions

G.1  The assumptions (both demographic and financial)adopted for this review taken as a

whole are intended to give a "best estimate" of the Fund's liabilities. In other words the assumptions do not include any margin for prudence. This means that there is, in my opinion, an equal chance of either a surplus or a deficit emerging at future reviews. In technical terms the results of this review provide a neutral estimate of the financial position of the Fund.

G.2  I discussed the financial assumptions for this review with the Management Board at

their meeting on 28 June 2011, based on my paper of 9 June 2011. The Management Board accepted the recommendations in my paper which are summarised in the remainder of this section.

G.3  Table G.1 summarises the principal financial assumptions adopted for the current

review, together with those adopted at the 2006 review.

Table G.1: Principal financial assumptions (market-based)

Assumption  2010 review  2006 review Real rate of return, net of prices

Risk free assets (20%)  0.25% p.a.  1.3% p.a. Return-seeking assets (80%)  4.25% p.a.  4.05% p.a. Overall rate of return, net of prices  3.5% p.a.  3.5% p.a. Gross rate of return  -  6.5% p.a. Rate of return, net of earnings  2.0% p.a.  2.0% p.a. Price increases  -  2.9% p.a. Real earnings growth  1.5% p.a.  1.5% p.a.

G.4  Before we consider expected real returns in more detail we need to be clear on the

measures of inflation which are involved.

Jersey CLI and UK RPI

G.5  For most investors in sterling denominated assets, the UK Retail Price s Index (RPI) is

a more relevant measure of inflation than the Jersey CLI. Moreover the payments on index-linked gilts are calculated using RPI. Therefore the discussion of expected real returns below considers returns relative to the UK Retail Price s Index (RPI) rather than to Jersey CLI, which is the relevant measure for a JTSF review. This means that, in order to set assumptions for this review, we must make an assumption about the difference between RPI and Jersey CLI over the long term.

G.6 For the past five years or so, the Jersey CLI has increased at more or less the same

rate as the UK RPI, other than over the most recent few months. Looking back further (ten years and more) Jersey CLI increased at a notably faster rate than UK RPI. We understand that the States of Jersey's economic advisors recommend that it would be reasonable to assume for our purposes that the Jersey CLI will exceed UK RPI by 0.25% a year for the long term.[1]

G.7 We therefore propose to assume that the Jersey CLI will be closely correlated to UK

RPI over the longer term, but at a level 0.25% a year higher on average.

Investment returns – the equity risk premium'

G.8 As at 31 December 2010, and based on terms of over 5 years and over 15 years, the

real yield on longer-dated UK index-linked gilts was around 0.5% a year, net of UK RPI. However, there is not a published forward looking market rate of return on equities comparable to the returns available on gilts. We have therefore considered:

academic research,

the practice of other pension schemes, and

the views of the Fund's investment advisors.

G.9 Many academic researchers have considered the additional return (over that available

on risk-free assets) which might be expected from investing in equities (that is, the equity risk premium'). Unfortunately, no firm conclusions have emerged. Typically, academic researchers have concluded that in the long term the equity risk premium might be between 2% and 4% a year. Of course, short-term conditions might mean that expectations on a particular date could lie outside this range.

G.10 The UK Pensions Regulator publishes some summary data on the practice of funded

UK pension schemes. While this doesn't directly cover schemes' assumptions for the equity risk premium, it is consistent with equity risk premia between 2% and 3%. It should be noted that these assumptions would be intended to be on the prudent side of best estimate (as a consequence of other aspects of the UK pension regulations).

G.11 The Fund's investment advisors have confirmed that their expectations for the ten

years from 1 January 2011 are that index-linked gilts will show a real return of about 0% a year and that equities (both UK and global) will show a real return of about 5% a year (over UK RPI). That is, the equity risk premium over the next ten years will be about 5%.

G.12 In addition, their best estimate of the total real return over ten years based on the

Fund's strategic asset allocation is 6.6% (over UK RPI). This includes an allowance for expected manager outperformance.

G.13 While the Fund's investment advisors estimates of the Fund's likely returns are higher

than might otherwise be expected, it is important to recognise that their estimates refer to the next ten years specifically, and not to the longer term.

Real discount rate for 2010 review

G.14 Taking all this into account, I believe it is reasonable to assume a long-term equity risk

premium of around 4% a year, net of investment expenses. This might be considered a long-term best estimate, being more prudent than the Fund's investment advisors' best estimate of 5% a year over the next ten years, and more optimistic than the 2%-3% a year typically adopted recently by funded UK pension schemes as a prudent long-term assumption. It is at the high end of the long-term range suggested by academic research.

G.15 The trustees should appreciate that there is a high level of uncertainty around this

assumption, and that future experience could differ materially. It would be possible to justify a higher or lower equity risk premium assumption for this review of the JTSF.

G.16 An equity risk premium of about 4.0% a year combined with real yields of about 0.5% a

year on index-linked gilts would lead to an expected real return of about 4.5% on the Fund's allocation to return-seeking assets. Assuming that the assets will be invested in line with the Fund's current strategic asset allocation (80% in return-seeking assets) would lead to an expect return of about 3.75% a year, net of UK RPI.

G.17 If we assume that Jersey CLI will exceed UK RPI by 0.25% on average, then this would

give a real return assumption of 3.5% a year (net of CLI) on market values at the review date. This real rate of 3.5% would be net of investment expenses.

G.18 We propose to use the same assumptions to determine the standard contribution rate

in respect of future service accrual. This is reasonable since the Scheme is broadly cash-flow neutral – that is, income from contributions and investments is broadly equal to benefit outgo – and seems likely to remain so for some time. Thus, uncertainties about the returns which might be obtained from the investment of new money in the future are not a material consideration.

Gross rate of return

G.19 At the previous actuarial review in 2006 it was necessary to value members' base

pensions and pension increases separately. Because pension increases are now paid from the Fund this is not necessary at this review and so has not been considered further at this stage.

Real earnings growth

G.20 Over the past four years, general earnings increases (excluding career and/or

promotional increases) awarded to JTSF members have been close to, or even less than, increases in the Jersey CLI, and so real earnings growth (net of inflation) has been nil or even negative. However, for the purpose of the actuarial review, an assumption is required about general earnings increases over the long-term. Consistent with past economic experience, we would expect earnings to increase at a faster rate than prices over the long-term.

G.21 We propose to assume that long-term real earnings growth will be about 1.5% a year

(in excess of price increases). This is the same assumption as was adopted for the 2006 review.

Appendix H  Demographic assumptions

H.1  GAD has analysed the demographic experience of the Fund over the last four to nine

years in order to inform the decision on suitable valuation assumptions. The full details of this analysis can be found in my note of 2 September 2011, which was presented to the Management Board at their meeting of 13 September 2011. I also produced a separate paper on the active member's promotional salary increase assumption in a note on 31 October 2011.

H.2  After discussion the Management Board agreed that the demographic assumptions

adopted should be the same as those of the 2006 review except for:

pensioner mortality, which should be updated to use the latest relevant published tables from the Actuarial Profession (the so called S1' Tables),

active member's salary increases,

active member's rates of withdrawal from the scheme, and

active member's rates of ill health retirement.

H.3  The above assumptions were updated to better reflect the experience of the Fund. The

updated demographic assumptions were described in full in my summary of proposed assumptions of 11 November 2011, which the Management Board accepted at their meeting of 23 November 2011. These assumptions are described further in the remainder of this appendix.

Assumptions for current and future pensioners

H.4  Table H.1 shows the assumptions for mortality in retirement for current and future

pensioners. Table H.2 shows the assumed difference in age between member and a surviving spouse (if any) on the member's death at a given age. Table H.3 shows the assumed proportions of members who leave a surviving spouse on the member's death at a given age. Table H.4 shows the assumed proportion of widow(er)s who remarry at a given age.

Table H 1: Mortality assumptions

Table H 2: Age difference at death (member age less spouse age)

.

Table H 3: Proportion of members married (on death) per 1,000 members

Table H 4: Rate of remarriage per 1,000 widow(er)s

Assumptions for deferred members

H.5  I propose to adopt the same assumptions as for pensioners, except as shown below.

This is consistent with my paper on demographic assumptions dated 2 September 2011.

Early and late retirement

H.6  I propose to assume that early and late retirements are cost neutral for deferred

members (this is equivalent to assuming that New section deferred members retire at 65, there is no provision for early retirement for Existing section members).

Commutation

Re-entry to active service

H.7  Allowance for future re-entry is made by applying a loading of 0.5% to the revaluation in

deferment assumption. This is broadly equivalent to assuming that one third of deferred members will re-enter active service.

Assumptions for active members

H.8  Active members have been valued using the same assumptions as pensioners and

deferred members above, except as shown below. This is consistent with my paper on demographic assumptions dated 2 September 2011, except as follows:

I have increased withdrawal rates at older ages (over 50) in line with the Fund's past experience,

I have reduced ill-health retirement rates by 20% for men and 40% for women in line with the Fund's past experience,

I have adjusted the promotional salary scale as described in my note of 31 October 2011.

New section members are assumed to retire from active service at age 63 on average. Allowance is made for the fixed early retirement factor of 2.4% per year.

H.9  This was in accordance with the Management Board's request that the assumptions

should be set on a best estimate' basis.

H.10 Table H.5 shows the assumed annual rates of death of active members before

retirement age.

H.11 Table H.6 shows the assumed rates at which active members voluntarily leave the Fund

split by whether they have less than one year's service, one to year's service or more than two years' service.

H.12 Table H.7 shows the assumed annual rates of retirement from the Fund on the grounds

of ill health.

H.13 Table H.8 shows the assumed scale of average career progression promotional pay

increases active members can expect.

Table H.5: Death in service

Table H 6: Withdrawal rates (per 1,000 members)

Table H 7: Ill health early retirements per 100,000 lives

Table H 8: Promotional Salary Scale

Appendix I   Results

I.1  This section gives the results of my actuarial review of the Fund's ongoing funding

position (that is, assuming that the Fund continues to operate for the foreseeable future). It also contains an illustration of how sensitive the results are to the key assumptions.

Valuation results

I.2  As for the 2006 review, I have calculated the employer contribution rate as the difference

between the Standard Contribution Rate (SCR) for the assumed distribution of new entrants (who will all be New section members) less the New section members' contribution rate of 5%, plus expenses and the spreading of any surplus or deficit. These rates are summarised in Table I.1.

Table I.1 - Contribution rates