STATES OF JERSEY

JERSEY TEACHERS' SUPERANNUATION FUND: ACTUARIAL REVIEW AS AT 31ST DECEMBER 2013 – REPORT BY THE ACTUARY

Presented to the States on 13th March 2015 by the Chief Minister

STATES GREFFE

2015   Price code: E  R.30

REPORT OF THE CHIEF MINISTER

Article 3(12)  of  the  Teachers'  Superannuation  (Jersey)  Law  1979  requires  the appointment  of  an  Actuary  to  review  the  operation  of  the  Jersey  Teachers' Superannuation Fund (JTSF).

Under Article 3(13) of the Law, on each review under paragraph (12) the Actuary shall make a report to the Chief Minister, the Minister for Treasury and Resources and the Management Board on –

1. the financial condition of the Fund; and
2. the adequacy or otherwise of the contributions payable under this Law to support the pensions and other benefits payable under this Law.

The Scheme's Management Board and the States Employment Board have formally accepted the report, which was signed by the Scheme's Actuary on 7th January 2015 (see attached Appendix).

Valuation result

The main conclusions from the valuation are that –

1. There  is a  surplus  of  £7.4 million  as  at  31st  December  2013 (equivalent  to a  funding  level  of  101%),  using  best  estimate assumptions  and  after  taking  account  of  the  States  of  Jersey's expected future payments to cover the pension increase debt.
2. The pension increase debt which the States of Jersey is required to repay is £101.1 million as at 31st December 2013.
3. The employer contribution rate is 16.4% of pensionable salaries, of which 5.6% is being used to repay the pension increase debt and 10.8% to fund benefits.
4. Using best estimate assumptions, the future employer contributions (10.8% of pensionable earnings) are insufficient to fund the benefits being promised (13.4% of pensionable salaries).

Dealing with a surplus

The surplus of £7.4 million as at 31st December 2013 is based on the provisions of the Scheme at that date.

Where  a  surplus  is  disclosed  at  a  valuation,  Article 18(4)  of  the  Teachers' Superannuation  (Administration)  (Jersey)  Order  2007  requires  proposals  to  be submitted to the States to dispose of any surplus. Given that the size of the surplus is not material, the Scheme Actuary has recommended that no additional action should be taken to dispose of the surplus.

The Scheme Actuary therefore recommends that the remaining surplus is retained as a buffer against future adverse experience.

3

Notes on the Valuation

The  overall  approach  adopted  for  the  2013 valuation  is  the  same  as  for  the 2010 valuation. In particular, the Actuary continued to use best estimate assumptions, whereby the future outcome is just as likely to be better or worse than assumed.

At each valuation, the Scheme Actuary reviews the assumptions to be used to ensure that financial assumptions are based on market conditions at the valuation date, and that the demographic assumptions take into account the Scheme's experience over the 3 year valuation period and any industry developments, for example on mortality expectations. The assumptions adopted for the valuation are described in detail in Appendices G and H of the Valuation Report.

At the 2010 valuation, the Scheme Actuary determined that the Scheme was in a balanced position. The funding position has improved to a £7.4 million surplus over the last 3 years due to –

• higher investment returns than expected, and
• general pay awards and pension increases being lower than expected

Pension Increase Debt

At its meeting on 24th October 2005, the Education, Sport and Culture Committee agreed in principle to provide for a Teachers' Scheme similar to the Public Employees Contributory Retirement Scheme (PECRS). Changes to the Teachers' Scheme came into force on 1st April 2007 and, in the main, aligned teachers' benefits to Jersey public sector pension benefits available under the PECRS. These changes were given effect through the making, by the Chief Minister, of the Teachers' Superannuation (New Members) (Jersey) Order 2007.

As  a  result  of  the  changes,  the  funding  of  pension  increases  moved  from  the Education, Sport and Culture Revenue budget to the Jersey Teachers' Superannuation Fund, and the Scheme Actuary calculated a past service liability (the pension increase debt).

The Scheme Actuary has completed the 2010 and 2013 actuarial valuations on the basis that agreement is reached on the terms of repayment. The States has recognised the debt in its balance sheet since 2007, and a commitment to terms of repayment will have no additional balance sheet implications.

The actuarial report has been completed on the understanding that the States of Jersey will formally sign up to a repayment schedule within Orders for the repayment of the pension increase debt.

A formal repayment schedule has not as yet been incorporated into Orders. The JTSF Management Board and the Scheme Actuary are now requesting that this is formalised as  soon  as  possible.  The  States  Employment  Board  agreed  at  its  meeting  on 30th January 2015 that the drafting of Orders to formalise the terms of the debt should be progressed.

R.30/2015

Summary

The 2013 actuarial valuation has identified that, using best estimate assumptions, the cost of the benefit package for new entrants has increased from 12.8% to 13.4% of pensionable  salaries  since  the  last  valuation  in  2010.  The  current  employer contribution available to fund scheme benefits is 10.8% of pensionable salaries. There is  insufficient  ongoing  funding  to  pay  for  the  benefits  being  promised,  and  the situation has worsened over the valuation period. The Actuary has recommended that the Management Board work with the States to establish a sound funding strategy for the Scheme. The States Employment Board will need to consider how it is to address the sustainability of the Jersey Teachers' Superannuation Fund in the future.

A repayment schedule and basis for repayment needs to be incorporated into Orders for agreement, and it is proposed that the Law Draftsman's Office be requested to produce the draft Orders for signing.

Actuarial Report

The 2013 actuarial valuation was signed by the Scheme Actuary on 7th January 2015. A copy of every report, signed by the Scheme Actuary, shall be presented to the States by the Chief Minister as soon as practicable after it is made.

APPENDIX

Jersey Teachers' Superannuation Fund

Actuarial review as at 31 December 2013 Report by the actuary

Date:  7 January 2015 Author:  Ken Kneller

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 of the Fund as at 31 December 2013. The previous valuation was carried out as at 31 December 2010 and I signed the report on

10 January 2013.

I now submit my report on the actuarial review as at 31 December 2013. Appendix N sets out the limitations of this report.

Ken Kneller

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

Edinburgh

7 January 2015

Contents

1  Report  1  Regulations and actuarial standards relating to this review  8  Summary of existing members' provisions  9  Summary of new members' provisions  11  Membership data  13  The Fund's accounts from 2010 to 2013  23  Valuation and funding methodology  25  Financial assumptions  27  Demographic assumptions  32  Results  42  Solvency  47  Developments since the 2010 Review  49  Investment issues  52  Risks and uncertainties  54  Limitations  55

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

1  Report

Introduction

1. The two main purposes of the review are

> to assess the level of assets and liabilities in the Fund, and

> to comment on the adequacy of the contributions payable by the employers and members.

2. Membership of the Fund is open to teachers in schools and other educational establishments in Jersey.
3. Since 31 March 2007, pension increases are required to be funded in advance within the Fund. 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 respect of accrual before that date
4. I understand that the Management Board and the States have agreed in principle that the initial amount of the pension increase debt will be £91.6m as at 31 December 2010 and that the debt will be repaid over a period of time; however there is not yet a formal agreement covering the details and timing of the additional contributions needed to repay the debt.
5. 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 may be invalid and may have to be revised.

Summary

6. While the precise details of the pension increase debt remain unresolved, there is clearly some uncertainty about the valuation results.
7. Further, I understand that the current contribution rate being paid of 16.4% of pensionable salaries (which includes a contribution to service the pension increase debt) is fixed in regulations.
8. I have determined that the appropriate employer contribution rate to cover the accrual of new benefits in respect of continuing pensionable service would be 13.4% of pensionable salaries. This figure is 0.6% higher than the corresponding figure of 12.8% derived at the 2010 review.
9. Since the Management Board has specified that 5.6% of pensionable salaries should be considered to be servicing the pension increase debt, this leaves only 10.8% to cover the cost of ongoing accrual, which is 2.6% less than the assessed cost of 13.4% of pensionable salaries each year. This may be practical in the short term, however it does not seem viable as a long-term funding strategy.
10. The average employee contribution rate is 5.7% as at the effective date of this review.

11. Taking into account the States of Jersey's expected future payments to cover the pension increase debt, there is a small surplus of £7.4 million in the Fund on 31 December 2013. There was no surplus or deficit at the previous review as at 31 December 2010.
12. Regulation 18(4) of the Teachers' Superannuation (Administration) (Jersey) Order 2007 requires proposals to be submitted to the State to dispose of any surplus. Given that the size of the surplus is not material, I recommend a proposal that no additional action be taken to dispose of the surplus on the grounds listed in regulations 18(5)(a) and (b) of the 2007 order. It is expected that the surplus will gradually reduce to zero over a period of around 5 years, as a result of the underpayment of contributions relative to the assessed cost of continuing accrual, assuming that experience is in line with the assumptions adopted for this review.
13. I recommend that the Management Board should

press the States of Jersey to formalise the terms of the pension increase debt, and

work with the States of Jersey to establish a sound funding strategy for the future, with contributions being paid at least in line with the cost of continuing accrual.

Fund membership

14. At the review date, there were 1,150 contributors to the Fund with a total salary roll of £53.4 million and 919 pensions in payment with total annual pensions amounting to £15.2 million. There are a further 479 ex-contributors who have not yet started to receive their pension, whose deferred pensions total £2.3 million. For further details of the membership see Appendix D.

Treatment of the pension increase debt

15. The details of the pension increase debt have not been finalised but I understand that there is a provisional understanding that the initial amount of the debt will be £91.6m as at 31 December 2010 and that the debt will incur interest over time at the rate of 6.5% a year (in line with the gross discount rate used for the valuation as at 31 December 2010) less allowance for any repayments made.
16. On the basis above, assuming repayments have been made at a rate of 5.6% of pensionable salary, I calculated the pension increase debt to be £101.1m as at 31 December 2013.
17. However, for the purposes of this valuation, I have taken the pension increase debt onto the valuation balance sheet below face value, at £93.2m. This reflects the higher gross discount rate of 7.0% a year at this valuation, rather than the 6.5% expected to be earned on the debt. It broadly reflects an expectation that the debt will have been completely repaid by 2054 with, on average, payments being made in 2030.
18. Any significant change in the agreed initial amount of the debt or the repayment terms would have an impact on the capitalised value of the debt for valuation purposes.

Contributions

19. The cost of accruing benefits is set out in table 1 below.
20. Table 1 below shows the assessed contribution rates. Ideally, contributions would be payable at the assessed rate of 13.4% of pay towards ongoing accrual. However, given that the total contribution is currently fixed by regulations at the rate of 16.4% of pay and the Management Board has specified that we should assume that 5.6% of pay is used to provide for the pension increase debt, then the remaining 10.8% of pay will not fully cover the assessed costs of ongoing accrual.
21. The result derived in 2010 is shown for comparison. At the time of the 2010 valuation report, it had been expected that a new funding strategy would be identified and implemented which did not involve the underpayment of contributions relative to the cost of ongoing accrual.

Table 1: Contribution rates

Fund finances

22. 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.
23. The assets include:

> the invested assets,

> 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.

24. 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.

25. The valuation balance sheet is shown in table 2 below. Table 2: Valuation results

Value of  2013 result  2010 result

£ million  £ million

Liabilities (including pension increases)

Pensions in payment  216.6  168.9

Deferred members  39.8  42.4

Active members – past service  181.9  183.5

Active members – future service  119.8  111.3 Total liabilities  558.1  506.1 Assets

Future contributions 86.1  94.5 Pension increase debt  93.2  91.6 Investments  386.2  320.1 Total assets  565.5  506.1 Surplus / (deficiency)  7.4  0 Funding level  101%  100%

26. The cost of providing future pension increases is around 28% of the Fund's total liability. The Fund could therefore afford to provide some level of pension increases as long as it remained at least 72% funded at each formal valuation.

Method and approach

27. 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

28. 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

29. More details of these and the other assumptions can be found in Appendices G (financial assumptions) and H (demographic assumptions).

Sensitivity of results

30. 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

31. For further details of these results, see Appendix I. Solvency
32. Solvency is a measure of what level of the Fund's current liabilities would be covered by its assets were the Fund to wind up on the assessment date, here 31 December 2013, and the liabilities insured with an insurance company. In practice it may be difficult to insure the current benefits of the Fund exactly with an insurer, specifically the pension increases in line with Jersey inflation.
33. 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: Estimated solvency position (nearest 5%)

34. The solvency level has slightly improved since the 2010 valuation (although due to rounding, it is not apparent in respect of the figures above allowing for repayment of the pension increase debt). For more detail on the assumptions used see Appendix J.

Developments since the last valuation

1.35 I carried out the last actuarial valuation as at 31 December 2010. My report was signed on 10 January 2013.

1.36 The main factors which have improved the funding position since 2010 are:

> higher investment returns than expected, and

> general pay awards and pension increases being lower than expected.

1.37 This main factors which have worsened the funding position since 2010 are:

> the effect of increasing the gross discount rate on the value of the pension increase debt, and

> miscellaneous factors, including the effects of the recent data cleansing exercise. Investment issues

38. Investment markets have been volatile over the period from 31 December 2010 to 31 December 2013 (and continue to be so). Overall yields on corporate and UK Government bonds (both fixed interest and index-linked) are lower at this review compared to 2010. Equity markets have improved over the period, due to strong performance in 2012 and 2013.
39. The Fund invests around 90% in return-seeking assets (such as equities and property). 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

40. This report should be read in full with its appendices, which contain details of the data, method, assumptions and results of the valuation.

Compliance

41. For the avoidance of doubt, the JTSF is not subject to UK pensions legislation and regulation. 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 Understanding1for 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.

1https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/256757/SoU_v_2.0.pdf

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.

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 Fund.

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 Fund, 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.

Cessation on remarriage

B.18  Spouse pensions cease on remarriage or cohabitation unless the Management

Board directs otherwise.

Pension increases

B.19  Pensions in payment and preserved benefits are increased each January in line with

Jersey inflation over the 12 months to the previous December.

Impact of future valuations

B.20  Section 18 of the regulations2 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.

2 Teachers' Superannuation (Administration) (Jersey) Order 2007

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 Fund.

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 Fund, 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

Jersey inflation over the 12 months to the previous December.

Impact of future valuations

C.17  Section 18 of the regulations3 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.

3 Teachers' Superannuation (Administration) (Jersey) Order 2007

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  I 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 2013 and membership movements for the period since 31 December 2010. I have taken reasonable steps to satisfy myself that the data provided is of adequate quality for the purposes of the valuation, including carrying out tests to detect obvious inconsistencies. These checks provide no reason to doubt the validity of the information supplied but I am not in a position to confirm that the detailed information provided in respect of individual members is correct.

The Fund's accounts from 2010 to 2013

E.1  Table E.1 summarises the revenue accounts for each of the three years preceding 31

December 2013. Table E.2 shows the rates of return and RPI for each of the three years.

Table E.1: Fund revenue accounts, 2011 to 2013*

£ million  Year ended 31 December  Three years 2011  2012  2013  2011-2013 Fund at start of period  320.0  302.6  326.7  320.0 Income

Contributions  11.5  11.4  11.7  34.6 Investment income*  3.3  3.3  3.4  10.0 Incoming transfers  0.2  0.2  0.6  1.0 Total income  15.0  14.9  15.7  45.6 Outgo

Benefits  15.1  16.3  18.0  49.4 Administration

0.5  0.7  0.6  1.8

expenses*

Other  0.0  0.4  0.1  0.5 Total outgo  15.6  17.4  18.7  51.7

Net cashflows

(0.6)  (2.5)  (3.0)  (6.1) (income less outgo)

Capital gains on

(16.8)  26.6  62.5  72.3 investments

Fund at end of period  302.6  326.7  386.2  386.2

* net of investment expenses

Table E.2: RPI and Rates of return, 2011 to 2013

Year ended 31 December  (Average) 2011  2012  2013  2011-2013

Jersey RPI  5.0%  2.1%  1.9%  3.0% Rate of return

Nominal  - 4.6%  9.1%  19.3%  7.4% Real (in excess of RPI)  - 9.1%  6.8%  17.1%  4.3%

Note that these return figures have been calculated by GAD and differ slightly from those shown in the annual accounts, due to minor differences in the method of calculation.

E.2  Table E.3 summarises the proportion of the Fund's assets held in different asset

classes at 31 December 2010 and 31 December 2013.

Table E.3: Distribution of assets as at 31 December 2013 (and 2010)

Investment class  31 December 2013  31 December 2010

£ million  %  £ million  %

* Since 31 December 2010 a majority of the Fund's assets have been placed in a Common Investment Fund (CIF)

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 2010.

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

liabilities are valued using discount rates derived from current market conditions (consistent with the value of the assets). The standard contribution rate will be assessed using discount rates considered appropriate for new investment in respect of future contributions – in practice, these discount rates are often the same as the market-based rates used to value the past service liabilities.

F.3  The 2010 valuation was carried out using an actuarial methodology called the Entry

Age Method (EAM), as follows:

the standard contribution rate was determined so as to be sufficient to meet the cost of all future benefits (including pension increases) for a typical new entrant (at the assumed normal entry age). This calculation reflected the benefit entitlements of members on the New Member scale;

the value of the liabilities (past and future service, and including pension increases) was compared to the combined value of the Fund's assets and future standard contributions (identifying that the Fund had a material deficit);

The deficit mainly arose as a result of the Fund taking on responsibility for pension increases, which had formerly been funded by employers as they arose. It was agreed that the deficit would be covered by the States of Jersey. A schedule of payments to cover this amount, called the pension increase debt' is being agreed by the Board and the States.

These future pension increase debt contributions can be treated as an asset of the Fund. At the 2010 valuation it was assumed that the pension increase debt contributions would exactly cover the deficit, so that the Fund was in balance as at 31 December 2010;

the recommended employers' contribution rate was determined by adjusting the employers' element of the standard contribution rate (that is, excluding members' contributions) to allow for administrative expenses expected to be charged to the Fund. In general, the employers' contribution rate would also be adjusted to allow for the surplus or deficit at the valuation date, but in 2010 the Fund was deemed to be in balance given the expected treatment of the pension increase debt.

F.4  The EAM is used less often now than it has been historically. However, it remains a

viable methodology for schemes with stable workforces, with members who tend to have similar patterns of employment, such as the JTSF.

F.5  Other alternative funding approaches that could be adopted for the current review are

the Attained Age Method (AAM) and the Projected Unit Method (PUM).

Under AAM the standard contribution rate would be determined for all current active members so as to be sufficient to meet all (projected) future benefits.

Under 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").

F.6  The Management Board at their meeting on 4 December 2013 opted to use the EAM

for the 2013 review.

Financial assumptions

G.1  The JTSF rules contain provisions to share' any surplus or deficit reported at a formal

valuation by amending benefits or contribution rates. It follows that assumptions might be chosen to avoid any deliberate material margins of prudence or optimism, since these would lead to a reported deficit or surplus which was not genuinely expected to emerge in practice. This could confuse the operation of the surplus / deficit sharing arrangements.

G.2  Following discussion with the Management Board, 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 deliberate material margins for prudence or optimism. 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.3  I discussed the financial assumptions for this review with the Management Board at

their meeting on 25 March 2014, based on my paper of 14 March 2014. The Management Board accepted the recommendations in my paper which are summarised in the remainder of this section.

G.4  Table G.1 summarises the principal financial assumptions adopted for the current

review, together with those adopted at the 2010 review.

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

Rationale for the discount rate assumption

G.5  The discount rate reflects the time value of money', and so can be thought of as the

interest one might earn on investments. It is therefore natural to have regard to expected investment performance when setting discount rate assumptions, subject to any external constraints, for example the requirements of the Fund rules or any overriding legislation or regulation.

G.6  It therefore seems appropriate to adopt a discount rate which has regard to the best

estimate of the future investment returns which the JTSF might expect to achieve given its long-term investment strategy, while reflecting other relevant factors.

Investment experience 2011 to 2013

G.7 The discount rate is a forward looking measure, however recent experience provides

context for the decision. Over the three year period since the last actuarial review, the Fund earned an estimated average real rate of return of 4.3% a year, slightly greater than the discount rate (of 3.5% a year) adopted at the 2010 review.

G.8 Appendix E summarises the Fund's revenue accounts for the period 1 January 2011 to

31 December 2013 and shows the approximate rates of return (nominal and real) earned over that period.

Investment strategy

G.9 The Fund's investment strategy is to invest the bulk of the portfolio (around 90%) in

return-seeking assets (such as equities and property), and 10% in risk-reducing assets (such as bonds). As at 31 December 2013, around 93% of the (invested) portfolio was invested in equities and properties, and 7% in bonds and cash.

G.10 In considering the expected returns, we consider only the investable assets. That is, we

exclude the pension increase debt asset.

Jersey inflation and UK RPI

G.11 The discussion of expected real returns which follows starts by considering returns

relative to the UK Retail Price s Index (RPI), rather than to Jersey inflation which is the relevant measure for a JTSF review. This is consistent with the investment advisors' practice, which reflects the much greater information available for the UK compared to Jersey.

G.12 We note that the JTSF rules refer to a Jersey Cost of Living Index (CLI)[4]. However, we

understand that no official index exists with this name, and in practice the Fund uses Jersey RPI as published by the Chief Minister's Statistics Unit where necessary.

G.13 Over the past ten years or so, the Jersey RPI has increased at a comparable rate to

UK RPI. Looking back further (ten years and more) we understand that Jersey RPI increased at a notably faster rate than UK RPI.

G.14 The Chief Minister's Economic Advisor, Dougie Peedle, has observed that:

over the long term, say 1950 to date, Jersey RPI has exceeded UK RPI by around 0.25% a year. (This is consistent with the assumption adopted at the 2010 review of the JTSF),

conversely, it seems implausible for Jersey inflation to exceed UK inflation indefinitely, given the impact this would have on competitiveness (in the context of a shared currency), and

the States of Jersey's working assumption for medium to long-term financial planning is that Jersey RPI will be 3.5% a year.

Investment returns – the equity risk premium'

G.15  We can analyse expected investment returns by considering the market yields on

index-linked gilts, which can be interpreted as the market risk-free return, and then considering the additional return which might be expected from investment in return- seeking assets. The additional return (over risk-free rates) expected from investment in equities is usually called the equity risk premium'.

G.16  As at 31 December 2013, and based on terms of over 5 years and over 15 years, the

real market yield on longer-dated UK index-linked gilts was around 0% a year, net of UK RPI. However, there is not an obvious market rate of return that can be readily identified in respect of equities relative 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.17  Many academic researchers have considered the equity risk premium'. There is

however no clear consensus on what the equity risk premium is, or how it might vary from time to time. Typically, academic researchers have concluded that in the long term the equity risk premium might be between 2% and 4% a year. Short-term conditions, however, might mean that expectations on a particular date could lie outside this range.

G.18  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, the published data is consistent with an assumed equity risk premium of 1.5-2.5%. It should be noted that these assumptions would be intended to be clearly on the prudent side of best estimate (as a consequence of other aspects of the UK pension regulations).

G.19  The Fund's investment advisors have confirmed that their expectations for the ten

years from 1 January 2014 are that UK equities will show a real return of 4.25% a year (over UK RPI). For the portfolio as a whole, and taking into account the large element of global equities in the fund, the equity risk premium over the next ten years is expected to be about 4.5%.

G.20  This equates to a best-estimate of the total real return over ten years based on the

Fund's strategic asset allocation of 3.9% (over UK RPI). This is based on analysis which excludes any allowance for expected manager outperformance as in our view it would be unusual to allow for this when considering and setting the valuation discount rate.

G.21  It should be noted that the investment advisors' estimates of expected future

investment returns refer to the next ten years only, and not to the longer term. It may not be reasonable to adopt a discount rate which is predicated on returns remaining this high in the longer term, given the academic research and the practice of other funded pension schemes.

Real discount rate for the 2013 review

G.22  Taking all this into account, maintaining a real discount rate of 3.5% a year (in excess

of Jersey inflation) would appear reasonable to me, and could be justified either as:

an expected real investment return of 3.5% in excess of UK RPI, with expected Jersey RPI assumed to be the same as expected UK RPI or

an expected real investment return of 3.75% in excess of UK RPI, with expected Jersey RPI assumed to be 0.25% a year higher than UK RPI on average.

G.23  A real discount rate of 3.5% a year could be a reasonable best estimate of the long-

term expected investment returns which the JTSF might achieve on its investable assets. It is slightly lower than the Management Board's investment advisors' expected returns over the next ten years, however that may be reasonable given that:

the discount rate needs to reflect expectations over the long term, not just the next ten years,

there is uncertainty regarding the likely future differential between UK RPI and Jersey RPI, and

the expected returns are predicated on a high allocation to return-seeking assets, which may not persist in the long term.

G.24  The Management Board should appreciate that there is considerable uncertainty

around this assumption, and that future experience could differ materially. It would be possible to justify a higher or lower discount rate for this review of the JTSF. On balance, I believe that the discount rate of 3.5% lies towards the top of the range of reasonable assumptions for the 2013 review. There will be an obligation to reconsider the decision afresh at future reviews.

G.25  The same assumptions will be used to determine the standard contribution rate in

respect of future service accrual. This is reasonable since the Fund does not currently have an excess of contribution income over benefit outgo and this position 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.

Real earnings growth

G.26  Over the past three years, the consolidated pay awards for JTSF members (excluding

career and/or promotional increases) have been on the whole lower than the increases in the Jersey RPI, apart from the January 2014 award. Therefore real earnings growth (net of inflation) has been negative over the past three years. However, for the purpose of the actuarial review, a long-term assumption is required regarding general earnings increases.

G.27  We have maintained the long-term assumption for real earnings growth at 1.5% a year

(in excess of price increases), as was adopted for the 2010 review, and consistent with long-term historic economic experience.

G.28  The relatively short period of pay restraint since 2010 does not, by itself, provide

sufficient evidence to warrant altering this assumption.

Alternative approaches to setting the discount rate

G.29  The rationale given above includes the assumption that the Fund's current investment

strategy will continue for the long term. Given the high allocation to return-seeking assets, an alternative approach would be to assume that the allocation to return- seeking assets declines over time. This might be to reflect an actual long-term expectation that this will happen, or simply to introduce an element of prudence into the assumptions.

G.30  All other things being equal, such an approach would reduce the discount rate and

increase the assessed value of the liabilities, thus leading to a smaller surplus (or bigger deficit). Conversely, a more sophisticated approach to considering how discount rates might vary over time might justify placing more weight on the investment advisors' views on the short-term equity risk premium, which would offset (perhaps completely) the effect of a lower allocation to return-seeking assets.

G.31  We have not considered such approaches further at this stage, but would be happy to

do so, particularly if the Board had any expectation that the investment strategy might change over the long term.

Demographic assumptions

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

twelve years in order to inform the decision on suitable valuation assumptions. The full details of this analysis can be found in my paper of 19 August 2014, which was presented to the Management Board at their meeting of 7 October 2014.

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

adopted should be the same as those of the 2010 review except for:

> Future improvements in mortality, to reflect the release of a new set of national projections by the Office for National Statistics (ONS) in 2012.

> Ill health pensioners' age adjustment (compared to the mortality assumption used for normal health pensioners) which has been reduced from the +4 years assumed at the 2010 valuation to +3 years for this valuation, to better reflect the experience of the Fund.

Assumptions for current and future pensioners

H.3  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

Men  Women

Age  Rate  Age  Rate  Age  Rate  Age  Rate

Under 23  29  66  849  Under 23  36  66  622

23  44  67  850  23  51  67  617 24  73  68  848  24  80  68  610 25  101  69  844  25  109  69  600 26  129  70  840  26  138  70  590 27  158  71  836  27  166  71  580 28  187  72  832  28  193  72  571 29  217  73  826  29  219  73  556 30  247  74  818  30  246  74  535 31  277  75  810  31  272  75  514 32  306  76  802  32  299  76  493 33  335  77  794  33  325  77  473 34  365  78  785  34  350  78  449 35  395  79  775  35  375  79  420 36  425  80  765  36  400  80  391 37  454  81  754  37  425  81  361 38  482  82  744  38  446  82  331 39  509  83  726  39  464  83  302 40  536  84  702  40  482  84  274 41  563  85  678  41  500  85  246 42  589  86  654  42  519  86  218 43  612  87  629  43  539  87  191 44  632  88  598  44  561  88  167 45  653  89  562  45  583  89  145 46  673  90  525  46  605  90  124 47  694  91  489  47  627  91  103 48  710  92  452  48  645  92  82 49  722  93  414  49  660  93  66 50  734  94  375  50  675  94  54 51  746  95  336  51  690  95  42 52  758  96  297  52  705  96  30 53  770  97  258  53  713  97  18 54  781  98  226  54  714  98  11 55  792  99  200  55  714  99  8 56  803  100  174  56  715  100  5 57  813  101  150  57  715  101  3 58  821  102  126  58  708  102  1 59  826  103  102  59  693  103  0 60  831  104  75  60  678  104  0 61  836  105  50  61  663  105  0 62  841  106  30  62  647  106  0 63  844  107  15  63  637  107  0 64  846  108  5  64  632  108  0 65   847   Over 108 0   65   627   Over 108 0

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

Men  Women

Age  Rate  Age  Rate

Below 20  45  Below 20  0 21  93  21  0

22  98  22  50 23  103  23  100

24  108  24  100 25  113  25  100

26  118  26  100 27  123  27  100

28  125  28  99 29  125  29  97

30  125  30  95 31  125  31  93

32  125  32  91 33  122  33  87

34  116  34  81 35  110  35  75

36  104  36  69 37  98  37  63

38  93  38  58 39  88  39  54

40  83  40  50 41  79  41  46

42  75  42  42 43  71  43  39

44  68  44  37 45  65  45  34

46  62  46  32 47  61  47  29

48  60  48  27 49  59  49  25

50  58  50  23 51  57  51  21

52  56  52  19 53  55  53  17

54  54  54  16 55  53  55  14

56  52  56  13 57  51  57  11

58  49  58  9 59  47  59  8

60  43  60  7 61  39  61  6

62  35  62  5 63  31  63  4

64  27  64  3 65  23  65  3

66  18  66  2 67  13  67  2

68  8  68  1 69  4  69  1

70  1  70  0 Over 70  0  Over 70  0

Assumptions for deferred members

H.4  The same assumptions as for pensioners will be adopted, except as shown below.

Early and late retirement

H.5  It is assumed 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.6  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.7  Active members have been valued using the same assumptions as pensioners and

deferred members above, except as shown below.

H.8  Table H.5 shows the assumed annual rates of death of active members before

retirement age.

H.9  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 two year's service or more than two years' service.

H.10  Table H.7 shows the assumed annual rates of retirement from the Fund on the grounds

of ill health.

H.11  Table H.8 shows the assumed scale of average career progression promotional pay

increases active members can expect.

Table H.5: Death in service

Men  Women

Age  Rate per 100,000  Age  Rate per 100,000

lives  lives

Under 24  15  Under 24  15 24  18  24  15

25  20  25  15 26  20  26  19 27  20  27  23 28  20  28  23 29  20  29  23 30  20  30  23 31  23  31  23 32  25  32  26 33  25  33  30 34  28  34  30 35  30  35  34 36  33  36  38 37  35  37  38 38  38  38  41 39  43  39  45 40  48  40  49 41  53  41  53 42  58  42  56 43  63  43  60 44  70  44  64 45  80  45  68 46  90  46  71 47  100  47  79 48  110  48  86 49  123  49  94 50  138  50  101 51  153  51  113 52  168  52  128 53  183  53  143 54  198  54  158 55  215  55  173 56  235  56  188 57  255  57  206 58  275  58  229 59  298  59  251 60  323  60  274 61  348  61  296 62  375  62  323 63  405  63  356 64  435  64  394 65  468  65  435

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

Men  Women

Age  Less  One to  More than  Age  Less  One to  More than than 1  two  two  than 1  two  two

years'  years'  years'  year's  years'  years' service  service  service  service  service  service

Under 22  80  66  53  Under 22  80  84  88 23  82  66  53  23  84  84  88

24  86  67  53  24  92  85  87 25  90  69  52  25  100  88  87

26  94  71  52  26  108  90  84 27  98  72  50  27  116  92  80

28  98  72  48  28  116  94  76 29  94  71  46  29  108  92  72

30  90  68  44  30  100  86  68 31  86  65  42  31  92  81  65

32  82  62  40  32  84  76  63 33  80  59  38  33  78  71  61

34  80  57  36  34  74  67  58 35  80  57  34  35  70  63  56

36  80  56  32  36  66  59  53 37  80  55  31  37  62  54  47

38  80  55  30  38  61  50  42 39  80  54  29  39  63  47  37

40  80  54  28  40  65  46  32 41  80  54  28  41  67  46  29

42  80  53  27  42  69  47  28 43  81  53  26  43  72  47  26

44  83  53  25  44  76  48  25 45  85  53  24  45  80  49  23

46  87  54  23  46  84  51  23 47  89  54  22  47  88  53  23

48  91  54  21  48  94  55  23 49  93  54  19  49  102  58  23

50  98  56  18  50  114  64  23 51  116  66  19  51  130  73  25

52  140  79  21  52  147  82  26 53  164  89  22  53  163  92  28

54  191  100  23  54  177  101  29 55  217  112  24  55  202  113  32

56  252  130  25  56  271  146  37 57  303  155  26  57  410  215  42

58  337  219  27  58  500  343  47 59  350  275  28  59  500  500  53

60 plus  0  0  0  60 plus  0  0  0

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

Men  Women

Age  Rate  Age  Rate

21  0  21  3 22  0  22  3 23  0  23  5 24  4  24  6 25  4  25  8 26  4  26  9 27  6  27  12 28  9  28  17 29  13  29  21 30  16  30  24 31  20  31  29 32  26  32  34 33  32  33  39 34  41  34  44 35  50  35  50 36  58  36  55 37  69  37  61 38  85  38  66 39  102  39  74 40  120  40  83 41  138  41  93 42  158  42  107 43  193  43  128 44  246  44  160 45  310  45  195 46  372  46  235 47  435  47  278 48  538  48  330 49  702  49  398 50  866  50  476 51  996  51  559 52  1130  52  645 53  1270  53  735 54  1400  54  833

Table H.7: Ill health early retirements per 100,000 lives (continued)

Men  Women

Age  Rate  Age  Rate

55  1487  55  935 56  1553  56  1037 57  1603  57  1115 58  1629  58  1202 59  1648  59  1320 60  1958  60  1440 61  2330  61  1560 62  2440  62  1680 63  2520  63  1800 64  2600  64  1920 65  0  65  0

Table H.8: Promotional Salary Scale

Men  Women

Age  Rate  Age  Rate

18  80.51  18  81.27 19  83.27  19  83.88

20  86.05  20  86.52 21  88.84  21  89.18

22  91.63  22  91.87 23  94.43  23  94.56

24  97.22  24  97.28 25  100.00  25  100.00

26  102.77  26  102.73 27  105.51  27  105.46

28  108.23  28  108.20 29  110.92  29  110.92

30  113.57  30  113.64 31  116.18  31  116.35

32  118.74  32  119.05 33  121.24  33  121.72

34  123.53  34  124.05 35  125.61  35  126.03

36  127.45  36  127.62 37  129.21  37  129.18

38  130.87  38  130.72 39  132.42  39  132.23

40  133.88  40  133.72 41  135.22  41  135.17

42  136.45  42  136.58 43  137.56  43  137.97

44  138.56  44  139.32 45  139.43  45  140.63

46  140.18  46  141.70 47  140.80  47  142.78

48  141.42  48  143.87 49  142.05  49  144.97

50  142.68  50  146.08 51  143.31  51  146.68

52  143.95  52  147.20 53  144.59  53  147.64

54  145.23  54  147.98 55  145.55  55  148.16 Above 55  145.87  Above 55  148.16

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 2010 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. These rates are summarised in Table I.1.

Table I.1: Contribution rates

I.3  Regulations 9(2) of the Teachers' Superannuation (Existing Members) (Jersey) Order

1986 and 14(1) of the Teachers' Superannuation (New Members) (Jersey) Order 2007 state that employer's will contribute 16.4% of pensionable salary.

I.4  I understand that employers will continue to pay 5.6% of pensionable salary towards

reducing the pension increase debt, with the remaining 10.8% allocated to covering the cost of future accrual. There is therefore an underpayment of the standard contribution rate.

I.5  The assessed contribution rates include an allowance for pension increases.

I.6  I have also compared the assets of the Fund, including the present value of future

contributions in respect of current members, with the liabilities, including liabilities not yet accrued to current active members. These calculations all include in full the liability for pension increases, including increases on pensions accrued before 1 April 2007. This calculation assumes that the Fund will continue to operate and accept new members for the foreseeable future.

I.7  The results of this valuation are summarised in Table I.2 below. This includes future

standard contributions as an asset and all expected future service of current active members as a liability. For the future contribution asset I have taken the members contribution rate to be 5.7% based on the current average member contribution rate across both existing and new members, and the employer contribution rate to be 10.8%.

Table I.2: Balance sheets - total service

Value of  2013 result  2010 result

£ million  £ million

Liabilities (including pension increases)

Pensions in payment  216.6  168.9

Deferred members  39.8  42.4

Active members – past service  181.9  183.5

Active members – future service  119.9  111.3 Total liabilities  558.1  506.1 Assets

Future contributions 86.1  94.5 Pension increase debt  93.2  91.6 Investments  386.2  320.1 Total assets  565.5  506.1 Surplus / (deficiency)  7.4  0 Funding level  101%  100%

I.8  Table I.3 below shows the same results but without the accrual and contributions in

respect of future service. This provides an alternative perspective on the current funding position, for information only.

Table I.3: Balance sheets – past service only

Value of  2013 result  2010 result

£ million  £ million

Liabilities (including pension increases)

Pensions in payment  216.6  168.9

Deferred members  39.8  42.4

Active members – past service  181.9  183.5 Total liabilities  438.3  394.8 Assets

Pension increase debt  93.2  91.6 Investments  386.2  320.1 Total assets  479.4  411.7 Surplus / (deficiency)  41.1  16.9 Funding level  109%  104%

I.9  After taking into account the pension increase debt payments which are expected to be

paid by the States of Jersey there is a small surplus in the Fund. If the experience of the Fund is exactly in line with the assumptions made and all the recommended contributions are paid on schedule then there would be the same surplus at the next actuarial review. However, the Management Board should be aware of the uncertainties involved. In reality, due to random variation, the experience of the Fund is unlikely to be completely in line with assumptions and unanticipated events can occur.

I.10  Keeping the employer's contribution rate at 10.8% instead of implementing the new,

higher rate of 13.4% is expected to lead to a gradual worsening of the Fund's financial position.

I.11  The benefit cashflows of the Fund are linked either to Jersey inflation (for pensioners,

deferred pensioners and active members benefits for the period after withdrawing or retiring from the Fund) or (for current active members for the period before leaving the Fund) linked to individual salary increases. On average these increases will be in line with Teachers overall inflationary pay awards, if the relative salary distribution of members remains constant.

Sensitivity of results

I.12  In reality the future experience of the Fund is unknown, and so the future financial

position is uncertain. The results of an actuarial calculation are sensitive to the choice of assumptions made. The Management Board should be aware of the potential impact of changing the key valuation assumptions, which is broadly equivalent to the impact of future experience differing from expected.

I.13  Three of the most important valuation assumptions are:

> The discount rate (net of price inflation)

> The level of general salary inflation (net of price inflation)