Reporting of the Public Employees Retirement Scheme (PECRS) and treatment of any deficit

1240/5(2934)

WRITTEN QUESTIONS TO THE MINISTER FOR TREASURY AND RESOURCES BY SENATOR B.E. SHENTON

ANSWER TO BE TABLED ON TUESDAY 4th JULY 2006

Questions

1. Would the Minister inform memberswhyhereported to members that the Public Employees Contributory Retirement Scheme(PECRS) deficit asat 31st December 2004, had fallen to£17,400,000,whereas in his reply to my written questionon6thJune, 2006, heacknowledged that the deficit calculated underrecognised reporting standardswasinfact £158,441,000 - a difference of £141,041,000.
2. The notesto the FinancialReportand Accounts 2005 state that The Scheme is not a conventional final salary scheme in that the employers are not responsible for meeting any deficiency in the Scheme'. Would the Minister inform members –

( a ) w h e ther the scheme is now stand-alone' and, if so, that the States will not meet the cost of any

future deficits?

( b ) w h e ther PECRS members have been made aware of the possibility of any future dramatic cut in

benefits resulting  from  large  deficits  to  the  scheme caused  through  inflation  and  poor  investment returns?

(c )  of  the  past  service  liability,  under  FRS17,  at  the  time  the  States  agreed  the  Public  Employees

(Retirement) (Additional Contributions – Amendments) (Jersey) Regulations 200- (P.190/2005) on 27th September 2005, which confirmed responsibility for that liability arising from the restructuring of the PECRS arrangements with effect from 1st January 1988?

Answers

1. T h e  actuarial  valuation  as  at  31st  December  2004,  published  in  March  2006,  values  the  deficit  at £17,400,000.

T h e total deficit as at 31st December 2005, and calculated in accordance with FRS17, is £158,441,000.

The equivalent value as at 31st December 2004, is £213,095,000. Neither of these figures includes pre- 1987 debt.

T h e r e are two main reasons for the difference between the actuarial calculation and the total deficit

calculation. Of these, the more significant is the fact that the two sets of figures are evaluated using different actuarial assumptions. In particular, the valuation position is evaluated using an assumed future rate of return on assets which is set having regard to the asset classes in which the PECRS is invested. In contrast, the total deficit figure is derived from figures produced in accordance with accounting standard FRS17. This accounting standard requires the assumed rate of return to be derived from the corporate bond market, despite the fact that the PECRS invests predominantly in other asset classes such as equities. Because the returns available on corporate bonds are generally lower than might be assumed on equities,  future  investment  returns  are  assumed  to  be  lower  for  the  total  deficit  calculation.  The conclusion, therefore, is that a higher level of assets is required to meet the liabilities, and hence the deficiency is shown to be higher than under the valuation calculation.

T h e second key reason for the difference is that the two calculations are actually comparing different things. The valuation calculation looks at the expected cost of all of the benefit promises made by the

Fund, for both service prior to the measurement date and also for service after the measurement date, including the future service for new entrants to the Scheme. This is compared with all assets, including the pre 1987 debt, as well as the expected level of future contributions. The difference between the two

amounts gives the valuation surplus or deficiency.

In c o ntrast, the total deficit calculation is a more simple comparison of the expected cost of all promises

made in respect of service before the measurement date against the value of all assets, including the pre 1987 debt. This calculation, therefore, excludes the expected costs of promises in respect of service after the measurement date, and expected future contributions.

It s h o uld be noted that the total deficit calculation is slightly inconsistent in that the value of the pre 1987

debt taken into account is as certified by the Actuary, rather than calculated using the same assumptions required for accounting purposes. As referred to in the answer to part 2(c) below, the assumptions used to evaluate the debt for certification purposes do not necessarily match those used for accounting purposes. The value of the debt based on the assumptions used for accounting purposes is not readily available. This inconsistency does not alter the central issues discussed above.

2(a) T he Scheme is "stand alone" and not a conventional final salary scheme. The employers are not

responsible for meeting any deficiency in the Scheme other than the pre-1987 debt. Accordingly, the States has no obligation to meet the cost of any deficits in PECRS, which is why it has not recognised a liability in accounts in accordance with FRS17.

2. A n extensive consultation exercise, including a thorough explanation of the revised benefits and associated transference ofriskofmovingto the newscheme,was undertaken when existing members were given the choice as to whether they wished to remainunder the 1967 Regulations ortransfer into the new scheme.

I n fo r mation provided to both new and existing members of the current scheme includes the following

statement on Pension Increases:

" Pensions in payment and deferred pension are reviewed each January with the aim of providing increases in line with the rise in the Jersey Cost of Living Index. Proportionate increases are awarded for pensions which came into payment and for deferred pensions which came into existence part way through the previous year.

I n creases in line with rises in the Jersey Cost of Living Index cannot, however, be guaranteed and are

subject to the financial condition of the Scheme remaining satisfactory."

The following information is provided regarding the financial condition of the scheme:

" I f, at a future valuation of the Scheme, the Actuary advises that its financial condition is no longer satisfactory, proposals agreed by the Committee of Management may be submitted to the States for members contributions and/or employer's contributions to be increased and/or member's benefits to be reduced which may affect pension increases."

3. C alculations in accordance with accounting standard FRS17 bear no relation to the pre-1987 debt calculation .Themethodology for calculating the pre-1987 liability wasexplainedbythe Minister in answer to a question by Senator B.E. Shenton on 6th June 2006, (part (d)).Asit is calculated on a future revenue stream basedon 2% ofpayroll increased by the value of future pay awards, the capital value will fluctuate.

A s a l so stated in answer to the same question (part (a)) on the 6th June 2006, the calculation of the value

of the pre-1987 debt at 31st December 2005, was £123,152,000. No equivalent valuation has been calculated as at 27th September 2005, but it is assumed that the figure would have been broadly similar.

It would appear from the questions tabled today, and on 6th June 2006, that because of the undoubted complexity of this issue there may be some misunderstandings that are, perhaps, the source of unnecessary anxiety. It might have been simpler for the Senator to contact me or Treasury officers and to express his concerns, which could then have been dealt with. I remain happy to offer the Senator, or other interested members, the chance to meet and to discuss these complex PECRS issues, in order to assist their understanding and address their queries.