NILGOSC
NILGOSC
Circular
05/2004
12 August 2004
To: All Employing Authorities –
Chief Executive (Copy to Payroll Manager)
Dear Colleague
As you should already be aware, the latest three yearly
valuation of the NILGOSC fund is being carried out as at 31 March 2004. This will lead to revised contributions
being payable from April 2005. The
Committee has appointed Hymans Robertson Consultants and Actuaries to carry out
this actuarial valuation. The
Committee has already met with the Actuaries to discuss the 2004 valuation and
I write to help reduce the uncertainty for setting your budgets for 2005/06.
Background
At the 2001
Actuarial Valuation of the Scheme, the then Actuary estimated that the required
employers’ contribution rate in respect of benefits accruing in the future was
11.9% of payroll. The Actuary also
estimated that, by virtue of the surplus in the Fund which he reported at 31
March 2001, the contribution rate for employers in the Fund prior to 31 March
1999 could continue at 4.6% of payroll for a further three years, a rate which
has remained consistently and significantly below the cost of accruing benefits
for many years. Agreed contributions for other employers were also below the
cost of benefits accruing.
As you should
be aware from my paper of October 2003 (Circular 07/2003), the Fund has
suffered from reduced investment returns arising from the fall in global stock
markets and the return on the Scheme’s assets since 2001 has been significantly
lower than the long-term returns anticipated in valuing the liabilities in
2001.
Continuing
improvements in life expectancy also mean that the assumptions used to value
future pensions for the 2004 valuation will place a higher value on the
Scheme’s liabilities. This causes
further upward pressure on contributions.
Expectations
for 2004 Valuation
The surplus at
31 March 2001 is expected to be replaced by a deficit as at
31 March 2004. As employers have
been paying contributions at a lower rate than that required to meet the cost
of benefits accruing over the last three years, the decline in the funding
level of the Scheme has accelerated to the extent that a significant increase
in the employers’ contributions is expected to be required. The exact increase will depend on a variety
of factors including any changes in the structure of the employers’ liabilities
since 2001, in particular changes in the proportions of active, deferred and
pensioner members, the assumptions adopted, in particular, the anticipated
future returns from the Scheme’s equity investments, and the period over which
deficit recovery is targeted.
Implications
for Employer Contributions
In the
circular I issued in October 2003 (Circular 07/2003), I indicated that there
would be increases in contributions for employers with effect from 1 April 2005
of the order of 2% to 4% of pay for at least three years, with a larger rise in
the first year. Despite the modest
recovery in equity markets since last autumn, the outlook for employer
contributions has not improved.
Our new
Actuary, Douglas Anderson of Hymans Robertson, has confirmed that he is happy
to phase in the contribution rise, but has stressed that as long as
contributions remain significantly below the cost of accruing benefits, the
funding level would be expected to continue falling.
I am conscious
that employers need to budget for any increases at an early stage. It is
proposed for employers currently paying 4.6% of payroll in the current year to
fix the employer contribution rates at 8.5% of pay for the year from 1 April
2005 to 31 March 2006. Where an employer has been paying a higher rate
than 4.6%, the following rates will apply:
Current Rate Proposed Rate
7.5% 11.5%
8.3% 12%
11.9% 16%
When the
results of the 2004 valuation are available the Actuary will set the rates for
2006/07 and 2007/08. It is possible
that contribution rises will be phased in over a period longer than three
years, particularly if the rise in the rate is to be contained within the 2% of
pay to 4% of pay a year level.
Employer
Consultation Meeting on 16 December 2004
The valuation
results will be presented to the Committee on 23 November. In order that you may understand the results
of the valuation and the implication of future contribution rate increases,
there will be a meeting for employers on 16 December at Templeton House at
10.30 am. A further meeting may be held in the afternoon if the numbers wishing
to attend cannot be accommodated in the morning. At this meeting, Douglas Anderson and Alison Murray will present
the 2004 valuation results. You will have the opportunity to share your views
with them. Please could you let me know
by 30 September 2004 who will be attending from your organisation.
In the
meantime, if you have any questions, please do not hesitate to contact me.
Yours
sincerely
Deane Morrice
Secretary