Report of the Actuary for 2005/06 Accounts

 

 

Actuarial statement for the purpose of Regulation 77 of the Local Government Pension Scheme Regulations (Northern Ireland) 2002.

 

As required by regulations, an actuarial valuation of the Fund’s assets and liabilities was carried out as at 31 March 2004. This is part of a series of three yearly valuations.

 

Summary of Methods and Assumptions used

 

The Common Contribution Rate of 17.3% of pay (2001:4.6% of pay) was calculated on the Projected Unit Method. This assesses the cost of benefits accruing to existing members during the year following the valuation, allowing for future salary increases. The resulting contribution rate is adjusted to allow for any difference in the value of accrued liabilities (allowing for future salary increases) and the market value of assets. Any deficit is spread over a period of 20 years.

 

A higher contribution rate has been certified for one individual employer that is closed to new entrants, calculated under the Attained Age Method. This method assesses the cost of benefits accruing to existing members during their anticipated period of future membership allowing for future salary increases. In this case, the resulting contribution rate is adjusted by spreading the past service deficit over a period of 15 years.

 

Since I have taken assets into account at their market value it is appropriate for me to take my lead from the market when setting the financial assumptions used to value the ongoing liabilities, to ensure compatibility of the asset and liability valuation bases. The anticipated returns on assets used to place capital value on the stream of projected liability payments, are set by reference to the prevailing returns available on investing in the Government bond market. Long-term returns from equities of 2% a year more than Government bonds are anticipated.

 

The key financial assumptions adopted for this valuation were as follows:

 

Financial Assumptions

March 2004

 

% p.a.

% p.a.

 

Nominal

Real

Minimum risk rate of return

4.7&

1.8%

Investment Return

 

 

Equities

6.7%

3.8%

Government Bonds

4.7%

1.8%

Property

5.7%

2.8%

Discount Rate = (75% Equities, 18% Gilts, 75 Property)

6.3%

3.4%

Pay Increases

4.4%

1.5

Price Inflation / Pension Increases

2.9%

-

 

 

Full details of the method and assumptions are described in the valuation report dated March 2005.

 

 

2004 Valuation Results

 

The 2004 valuation revealed that as 31 March 2004, the Fund’s assets as a whole were sufficient to meet 85% (2001:121%) of the liabilities accrued up to that date. Assets were taken into account at their then market value of £2,152m (£2,376m smoothed market value at 31 March 2001).

 

The Committee agreed to allow employers to phase in the contribution rise – for most employers from 4.6% to 17.3% of pay – over a period of up to 6 years.

 

The minimum employer contribution rates are set out in the Rates and Adjustments certificate included in our valuation report. For most employers, they are as follows:

 

 

Minimum Employer Contribution Rate

2004/05

2005/06

2006/07

2007/08

4.6%

8.5%

11%

13%

 

 

Unless experience up to the 2007 valuation is better than anticipated in the 2004 valuation assumptions, further contribution rises would be expected, taking the contributions up to around the level of the Common Contribution Rate of 17.3% of pay by 2010/11. If experience is in line with the 2004 valuation assumptions and employers pay the minimum contribution rates, I would expect the funding level to fall by around three percentage points.

 

Employers can pay more than the minimum rate if they wish. Doing so would reduce the risk of further contribution rises after the 2007 valuation.

 

None of these figures allow for the potential savings which would flow if the Rule of 85 was abolished.

 

Experience Since 31 March 2004

 

The financial experience of the Fund since the 31 March 2004 valuation has been mixed, with significant rises in the value of equity investments but, partially offsetting this, falls in long-tem rates of interest.  Also due to the phasing-in of contribution rate increases, employers are currently paying insufficient contributions to meet the cost of benefit accrual.  As at May 2006, I would expect the combined effects of the changes in investment market conditions, the inclusion of a reserve for mortality improvement and the phasing in of employer contributions to result in an increase to employer contribution rates.  As a result, if a valuation was carried out now, I would expect to recommended employer contribution rates to be higher than those recommended at the 31 March 2004 valuation.

 

Copies of the valuation report are available on request from the Northern Ireland Local Government Officers’ Superannuation Committee, the administering authority to the Fund. The next valuation of the Fund will be carried out as at 31 March 2007.

 

 

W Douglas B Anderson                                                                        Hymans Robertson LLP

Fellow of the Institute of Actuaries                                                      20 Waterloo Street

For and on behalf of Hymans Robertson LLP                                      GLASGOW

16 May 2006                                                                                         G2 6DB