1. TUC Pensions: From Reform to Reality Conference
Scheme Funding
TUC
Pensions: From Reform to Reality Conference

2. TUC Conference Reform to Reality
Reality is here for SSF, it is now and the future
Interactive presentation of the issues Trustees are facing

3. Aims of the presentation
To increase understanding of roles
To consider and discuss challenges
Emphasis on approach and not answer

4. Scope of the workshop High level review Focus on key issues
To involve all participants
Not a test

5. Trustee knowledge and understanding
Scope document available (on our website under ‘Information for trustees’)
E-learning: first modules of ‘Trustee toolkit’ released, funding modules expected autumn 2006

6. Format of case study
Break out topic – Agreeing appropriate recovery plan
Feedback from 2 tables
Plus other comments
Further Q & As at end of the session
Regulator is not here to give answers, but to give support in considering the issues

7. Timing of presentation and case study
Scheme Specific Funding – 15 min
Presentation on case study – 15 mins
Breakout – 20 mins
Report back – 10 mins
Q & As – 10 mins

8. The future is now… MFR phasing out SSF phasing in
But impacts decision making now…
…even before full transition

9. The future is now… Trustee role central:
Handling conflicts of interest
Setting funding target
Agreeing recovery plan
Adapting to changes
Scheme is a key stakeholder in business

10. Therefore…
Great expectations

11. What is SSF? Scheme specific funding: A new approach to funding
Assets to cover technical provisions
Assumptions specific to your scheme and employer
Amount to provide for your scheme’s liabilities

12. What is SSF? If insufficient funds, recovery plan needed:
To reach technical provisions
Over recovery period
Period specific to your scheme and employer
Payment profile tailored to your scheme and employer

13. The Pensions Regulator’s approach
Generally trustees and employers to agree
Regulator’s approach contained in the regulator’s statement issued in May 2006
Triggers referred to
One of regulator’s tools for identification
Other methods available
Our triggers are not your targets
Our approach on no-names contact…

14. Practical example Case study
Breakout - agreeing the appropriate recovery plan
Opportunity to apply principles

15. Case study FiltraCure plc and FiltraCure pension scheme FiltraCure plc is a fictitious company, the details of which we have created for this workshop. No resemblance to any other entity is intended and, if any, this would be entirely coincidental.

16. FiltraCure plc Introduction
Employer
status
Scheme
Trustees

17. Case study FiltraCure plc
Medium sized plc
Pharmaceuticals
Approx 2,000 staff
Turnover of £350m year to 30 Sept 2005

18. Case study FiltraCure plc
Developing new drug to treat dust allergy
Seeking new worldwide licences
Delays in licensing
Competition issues
Currently restructuring

19. Case study FiltraCure pension scheme
3,800 members
Single employer defined benefit scheme
Closed to new members two years ago
MFR funding level 95%
Contributions £6m per annum including £1m to past deficit
Rules give trustees power to set schedule of contributions with agreement of employer

20. Case study FiltraCure pension scheme Trustee Board
Three company-appointed trustees:
finance director (chair of trustees)
company secretary
human resources director
Three member-nominated trustees:
production line manager
research manager
pensioner and ex-employee

21. Trustee conflicts
Can arise
Vital to identify early on
Must act on
Introduce procedures to facilitate
Where appropriate seek advice on how to manage
Guidance on our trustee web pages

22. Trustee conflicts
When making decisions:
Must be in best interests of scheme members
Other duties and interests must be set aside
In particular:
Must fulfil general and statutory duties
This includes SSF

23. Understanding covenants

24. Covenants
Covenant
Employer’s financial position…
Its prospects…
…and willingness to fund benefits
Therefore
Essential for trustees to assess covenant…
…with appropriate professional advice

25. Understanding covenants
Financial position
Existing cash resources
Credit ratings
Prospects
Future forecast cash resources
Change in priority of free cash distribution
Alternative ability to raise funds in market

26. Understanding covenants
Willingness
Negotiation between sponsor and trustees
Back up support of new legislation and regulatory powers

27. Competing financial demands
Financial position
Competing financial demands
Not constrained
Soft constrained
Hard constrained
Few
Many

28. Technical provisions

29. Trustee deliverables Input from Trustees Employers Iterative process
Methods
and
assumptions
Statement
of funding
principles
Actuarial
valuation
Recovery
plan
Schedule of
contributions
Input from
Trustees
Employers
Actuary
Other advisers
Iterative process
15 months to complete

30. Technical provisions
Investment return
(Investment mix)
(Employer covenant)
Applied
on scheme
specific
basis
Technical
provisions
Mortality rates Salary increases RPI Member profile

31. Prudence Technical provisions
Employer ability to make good shortfall (if any)
Risk adopted in assumptions
Risk adopted in assumptions

32. Breakout topic Recovery plans

33. Breakout topic The recovery plan
The goal
To eliminate the shortfall
As quickly as employer can reasonably afford

34. Breakout topic The recovery plan
Two issues
The period to meet the shortfall
The structure of payments over period

35. Breakout topic The recovery plan
Commonly
Hard constrained
Soft constrained
Non constrained
Time to eliminate shortfall

36. Breakout topic The recovery plan
Factors include
The membership profile
The employer’s business plans and covenant
The position on scheme winding up
The position on potential insolvency

37. Breakout topic The recovery plan
Assume £40m funding shortfall
Discuss competing demands on funds
Review recovery plan options – length and profile
Feedback

38. Breakout topic Three key questions
How would you balance the competing demands?
What length recovery plan?
How would the payments be structured over time?

39. Scheme specific funding key messages
Trustee role vital
Need to assess employer covenant
Financial assumptions specific to scheme and employer
Recovery period and payment structure also specific
Our triggers are not your targets

40. Scheme specific funding key messages
Eliminate shortfall as quickly as employer can reasonably afford
Conflicts need to be identified and managed

41. Scheme specific funding key messages
The Pensions Regulator’s role
Regulator is referee not player
But will intervene where appropriate
Powers to impose

42. Any questions?