The staff pension scheme — questions answered
As a result of the many comments received through the letters pages of The Journal, the trustees of the Royal Pharmaceutical Society’s staff pension scheme and Bernard
Kelly, the Society’s director of finance, comment on the current situation facing the scheme
Questions answered by
the trustees of the Society’s staff pension
scheme
Who are the scheme’s trustees? The trustee board comprises six
individuals chosen by the Council and by the scheme members. The trustees
have extensive knowledge of pensions and have a legal duty to keep fully
informed and up to date with relevant legislation and how this affects
the Society’s scheme. Knowledge and experience of the Society and
understanding of the current environment helps us as trustees to discharge
our duty.
What are the issues that affect the scheme? The high cost of final salary
schemes has become an issue for employers throughout the country for
a number of reasons:
Legislation There have been two major pieces of pension legislation
in the past 13 years, the Pensions Act 1995 and the Pensions Act 2004,
which both introduced enormous changes, causing a steady flood of costly
regulation. This has created greater protection for pensions and gives
us a more rigorous legal framework in which to work.
The trustees must manage the scheme in accordance with strict procedures.
The Society, as employer, is also bound by equivalent regulations. For
example, it is now a requirement that, if a solvent employer winds up
its final salary pension scheme, it must ensure that the scheme has sufficient
funds to meet the full costs of its members’ pension benefits.
Legally, any shortfall between the amount of the scheme’s assets
and the cost of securing all final pensions has to be paid, in full,
by the employer.
Longevity People are living longer and, therefore, the cost of providing
pensions has increased dramatically.
Economic climate Returns on investments are unpredictable and subject
to global volatility.
Have the trustees discussed the challenges facing
the scheme with the Society? Yes. The scheme had a valuation in 2003, which showed a deficit
in the pension fund. But, because of the reasons stated above, it is
common for private sector pension funds to suffer shortfalls and it is
normal for companies to take a long-term view in managing deficits.
At that stage there was no reason to press the Society to meet the deficit
with any urgency. Since then the position has changed as a result of
the Pensions Act 2004 and the planned demerger of the Society.
In this new and uncertain situation, the trustees need to be alert to
how any proposals could or would affect the scheme and the ability of
the Society to continue to meet its costs. We can no longer take a long-term
view and must look to how the deficit can be met with a short-term plan.
How much is the deficit in the scheme? This is currently being calculated.
This year is the first time that a triennial valuation of the scheme
is being undertaken by our actuary under the new regime of regulatory
rules, which is much more rigorous than before. A valuation is a snapshot
of the position of the scheme on a particular date.
This valuation will tell us the actuarial value of the scheme’s
assets and the cost of its pension liabilities as at 31 December 2006,
highlight any deficit and determine what on-going funding is required
to support those liabilities. The trustees and Society are working together
to finalise this by the pensions
regulator’s deadline of March 2008, by
which time we must reach agreement about the terms and timing to eliminate
any
shortfall.
If the pensions regulator is not happy with our plan to make good the
deficit, it can impose its own plan on the Society.
Questions answered by Bernard Kelly, director of finance at the Society
What is the background to the Society’s scheme? The Society’s
final salary pension scheme was established in the early 1960s. In common
with all responsible employers at the time, the Society saw it as a major
factor in attracting and retaining staff. The scheme was closed to all
new entrants in January 2003 and, since then, the Society has offered
a stakeholder scheme to new members of staff.
This year, as well as addressing the unavoidable cost of the deficit
in the scheme, the Society has had to come to terms with the prospect
of setting up the new regulatory body for pharmacy.
Like the trustees, we have legal obligations in respect of the scheme
and the scheme members. We also have obligations to the Society’s
members which means, first and foremost, controlling costs.
What is the Society’s take on the deficit? A simple definition
of a pension scheme deficit is the difference between the assets held
by the scheme and its liabilities in terms of pension rights accrued
by the scheme members.
In the Society’s case, this is not the result of mismanagement
on the part of the trustees, nor is it something that has occurred overnight.
Most private sector pension schemes like the Society’s do not have
the luxury of being risk-free and few have guaranteed protection against
the ravages of inflation. A combination of higher taxes, falling investment
returns and the fact that people are living longer
affects both the employer’s cost of providing a final salary scheme
and the benefits it can afford to provide. These factors have pushed
the majority of company schemes into deficit and forced many to close.
In the private sector, there is legislation to ensure that all pension
benefits provided by occupational pension schemes, like the Society’s
scheme, must have real assets in place at all times specifically and
solely to meet the accrued pension liabilities.
What has the Society been doing to manage the deficit? The Society has
been steadily working with the trustees to make good the shortfall in
the scheme’s funds through investment returns and additional contributions.
While managing the deficit, the Society is liable to continue to meet
the cost of pension benefits that have already accrued and future benefits
as they accrue.
It has been looking at how the costs of future benefits might be controlled,
as there is less scope to reduce the cost of the past service benefits.
We are about to start a formal consultation with scheme members about
possibly reducing the value of the benefits to be accrued in future years.
Meanwhile we have been considering with our advisers what might be done
to contain the past service liability (the deficit).
The trustees have been receptive to our ideas and agreed we should continue
to explore all possibilities.
Is the Society fee increase directly linked to the
scheme deficit? The
deficit in the scheme is one of a number of factors that have had an
impact on the Society’s reserves and all of these were taken into
account when the Council considered the fee increase for 2008.
The Society’s Treasurer has told members why the Council has proposed
the fees increase and restoring our reserves to levels similar to those
held in prior years is one part of this.
Last year, mindful of the forthcoming valuation, we made a special contribution
to the scheme of £1.9m from Society reserves. It has been implied
that we are proposing to do the same again this year. This is a misunderstanding:
no further special contribution is planned.
What is incontrovertible, however, is that the Society is legally compelled
to meet the cost of its scheme, and the impending creation of the General
Pharmaceutical Council has brought this to the fore.
Where will the Society go from here? When the current valuation is finalised
we will negotiate with the trustees to agree how and when the past service
deficit cost is met. However because the trustees have, among other matters,
to take into consideration the employer’s situation, it would be
unreasonable of the trustees to ask us to immediately find a large capital
sum to cover the deficit. Therefore, as the Treasurer has indicated,
we hope to be able to continue to make good the shortfall over a reasonable
number of years. |
The
Pharmaceutical Journal