Introduction

  • 1.1 The Local Government Pension Scheme (Amendment) Regulations 2004 require the Isle of Wight Council Pension Fund to prepare and publish a Funding Strategy Statement (FSS) by 31 March 2005. This must be taken into account by the Fund’s actuary when setting employers’ contribution rates.
  • 1.2 The Chartered Institute of Public Finance and Accountancy (CIPFA) has issued detailed guidance on the content and format of an FSS. This guidance has been followed in preparing this draft.

Consultation

  • 1.3 All employers in the Isle of Wight Council Pension Fund have been given the opportunity to comment and contribute to this FSS. The Fund’s actuary, Hymans Robertson, has also assisted in its preparation.

Purpose of the Funding Strategy Statement

  • 1.4 The FSS has two main purposes:
• To set out clearly the Fund’s strategy for how it intends to meet its liabilities over the long term.
• To explain how the Fund will work towards the maintenance of stable employers’ contribution rates.

The Aims of the Fund

  • The Fund has four main aims:

• To make sure the Fund is always able to meet its liabilities.
• To enable employers’ contribution rates to be kept as stable as possible and affordable for the Fund’s employers.

• To manage the employers’ liabilities effectively.
• To maximise the income from investments within reasonable risk parameters.

These aims are explained in more detail below.

To make sure the Fund is always able to meet its liabilities

  • The Fund’s long-term solvency is the primary aim. Accordingly, employers’ contributions will be set to ensure liabilities can be met over the long term.
  • The Isle of Wight Council as administering authority will make sure that the Fund always has sufficient cash available to pay pensions, transfer values to other pension funds, and other costs and expenses. Such expenditure will normally be met from incoming contributions from employees and employers and investment income to avoid the cost of selling any of the Fund’s investments. The Fund reviews the position on a quarterly basis to make sure that sufficient cash is available to meet its obligations.

To enable employers’ contribution rates to be kept as stable as possible and affordable for the Fund’s employers

  • Achieving stability in employers’ contribution rates requires investment in assets which ‘match’ the Fund’s liabilities. In this context, ‘match’ means behaving in a similar manner to the liabilities as economic conditions alter. Index-linked and fixed interest investments are the best match for the Fund’s liabilities.
  • Other asset classes, such as shares and property, offer the potential for higher long-term rates of return. A substantial proportion of the Fund’s investments are held in these asset classes with the aim of increasing investment returns. However, these asset classes are more risky and can lead to volatile returns over short-term periods.
  • This short-term volatility in investment returns can lead to similar volatility in the Fund’s solvency level in successive actuarial valuations, which in turn can mean volatility in employers’ contribution rates. Such volatility can be reduced by the use of smoothing adjustments as advised by the actuary.
  • Maintaining stability in employers’ contribution rates can run counter to the primary aim of ensuring solvency. There is a balance to be struck between the investment policy, smoothing adjustments used when carrying out actuarial valuations, and the stability of employers’ contribution rates from one valuation period to the next.
  • The position can be even more volatile for admitted bodies with short-term contracts where the use of smoothing adjustments is less appropriate.

To manage the employers’ liabilities effectively

  • The Council as administering authority makes sure that the Fund’s liabilities are managed effectively. This is achieved by commissioning actuarial valuations every three years as required by law, which determine the employers’ contribution rates required to make sure liabilities can be managed effectively.

To maximise the income from investments within reasonable risk parameters

  • Returns which are expected to be higher over the long term than those from index-linked stocks are sought by investing in other asset classes such as shares and property. However, investment is restricted as specified in the Local Government Pension Scheme (LGPS) investment regulations.
  • Risk parameters are controlled by restricting investment to asset classes generally recognized as appropriate for UK pension funds. The potential risks of investing in the various asset classes are reviewed by the Council from time to time with the assistance of the Fund’s actuary and its investment managers.

Purposes of the Fund

  • The purposes of the Fund are:
• To pay out pensions and benefits, transfer values for fund members moving to other schemes, and other costs, charges and expenses.
• To receive contributions, transfer values for fund members moving from other schemes, and investment income.

Responsibilities of the key parties

  • The key parties with obligations to the Fund are the Council as administering authority, employers in the Fund (including the Council), and the Fund’s actuary.

The Council’s obligations

  • To collect employers’ and employees’ contributions and, as far as possible, make sure they are paid by the due date as specified in the LGPS regulations.
  • To invest surplus monies in accordance with the LGPS regulations relating to the investment of funds.
  • To make sure that cash is always available to meet the Fund’s liabilities when they are due.
  • To manage the valuation process in consultation with the Fund’s actuary, ensuring that appropriate timescales are agreed and that accurate data is provided.
  • To monitor the Fund’s investment performance and funding level on a regular basis.
  • To prepare and maintain a Statement of Investment Principles and a Funding Strategy Statement.

Individual employers’ obligations

  • To deduct contributions from employees’ pay, and make employers’ contributions at the rates specified by the actuary, paying both to the Council by the due date.
  • To exercise discretions allowed to employers within the LGPS regulations.
  • To pay for agreed added years arrangements.
  • To keep the Council fully informed of all changes to membership, or other changes which could affect the solvency position.

The actuary’s obligations

  • To prepare actuarial valuations every three years as required by law, setting employers’ contribution rates after agreeing assumptions with the Council and having regard to this Funding Strategy Statement. The valuation will be prepared in accordance with the latest guidance issued by the Institute and Faculty of Actuaries, as far as it applies to the LGPS.
  • To prepare advice and calculations in connection with bulk transfers and individual benefit-related matters.

Solvency

  • The Council will seek to ensure the Fund is solvent. Solvency is defined as being achieved when the value of the Fund’s assets is greater than or equal to the value of the Fund’s liabilities, based on current actuarial methods and assumptions.
  • The ‘projected unit’ method of valuation will be used when assessing solvency, using assumptions appropriate for an ongoing pension fund with financially sound member employers.
  • The financial assumptions used to assess the funding level will have regard to the yields available on long-term fixed interest and index-linked gilt-edged investments.
  • The Council has agreed with the actuary that the assumptions will make short-term allowance for the higher long-term returns that are expected on the assets actually held by the Fund, and accepts the risks of such an approach if those additional returns fail to materialize. The position will be reviewed in subsequent three-yearly actuarial valuations.
  • The Council has also agreed with the actuary that explicit smoothing adjustments can be used when measuring solvency. It is unlikely that the use of these adjustments will be extended to employers whose participation in the Fund is for a fixed period (for example non-local authority employers awarded contracts for the provision of local authority services).

Funding strategy

  • When an actuarial valuation shows that the Fund has a past service deficit based on this solvency measure, employers’ contribution rates will be adjusted to target solvency over a period of years (the recovery period). A common recovery period of 25 years for all employers in the Fund has been set by the Council in consultation with the Fund’s actuary. The length of the recovery period is determined by balancing the Fund’s solvency requirements against the financial strength of the main scheduled employers in the Fund.
  • The Fund’s liabilities mostly take the form of benefit payments over long periods of time. The main scheduled employers in the Fund are financed through central and local taxation and can be viewed as very financially secure. As these employers ultimately underwrite the Fund’s finances, the Council has agreed a recovery period of 25 years which is longer than the average future working lifetime of the Fund’s contributors. This is consistent with keeping employers’ contribution rates as stable as possible. Were any member employer to participate in the Fund for a short period only it is unlikely that the Council and actuary would agree a recovery period longer than the remaining term of participation.
  • In order to avoid volatility in contribution rates some of the smaller employers in the Fund are grouped together with a common contribution rate. This can give rise to cross-subsidies between employers and, in order to minimize this, pooled employers in the Fund are required to make up-front contributions, calculated using the Government Actuary’s Department factors, to cover the costs of early retirements.
In deciding whether to pool employers the following guidelines will be used:
  • Maintaining existing arrangements may have advantages of stability
  • Employer’s preference will normally be paramount, but the implications need to be understood by all parties
  • Private sector contractors should be assessed separately
  • Closed admission bodies should not be pooled
  • Subject to the above, employers with less than 20 active employees should generally be pooled for reasons of stability, provided suitable other employers exist.
  • At each actuarial valuation, the Council will consider whether new higher employers’ contribution rates should be payable immediately, or phased in. The Council discusses with the actuary the risks of adopting such an approach. The current policy is to phase in over a maximum of three annual steps. However, such increases may be phased in over forthcoming and subsequent valuation periods, on a year by year basis, if budgetary constraints make this necessary, up to a maximum of 6 annual steps in total.

Identification of risks and counter measures

  • The Council’s overall policy on risk is to identify all risks to the Fund and to consider the position both in aggregate and at individual risk level. Risks to the Fund will be monitored and action taken to limit them as soon as possible. The main risks are:

Demographic

  • Demographic risks include changing retirement patterns and increasing life expectancy. The Council will make sure that the Fund’s actuary investigates these matters at each valuation, or more frequently if necessary. The actuary will report to the Council as appropriate. The Council will then agree with the actuary any necessary changes to the assumptions used in assessing solvency.
  • If significant demographic changes become apparent between valuations, the Council will notify all participating employers of the likely impact on their contributions after the next full valuation, and will review any bonds that are in place for transferee admitted bodies.

Regulatory

  • The risks relate to changes in LGPS regulations, national pensions legislation and Inland Revenue rules. The Council will keep abreast of all proposed changes and, whenever possible, comment on the Fund’s behalf during consultation periods. The Council will, if thought necessary, ask the Fund’s actuary to assess the impact of any changes on employers’ contribution rates.
  • The Council will then notify employers of the likely effect on employers’ contribution rates at the next valuation, if they are significant.

Governance

  • This covers the risk of unexpected structural changes in the Fund’s membership (for example the closure of an employer to new entrants or the large scale withdrawal or retirement of groups of staff), and the related risk of an employer failing to notify the Council promptly.
  • To limit this risk, the Council requires the other participating employers to communicate regularly with it on such matters.

Statistical/Financial

  • Risks to the Fund are posed by the performances of the various investment markets, the quality of the Fund’s managers, variations in pay and price inflation, and the budget constraints faced by the Fund’s employers.
  • The Council regularly reviews these factors in conjunction with the actuary to decide whether the assumptions used in assessing solvency are still appropriate.

Investment returns

  • The assumption that investment returns will be in excess of those accruing on Government bonds introduces an element of risk, in that those returns may not materialize. The Council will monitor the underlying solvency position assuming no such excess returns to make sure the funding strategy remains realistic.

Smoothing

  • The use of a smoothing adjustment to the value of the Fund’s assets introduces an element of risk, in that the smoothing adjustment may not provide a correct measure of the underlying position. This adjustment is reviewed at the end of each valuation to ensure it remains within acceptable limits.

Recovery period

  • Allowing surpluses or deficiencies to be eliminated over 25 years entails a risk that action to restore solvency is inadequate between successive actuarial valuations. The associated risk is reviewed in conjunction with the actuary as part of the three-yearly valuation process, to ensure as far as possible that the action taken to restore solvency is sufficient. In practice, the smoothing and damping arrangements described in this statement deal with this, although more recently the severe reductions in asset values and interest rates have increased the volatility in employers’ contribution rates.
  • Introducing increases in employers’ contribution rates in annual steps rather than immediately introduces a risk that action to restore solvency is insufficient in the early years of the process. The Council’s policy is to limit the number of permitted steps to three, or, in exceptional circumstances, six. In addition, it accepts that a slightly higher final rate may be necessary at the end of the stepping process to help make up the shortfall.

Links to investment policy set out in the Fund’s Statement of Investment Principles

  • The Council has produced this Funding Strategy Statement having taken an overall view of the level of risk inherent in the investment policy set out in the Statement of Investment Principles which forms an appendix to this document.
  • Both documents are subject to regular review.

Future monitoring

  • The Council plans to review this Statement as part of the three-yearly actuarial valuation process unless circumstances arise which require earlier action.
  • The Fund’s solvency position will be monitored on an approximate basis at regular intervals between valuations in conjunction with the actuary. Discussions will be held with the actuary to establish whether any changes are significant enough to require further action, such as advising employers of the need for different employers’ contribution rates after the next valuation.



Paul Wilkinson

Chief Financial Officer

14th October 2004
Introduction
1.1 This Statement of Investment Principles has been adopted by Isle of Wight Council (“the Council”) in relation to the investment of assets of the Council’s Pension Fund. The principles set out in this Statement were agreed by the Investment Panel at their meeting on 14th February 2003.
1.2 Investments are monitored on a regular basis by the Pension Fund Investment Panel (the Panel) of the Council acting on the delegated authority of the Isle of Wight Council. Advice is received as required from professional advisers. In addition, the Panel formally review the performance of investments quarterly and the overall strategy on an annual basis.
1.3 In preparing this statement the Panel has taken written advice from the investment practice of Hymans Robertson Consultants and Actuaries. Due account has been taken of the maturity profile of the Fund (in terms of the relative proportions of liabilities in respect of pensioners and active members), together with the level of disclosed surplus or deficit.
1.4 The Panel has agreed an asset allocation benchmark, a performance target and various controls on the Fund’s investments following an asset liability study. They reflect the Panel’s views on the appropriate balance between maximising the long-term return on investments and minimising short term volatility and risk. The benchmark reflects the position following the Actuarial Valuation of the Fund as at 31st March 2001 and an asset liability study carried out in March 2002. Asset allocations were reviewed in July 2003, and on the advice of the Investment Advisor were left unchanged. It is intended that strategy will be fundamentally reviewed at least every three years following actuarial valuations of the Fund.
Objectives
2.1 Primary Objective
The primary objective of the Fund is as follows:
To provide for members pension and lump sum benefits on their retirement or for their dependants benefits on death before or after retirement, on a defined benefits basis.
In order that this primary objective can be achieved, the following funding and investment objectives have been agreed.
2.2 Funding Objectives - Ongoing Basis
To fund the Fund such as to target, in normal market conditions, that accrued benefits are fully covered by the value of the assets of the Fund and that an appropriate level of contributions is agreed by the administering authority to meet the cost of future benefits accruing. For employee members, benefits will be based on service completed but will take account of future salary increases.


The assumptions used for this test, corresponding with the assumptions used in the latest Actuarial Valuation, are shown in Annexe 1 and the liability mix is shown in Annexe 2. This position will be reviewed at least at each triennial Actuarial Valuation.
Investment Objectives
3.1 Funding Objectives
To achieve a return on Fund assets which is sufficient, over the long-term, to meet the funding objectives set out above on an ongoing basis. To achieve these objectives the following parameters have been agreed.
3.2 Choosing Investments
The Panel will ensure that one or more investment managers are appointed who are authorised according to appropriate Local Government Regulations to manage the assets of the Fund.
Details of the manager appointed to manage the Fund’s assets are summarised in Annexe 3. The investment manager will be given full discretion over the choice of individual stocks and is expected to maintain a diversified portfolio.
3.3 Types of Investments to be held
The investment manager may invest in UK and overseas investments including equities, fixed and index linked bonds, cash and property, using pooled funds where agreed. At any time, the proportions held in each asset class will reflect the manager’s views relative to its benchmark and subject to certain control limits imposed by the Panel.
3.4 Balance between different kinds of investments
The benchmark adopted by the Panel has been based on consideration of the liability profile of the Fund; it is summarised in Annexe 3. Within each major market the investment manager will hold a diversified portfolio of stocks or will invest in pooled funds to achieve this diversification. The policy implied by this benchmark will result in a significant weight being given to “real” as opposed to “monetary” assets which the Panel acknowledges as appropriate given the current liability profile and funding position of their Fund.
3.5 Risk
Currently the Panel has appointed Schroder Investment Management Limited as the sole investment manager. The adoption of an asset allocation benchmark and control ranges for each asset class (as summarised in Annexe 3) and the explicit monitoring of performance relative to a performance target, constrains the investment manager from deviating significantly from the intended approach, while permitting flexibility to manage the Fund in such a way as to enhance returns.
3.6 Expected return on investments
The majority of the Fund’s assets are managed on an active basis and are expected to outperform their respective benchmarks over the long term. The investment performance achieved by the Fund over the long term is expected to exceed the rate of return assumed by the Actuary in funding the Fund on an ongoing basis.

3.8 Realisation of investments
The majority of assets held by the Fund are quoted on major stock markets and may be realised quickly if required. Property investments, which are relatively illiquid, currently make up a modest proportion of the Fund’s assets.
3.9 Social, Environment & Ethical Considerations
The Panel recognises that social, environmental and ethical considerations are among the factors which can affect the financial return on investments.
Having discussed the matter, the Panel has decided that any policy on Socially Responsible Investments should not conflict with the Fund’s investment objective as set out in Section 2.1 above.
The Panel has requested that the manager continue to give due consideration to these factors, particularly in the areas of business sustainability and reputational risk, when deciding on the selection, retention and realisation of individual investments.
3.10 Exercise of Voting Rights
The Panel has delegated the exercise of voting rights to the investment manager on the basis that voting power will be exercised by the investment manager with the objective of preserving and enhancing long term shareholder value. Accordingly, the manager has produced written guidelines of its process and practice in this regard. The manager is encouraged to vote at extraordinary general meetings of companies. Voting actions are reported to the Panel on a regular basis and these actions are reviewed and discussed as appropriate.
3.11 Additional Voluntary Contributions (AVC’s)
Members have the opportunity to invest in AVC funds as detailed in Annexe 4.
3.12 The ten principles of investment practice
The extent to which the Council has complied with the principles is set out in the document entitled Isle of Wight Council Pension Fund – Myners Code Adherence Document published in February 2005. This is attached at Annexe 5.
ANNEXES

Main Longer Term Actuarial Assumptions as at 31st March 2004
Nominal % per annum
Real Return
% per annum
RPI Inflation
2.9
-
Increases in pay (excl. Increments)
4.4
1.5
Investment returns *- equities – bonds
6.70
4.90
3.80
2.50

* net of investment expenses
  1. Liability Mix at 31st March 2004
Liability
£M
% of Total Liabilities
% of Fund
Employee members
94.0
40
57
Deferred pensioners
27.0
12
16
Pensioners
112.9
48
67
Total Liabilities
233.8
100
140
Deficit
67.2
29
40
Total fund (at actuarial value)
166.6
97
100
  1. Investment Management Arrangements
A new scheme specific benchmark was introduced on 1st July 2002 following an asset/liability study. This benchmark is set out below:-


Asset Class

Benchmark %

Control Ranges
%
Index

Equities
75.0
70-80
UK Equities
45.0
40-50
FTSE All-Share
Overseas Equities
30.0
25-35
Composite

US
10.0
5-15
FTSE AW North America
Europe
10.0
5-15
FTSE W1 Europe ex UK
Japan
4.0
0-9
FTSE AW Japan
Pacific Basin (ex Japan)
4.0
0-9
FTSE AW Developed Asia Pacific ex Japan
Emerging Markets
2.0
0-7
FTSE AW Advanced Emerging Markets
Other Assets
25
20-30
UK Gilts
4
0-9
FTSE A Over 15 Years
UK Corporate Bonds
8
3-13
Merrill Lynch Sterling Non-Gilt All Stock Index
UK Index Linked
2.5
0-7.5
FTSE A Over 5 Years Index Linked
Overseas
2.5
0-7.5
Lehman Global Aggregate ex UK
Property
8
3-13
IPD Monthly
Cash
0
0-5
LIBID 7 Day
Schroder Investment Management Limited were appointed to manage the Scheme assets with effect from November 1991. Their investment objective is to out perform the benchmark by 1% per annum over rolling 3 year periods.

  1. AVC Arrangements
The Investment Panel have set up a number of options for members’ additional voluntary contributions (AVCs). The options are set out below. At retirement, the accumulated value of a member’s AVCs is used to purchase an annuity on the open market, or the member may elect to buy additional service in the scheme.
Provider
Investment Vehicle
Nationwide Building Society
Cash
Prudential
Discretionary Fund
Prudential
With Profits
The cash option offers interest on deposits.
The Discretionary Fund is a vehicle which allows members to invest in a range of assets including equities, bonds and property.
The with profits vehicle is designed to provide smoothed medium to long term growth by investing in a range of assets including equities, bonds and property. The investment returns are distributed by way of reversionary and terminal bonuses.
The Panel has chosen the particular providers and investment vehicles taking into account past investment performance, charging structure, flexibility and the quality of administration.
The Panel review the AVC investment options on a regular basis. The next review is due in July 2006.



Page last updated on: 15/12/2009