Agenda item

Report of the City Treasurer.

7.1       George Bruce presented the item and began by focusing on the first risk identified by the Board for consideration: Funding – Inflation and Interest Rates Assumed in the Valuation are Inaccurate (risk 4). He advised that final salary pensions were uprated at an average (effective) rate of 1.3% per annum for the three years 2014 – 2016, with the pension increasing by 2.7% in 2014 and 0% in 2016. This compared to the assumed increase of 2.7% per annum from the 2013 triennial valuation, meaning that liabilities had increased less than had been assumed, which would help the funding position. However, Gorge Bruce advised that liabilities could be higher in subsequent years and the Fund’s actuary would be taking into account inflation when considering the 2016 triennial valuation. The actuary would also factor in the financial markets and the activities of the Bank of England.

7.2       George Bruce advised that the 2013 triennial valuation had used a discount rate of 5.9% per annum for scheduled bodies and a lower discount rate for admission bodies to reflect their lower level of credit quality. However, most recent reports projected a higher value of the Fund’s assets than that projected in 2013, with an estimated return over the three year period of 6.9%.

7.3       Turning to the second risk, Funding – Scheme Members Live Longer Than Expected (risk 6), George Bruce advised that life expectancy overall was rising. The 2013 triennial valuation had observed that life expectancies in the previous decade had increased more quickly than most predictions and so the assumption adopted for this valuation gave a long term rate of improvement for mortality projection of 1.5% per annum, equivalent to 1.5 years additional life expectancy every decade. However, there were recent indications that improvements in life expectancy were stabilising or slowing.

7.4       During discussions, Members sought further details in respect of the most recent indications that increases in life expectancy were stabilising or slowing. The Chairman asked about the degree of likelihood that the assumed inflation and interest rates were correct and whether there was a reasonable prospect that these estimates would be reduced as the figures seemed high. He suggested that there be a description of what the numbering and grading related to in terms of the level of risk be included in the Risk Register. Members noted that inflation rates could have a significant impact upon the Fund. A Member commented on the limited impact the mitigating actions would have in respect of risk 4 and risk 6.

7.5       In reply to the issues raised, George Bruce advised that as well as increases in life expectancy appearing to be stabilising or slowing down, surveys of longevity were now able to be tailored to specific areas, such as by postcode, and were more exact. The Fund’s actuary’s longevity team were due to carry out an analysis of mortality experience over the last few years and produce a full report of its findings. George Bruce advised that it was almost certain that the assumed inflation and interest rates would not be absolutely correct and that it was preferable to take a more prudent approach to assumptions, as otherwise contributing employers could be at risk of greater costs in future years. However, the Fund had a relatively high proportion of equity assets and a drop in value of these would have a high impact on the Fund and would outweigh other factors such as assumed interest and inflation rates. George Bruce stated that efforts would be made to define ‘likelihood’ and ‘impact’ in the Risk Register. He added that impact was not just measured in terms of monetary values but also other factors, such as the number of scheme members affected.

7.6       Nikki Parsons stated that the nature of strategic risks, such as risk 4 and risk 6, meant that there was only so much mitigating actions could do. She added that the Risk Register is originally derived from a tri-borough management approach, however efforts would be made to make the Risk Register more Westminster Pension Fund specific.

7.7       Members requested that Risk 12, Operational Governance: Officers do not have appropriate skills and knowledge to perform their roles resulting in the service not being provided in line with best practice and legal requirements.  Succession planning is not in place leading to reduction of knowledge when an officer leaves; and Risk 23, Operational Administration:Administrators do not have sufficient staff or skills to manage the service leading to poor performance and complaints, be considered at the next meeting.

7.8       RESOLVED:

That contents of the report be noted.