The letter from the Chairman dated 10 April 2000, enclosed the results of the 1999 Actuarial Valuation and described the actions that the Trustee Board was taking to help it to decide on the way ahead.
To remind you, the valuation showed a small surplus of £20Mn in the Old Section. In the New Section, there was a deficit of £55Mn.
The valuation was conducted against a background of economic and regulatory change affecting all pension schemes. The Fund, which has a high and increasing proportion of pensioners and a rapidly reducing number of contributing members, relies increasingly on investment income to pay benefits. While the Stock Market has risen over the last few years, inflation has fallen significantly and investment income has also declined.
Furthermore, as the Fund becomes more mature, more attention needs to be paid to the security of members' pensions. This requires the Trustee Board to invest more in fixed interest investments (which generally can be guaranteed to provide income throughout their life to match the Fund's pension payments) and less in equities (i.e. company shares). Equities are expected to generate higher income over time but their value can go down.
A further factor, which has affected all pension funds, is the withdrawal by the Government of tax relief on dividends from equity investments. This has cost the New Section in excess of £90Mn and the Old Section in excess of £60Mn in capital terms.
The April letter said that the Trustee Board would be making enquiries of the Employers. Those consultations have taken place and have been taken into account by the Trustee Board in formulating the future benefit and contribution structure.
The existing arrangement provides for benefit to accrue at the rate of 1/60th of Pensionable Salary for each year of service. The current joint contribution rate of 13.3% of Pensionable Salaries needed to increase to 24% to pay for this level of benefit. The principal reason for this large increase was that the existing rate had been fixed when there was a surplus which was used partly to subsidise the contribution rate. As there is no longer a surplus, that subsidy cannot continue.
The consultation with Employers provided strong evidence that it was not viable to continue with the current 1/60th benefit structure. However, Employers generally agreed to continue to support the MNOPF on the basis of a 1/80th accrual rate, for which the joint contribution rate is 19.2%.
The Trustee Board accordingly has agreed to move to the 1/80th accrual rate. Employers will pay 11.9% and members 7.3%. These rates will be applied to a revised, slightly higher, definition of Pensionable Salary on which the benefits will also be calculated. Pensionable Salary will be Salary (as defined in the Rules) less one times the National Insurance Lower Earnings Limit, not 1½ times as at present. These changes will be effective from 1 October 2000.
An example of how this affects the contributions you pay to the MNOPF is set out in this announcement.
The current Optional Early Retirement Scheme (OER Scheme) terminates on 31 December 2000. This scheme places additional cost on the Fund that has been funded from past surpluses. The Trustee Board has decided that it is not appropriate to introduce a new scheme now that the Fund is in deficit. The consultation with Employers showed that there would be little support for funding a new OER Scheme as an additional cost item.
However, Employers did support continuing the existing OER Scheme for those who would qualify under it by 31 December 2000. This means that if you are 57 or over on 31 December 2000 - and meet the other qualifying conditions - you can continue in employment without losing your right to retire with full OER Scheme benefits at some later date before the normal retirement age. You will not have to retire before 31 December 2000 in order to benefit from the OER Scheme. Members who do not reach age 57 by the end of this year will not qualify for an OER Scheme benefit.
Details of this arrangement are set out in this announcement.
As previously advised, the Actuarial Valuation as at 31 March 1999 disclosed a deficit in the New Section of £55Mn on the actuarial assumptions adopted.
The Trustee Board has decided that action needs to be taken to ensure there is a sound mechanism for dealing with any deficit situations both now and in the future. In deciding upon a course of action the Trustee Board has taken account of the interests of the Members and the collective interests of the Employers.
The current Rules enable the Trustee Board to require Participating Employers to make up deficits in the Fund. The Trustee Board proposes to ask the Court for confirmation that Participating Employers retain their liability after ceasing to employ Active Members or eligible employees.
The Trustee Board has amended the Rules to ensure that the issue is put beyond any doubt for the future and that a Participating Employer will remain potentially liable, subject to the ability to discharge its liability by making an agreed payment to the Fund. There is further work to be done on this latter point and Employers will be consulted in due course. The Trustee Board also proposes to ask the Court to confirm the Rule amendment. The case may take some time to be heard, but the Rule amendment will apply unless overturned by the Court.
The Trustee Board cannot be certain of the stability of future membership and has decided that charging the employers an additional percentage of Pensionable Salary is not a satisfactory way of funding deficits. The Trustee Board also believes that it is intrinsically fairer to divide the deficit between Employers with reference to the proportion that each Employer's liabilities in the Fund bears to the total liabilities of the Employers.
The calculation of each Employer's share is a complex exercise. This is underway and it will be some time before it can be completed.
The April letter advised that further discussions were being held on the possibility of granting an increase to Old Section pensions. This is still under consideration. A decision has been deferred until the next meeting of the Trustee Board, on 30 June 2000.
The actions the Trustee Board has taken have been necessary to help ensure that the Fund's assets will be sufficient to meet members' benefits. The Trustee Board will continue to monitor the Fund's position by a further actuarial valuation as at 31 March 2000. The results of this will be available towards the end of the year. Members will be kept fully informed of the progress of the Fund.
If you have any questions about this announcement, please telephone the Member Liaison Service at MNPA on 01372 200200. Alternatively, you may wish to write to the Chief Executive at the address shown.
The current scheme remains in force until 31 December 2000. It will be extended after that date for those who could have retired under it but have chosen not to.
To qualify after 31 December 2000, you will need to:
have contributed to the Fund at any time between 1 January 1998 and 31 December 2000; and
have your 57th birthday on or before 31 December 2000; and
take an early retirement pension between 1 January 2001 and 31 December 2004.
The pension payable from the date of early retirement on or after 1 January 2001 will be the total of your pension accrued to that date with no reduction for early retirement. In addition, you will receive credit for the period between the date of retirement and your normal pension date (age 61). The credit will be calculated with reference to the revised accrual rate of 1/80th per year of Service and the revised definition of Pensionable Salary, again with no reduction for early retirement.
In this example, the Member is earning a Salary of £24,000 pa. It is assumed the Member is entitled to claim full tax relief and is working for an employer who is contracted-out of the State Earnings Related Pension Scheme.
(7.3% of Pensionable Salary)
|Tax relief @ 22%||£330|
|Net contribution after tax relief||£1,168|
|In addition you save National Insurance contributions of||£328|
|Net cost to you of membership of MNOPF||£840|
You pay reduced National Insurance contributions if you are contracted-out of the State Earnings Related Pension Scheme. As at 1 April 2000 the saving is 1.6% of pay between £3,484 per annum and £27,820 per annum. In this example, the net cost of £840 represents 3.5% of the Salary of £24,000.