Chairman's letter to members of 10 April 2000

Dear Member

When writing to you last December, we mentioned the 1999 Fund valuation – a regular financial health check carried out by the Fund’s actuary. We also wrote about the effects that changes in the UK economy have had on the Fund. This letter is to let you know the findings of the valuation, to explain briefly how these are reached and to outline the Trustees’ responsibilities towards the Fund.

Before explaining the results of the valuation, we would like to expand on the points made in the December 1999 letter. In brief, pension benefits have become more expensive to provide. This is true not just for the MNOPF but for all pension schemes whether they are occupational schemes run by employers or individual personal pension plans. This is due to recent economic changes.

Ours is a mature Fund. Each year there are more pensions to pay and total contributions reduce as the number of contributing members decreases. Therefore, the Fund must rely more and more on income from investments to pay benefits.

Over the past 25 years or so, the UK economy has seen strong increases in both the market value of investments and the level of income flowing from them. For some years, investment income had risen faster than allowed for by the Fund’s actuary and this resulted in surpluses. However, recently, with the fall in inflation, the pattern has changed. While market prices of shares and bonds - the principal investments for the Fund - are still rising, income has not increased at the same rate.

Economists do not expect these economic conditions to change in the foreseeable future which means that future investment income will probably be much lower than in the past. As already mentioned, this is NOT just a problem for the MNOPF. The increased cost of producing and accumulating investment income affects all pension schemes and long-term investors. The MNOPF has been well run throughout its history and the Trustees have always sought to use the best advisers. In the past, when returns have exceeded expectations, surpluses have been used to improve benefits, pay discretionary increases on pensions and reduce contributions. Indeed, the Fund has, historically, provided much better benefits than many other large pension schemes.

Where the Fund differs from most other schemes is that it is a private sector, industry-wide scheme. Over the years we have seen much change, with more employing companies leaving than joining. The result is that relatively few current employers are available to support the Fund. As the Fund is mature, the Trustees need to take a more cautious approach to investment, limiting the risk of investment volatility compared to less mature pension schemes, to make sure benefits are as secure as possible.

When our actuary values the Fund, he makes a number of assumptions about how the value of benefits will increase and how investments will perform over the many years ahead. These assumptions relate to expectations of future wage and price inflation, and the future cost of investments relative to the income expected from them. To reflect the recent changes in market conditions, the actuary has had to reduce his assessment of the expected absolute returns from current investments substantially (from 9% pa in 1996 to 6% pa for the New Section and from 9% pa to 5% pa for the Old Section). This has had a major effect on the outcome of the valuation. It is stressed that these changes reflect significant general market movements and not the performance of our investment managers.

The valuation showed that the value of the current liability to pay members’ benefits under the Old Section was £1,280 million. The market value of the assets to cover these liabilities was £1,300 million giving a small surplus of £20 million. Against the new market situation, the overwhelming responsibility of the Trustees is to protect the assets of the Old Section to ensure they remain sufficient to pay pensions until all liabilities of the Fund have been met.

The valuation showed that the value of the current liability to pay members’ benefits for past service completed under the New Section was £1,561 million. The value of the assets to cover these liabilities was £1,506 million leaving a shortfall of £55 million. It is worth noting that, if the actuary had been able to make the same assumptions in 1999 as he did for the 1996 valuation, there would have been a surplus of £250 million in the New Section rather than a shortfall.

For future service, the Actuary calculates that the contribution rate, which has been subsidised from surpluses in recent years, needs now to be about 24% of pensionable salaries to support the current benefits package.

Old Section – In 1996, the Old Section had sufficient estimated surplus to pay 2.5% pa increases if inflation continued at 4.5%pa. Now, the underlying rate of inflation has reduced to around 2.5% pa. If it continues at this rate and if the other assumptions in the Valuation are borne out, there is a small surplus.

Against this background, the Trustees have considered a 1% discretionary increase to pensions in payment, but have not yet reached a decision. NUMAST nominated Directors on the Board of Trustees are in favour of granting such an increase whereas Chamber of Shipping nominated Directors do not believe the finances of the Old Section are sufficiently good to support one. Further discussions will be held and pensioners will be notified of the outcome.

New Section – With the valuation disclosing a shortfall, there are no surplus assets out of which discretionary pension increases can be made. New Section pensions from April 2000 will therefore remain at their present level, except to the extent that any statutory increases are required.

With no reasonable expectation that economic conditions will change, unless steps are taken now the Fund’s position could get worse in the future. The Trustees have a duty to do their best to ensure that the Fund has sufficient assets to pay the benefits members have already built up and to make sure that contributions are paid at a rate which will meet the benefits promised for future service.

The Trustees will be making enquiries of the employers regarding the future level of benefits and contributions and how the shortfall in the New Section might be tackled. Alternative mechanisms for dealing with the shortfall are being considered, including a change to the rules to set out a basis for employers to pay additional contributions. The Trustees will then take the advice of the Fund’s actuary and lawyers to make sure that the proposals are financially sound and can be expected to cover the benefit promises made.

The Trustees will write to you again in a few weeks once they have decided on the way ahead.

We hope that this letter helps you to understand the circumstances currently faced by pension funds and how these changed economic factors have impacted on the valuation results and the current situation of our own Fund.

If you have any questions about this letter, please telephone the Member Liaison Service at MNPA on 01372 200200. Alternatively, you may wish to write to the Chief Executive at the address on this letter.

Yours faithfully