This letter is addressed to all MNOPF Members or their dependants who are in receipt of a pension from the Old Section and Members who have an Old Section pension which has not yet come into payment. The Old Section is the part of the MNOPF to which contributions were paid prior to April 1978.
I last wrote to you in a leaflet dated 19 March 2001 to advise you of the actions the Trustee Board were taking in relation to the Old Section and also mentioned the issues under consideration in the Summary Annual Report 2001 sent to all Members in September 2001.
To remind you, the main points in those previous communications are set out below.
The last actuarial valuation of the Old Section took place as at 31 March 2000. At that date, the liabilities of the Old Section amounted to £1248 million and the assets £1388 million, giving a surplus of £140 million. In that valuation no allowance was made for future increases to Old Section pensions and any increases granted in the future would therefore reduce that surplus.
Since 2000, a high proportion of the Old Section?s assets have been invested in fixed interest securities. This type of investment does not vary in line with the stock market and provides a regular flow of income to pay pensions. This means that about 80% of the Old Section?s assets are in investments which broadly match the liabilities for pensions. This provides a high degree of security but is expected to produce a lower level of return than investing in stock market shares. The remaining 20% is invested in investments with potential for a higher rate of return (being mainly stock market shares and property) and provides some prospect of increasing the surplus through growth.
In my letter of 19 March 2001, I mentioned that the Trustee Board wished to consider the long term security of Old Section benefits. I mentioned two areas of risk:
Investment Risk - This is the extent to which assets are not invested in investments that produce income to match liabilities.
Mortality Risk - This is the possibility that Members live longer than assumed in the actuarial valuation.
The investment risk can be largely removed by putting all the investments into fixed interest securities although the mortality risk would still remain. Both the investment risk and the mortality risk can be removed by purchasing annuities with insurance companies (ie. the insurance company guarantees to pay the pension no matter how long the pensioner lives).
In relation to the Old Section, the Trustee Board investigated the purchase of annuities, including obtaining quotes from insurance companies and taking appropriate legal and actuarial advice. The conclusion was that such a course would not offer significantly greater security than continuing to run the Old Section in its present form with its high level of fixed interest investments. Furthermore, that part of the Old Section invested in the stock market would give an opportunity for higher returns and additional surplus to be generated. The Trustee Board therefore decided that the best course of action is to continue as at present and review the position in a number of years, having regard to the increasing amount of pension that will come into payment as Members retire and changing economic conditions.
PENSION INCREASES 2002
Once the decision to run the Old Section on in its present form was made, the Trustee Board was in a position to consider pension increases.
As previously mentioned, there was a surplus of £140 million as at 31 March 2000. This assumed investment returns of 5% per annum. It is expected that the portfolio of fixed interest investments which make up the majority of the Old Section?s assets will return slightly more than 5% per annum, thus tending to increase the surplus. However, this may be offset to some extent by the trend for pensioners to live longer.
A further factor considered by the Trustee Board is that there is a substantial number of Members with generally small Old Section benefits who have not kept the Fund advised of changes of address and who cannot be contacted. Whilst all reasonable efforts are being made to trace such Members, it is possible that some of these benefits may never be claimed which may have the effect of increasing the surplus.
The Trustee Board has taken actuarial advice on how the surplus might be used to provide pension increases. This showed that the surplus is sufficient to support long term increases of about ½% per year each year in the future. Taking the likelihood of unclaimed benefits into account, a slightly higher rate may be possible. Bearing in mind that the last increase was in 1998, the Trustee Board has decided to award a discretionary increase of 3% at 1 April 2002, subject to applicable Inland Revenue limits. This will apply to all Old Section pensions at that date which are either already being paid or are yet to come into payment.
The effect of the 3% increase on the finances of the Old Section will be to increase its liabilities by about £36 million and thus reduce the surplus to just over £100 million.
FUTURE PENSION INCREASES
Each year the Trustee Board will review the financial position of the Old Section and consider, having taken actuarial advice, whether to grant a discretionary increase.
The Trustee Board believes that it is appropriate to release the surplus gradually rather than using it to pay larger pension increase now with the risk of having insufficient assets to deal with potentially unforeseen events.
As mentioned above, the long term increase supported by the current surplus (prior to the payment of the increase announced in this leaflet) is of the order of ½% per year. However, this does not mean that an increase at that level, or indeed any discretionary increase, will necessarily be paid in any particular year.
A higher level of increase, at 3%, is being paid this year (again, subject to applicable Inland Revenue limits) to take account of the fact that no increase had been paid for several years. However, there is no expectation that increases of a similar level will be granted next year or in the years following.
If you are also entitled to a New Section pension, you will know from previous communications that the valuation as at 31 March 2000 disclosed a small shortfall. The New Section has a substantial proportion of its investment in stock market shares. As the New Section is a younger fund than the Old Section, having less current pension liabilities, this is an appropriate investment strategy for producing good returns over the long term. However, in the short term, stock markets fluctuate and given the economic conditions which have prevailed since March 2000, the New Section remains in deficit. Thus, there are no surplus assets out of which discretionary pension increases can be paid and New Section pensions from April 2002 will therefore remain at their present level, except to the extent that any statutory increases are required.
Your increased pension will commence with the instalments due on 15 April 2002. If, when you receive your payslip, you have a query about the figures or about your tax code, please telephone 01372 200222.
If you have a general enquiry about the content of this letter, please telephone the Member Liaison Service on 01372 200200. Alternatively, you may wish to write to the Director of Pensions at the address on this letter, or if you have access to email, the address is email@example.com.