Pension Fund Black Hole?

I have received a number of enquires about the West Midlands Pension Fund and the press articles that have appeared concerning the funding gap.

BJ Tennant of Dudley has written to me twice & has asked me a specific question “CAN YOU TELL ME IF THERE IS A SHORT FALL OR BLACK HOLE WITH WOLVERHAMPTON BOROUGH COUNCIL WORKERS PENSION FUND AT THE MOMENT? ONE OF YOUR REMEDIES THE SAME AS WHAT IS BEING PROPOSED BY DUDLEY FINANCE DEPT TO INCREASE COUNCIL TAX TO MAKE UP THE DEFECIT?

THIS KIND OF ACTION WOULD MEAN MONEY BEING TAKEN FROM SENIOR CITIZENS PENSION BY WAY OF COUNCIL TAX, TO FUND COUNCIL WORKERS PENSION, THIS SURELY WOULD BE IMMORAL.

WHAT ARE YOUR THOUGHTS ON THIS? LOTS OF COUNCILLORS TEND TO CLOSE RANKS WHEN ASKED THIS TYPE OF QUESTION. AS YOU ARE AWARE A LOT OF PRESS IS AT THE MOMENT BEING GIVEN TO COUNCIL TAX PROBLEMS, DUDLEY COUNCIL APPEAR TO BLAME W'TON BOROUGH FOR THEIR £26 MILLION BLACK HOLE BECAUSE YOU INVEST THEIR PENSION FUNDS, AND CONTROL IT.
B.J.TENNANT

I thought that it may be of interest to others to post my second reply direct onto the www.philbateman.com

Again thanks for the note. If only life was so simple! I purposefully tried to respond in a manner that was straightforward and honest and carried the answer to your question. Now let me elaborate a little. The fund itself has to have a full actuarial valuation every three years by law. We are running up to the time for a further actuarial valuation. This valuation will use the data or information that it has now at the 31March 2004 as it kicks into its work which starts on the 1st April 2005.

The valuation will attempt to answer two basic questions. How much to pay the fund to meet current and future benefits? When to make the payments?

The fund is currently running with a strong net cash flow of the order of £200m per annum after paying current pension benefits.

Contributions have to be planned and paid now to put the funds aside to meet future pension benefits. Future pension benefit liabilities being created today will be payable many years into the future. The Actuarial Valuation process estimates that future years payments and determines future employing body contributions rates after taking account of funds payable.

This means that the Employing Body [Councils] employees and income and growth investments are put in and benefit payments are then subtracted. Then more complicated points are assessed inflation, pay awards incremental growth, volatility in investment returns, the longevity of beneficiaries etc are all factored in.

As the scheme is a defined benefit and defined employee contribution scheme. Benefit entitlement as I suspect you know is prescribed by regulations. Employing bodies [Dudley for example] have some limited flexibility in awarding enhanced benefit entitlement. Also the Government can change benefit entitlement by amending the regulations e.g. recent proposed changes to increase earliest age of retirement.

Employing body contribution rate is the key variable for the actuary to determine to balance the funding requirement over the long term. Each employer [like Dudley] is different, so each has a different rate.

So now to the provisional results the asset base is £4.7billion, past service liabilities £6.4billion; the deficit stands at £1.6billion [rounded figures]. The funding level is 74% future service rate [After removal of Rule 85 terms] 9.9%.

The deficit is down to the decline of the stock market pure and simple. Like many other pension funds the arrangements have been hit by a decline in stocks in the early 2,000. The Market looks to be in a recovery position and that should have a benefit on actions that the Fund can make.

The Fund will now start to adopt a strategy that will be 'prudent' in its investment level; it will mean that there will be a combination of investment out-performance, increased contribution input and extended recovery. Assumptions consistent with investment strategy adopted and a liability profile will all be part of the strategy for recovery.

A consultation and communications strategy with participating employees and other interested parties is also to be developed. The fund has also engaged outside experts to help to develop an investment strategy taking into account risk and future benefit payments.

I hope that this comprehensive response is helpful to you, there is an element in the Counciltax that will inevitable be raised to cover these type of costs and that will be decided by your own local authority. The fact is that this is a very strong pension fund it is well managed and is very safe for its members. Dudley does play a role in its management having representatives on the various panels and committees that guide the fund. The West Midlands Pension Fund is highly accountable to elected members.