What’s really in the pot?

PUBLIC sector pensions will be one of the defining political issues of 2014.

PUBLIC sector pensions will be one of the defining political issues of 2014.

Are they sustainable in their present form? If not, what changes are needed?

In February, the States are due to debate the second of these two questions, but the problem is that there is no clear consensus over the first.

Some people are sure there’s a massive black hole in the scheme, which threatens to bankrupt the States (that means us, the taxpayer) somewhere down the road. Others insist that is just scaremongering and all that’s needed – if anything – is a bit of tweaking.

What’s the truth? I’m no actuary, but I am happy to examine the evidence from a lay perspective – a bit like most of our deputies will have to do. In doing so, it’s vital we separate facts from urban myths.

One of the first bits of misinformation which must be nailed is that life expectancy has peaked and might even decline somewhat as the impact of obesity and an increasingly sedentary lifestyle kick in. That’s just not true.

Who knows what will happen in future decades, but the current trend is quite clear. Life expectancy has been rising relentlessly since the 1970s, and that shows no sign of abating.

Yes, obesity is a problem, but with smoking rates in steady decline, medical advances and many other factors favouring longevity, those born today are predicted to die far older than any previous generation. Any long-term pension plan simply must factor that in.

The second question is whether there’s really a big deficit in Guernsey’s current scheme. Here one really has to rely on expert advice, but it would be very surprising if it were in rude health.

Public-sector employment differs markedly from the private sector, but the fundamentals of funding final-salary pensions are common to both. Company after company has been forced to end final-salary pension schemes as potential funding deficits threaten the very existence of their businesses.

Typically, they haven’t cynically used the problem to save on pension contributions but have continued to pay similar amounts into new, defined-contribution schemes. What’s the difference? The risk that those contributions won’t adequately fund the promised benefits is removed (or transferred to the scheme member), meaning the company won’t be bankrupted by a big pension deficit.

The only real difference with a government scheme is that if the pension fund can’t meet its future liabilities, there’s always the option to simply tax us more to bridge the gap. Not only would that be grossly unfair on taxpayers, many of whom have lost their own final salary schemes, but it could do untold economic damage.

So what about government schemes elsewhere? Well, in the UK they are raising the pension age and moving to a ‘career average’ scheme, but already, leading academics are warning that this is far too little, too late.

Michael Johnson from the Centre for Policy Studies has even compared public-sector pension schemes there with the ponzi scheme run by the disgraced Bernie Madoff. He suggests the pension offer is worth 35% of the pay package, but contributions add up to only 21%. A recipe for disaster.

Ironically, even the recent public-sector pay constraint hasn’t really helped. True, lower, real-term wages may eventually reduce pension liabilities but, in the short term, it actually increases the shortfall as pensions go up by RPI while pay – and therefore contributions – rise by less.

Another argument is likely to be whether the States should be guided on the scale of their pension deficit by the international accounting standard, FRS 17.

True, there are shortcomings with this measure. For instance, it gives a snapshot in time rather than a smoothed-out trend, and can therefore fluctuate quite sharply.

That said, it is the internationally accepted best guide to pension funding and has to be used by every private-sector business. It would be perverse and worrying if our government felt they could ignore it.

Whatever report the Policy Council brings forward in February will have to spell out all these factors in detail and give objective, independent analysis from disinterested experts.

If, as some union representatives insist, it shows there’s no problem, I will be delighted. I don’t want worse pensions. But I will also be amazed.

If, however, it shows we are storing up big problems for the future, then they have to act, no matter how much of a backlash that invokes.

They owe that to future generations.

Comments for: "What’s really in the pot?"

GM

Peter Roffey seems to have understood and analysed the situation perfectly.

"It would be perverse and worrying if our government felt they could ignore it [FRS17]". Exactly - it is what I have been saying for the past two years.

GM

I've just done some calculations.

I have assumed that the fund of £1 billion will grow from investment returns at the rate of 6% per annum, with no contributions being added each year (ie the current position where £40m of contributions are used to £40m of pensions-in-payment. After 10 years, the £1 billion fund would be worth £1.791 billion.

I have then done the same calculation, but with an extra £50m of new contributions being added to the fund each year (ie £90m in and £40m paid out). After 10 years, the £1 billion fund would be worth £2.45 billion. So an extra £500m added (10 years x £50m) with compounding actually adds a further £659m.

For the liabilities,I have compounded the 2010 liabilities figure of £1.5 billion for the next 10 years at a rate of just 5% per annum. But I have been conservative by not starting the compounding from 2010, but instead from 2013. At the end of 10 years, that liabilities figure would be £2.443 billion.

So, after 10 years based on those assumptions, the assets would then cover the liabilities (just).

That all depends though in an extra £50m being pumped into the fund. Clearly that could come from a mixture of employer and employee contributions. Let's assume that the employees didn't agree to raising their contribution levels, and that it was left to the States to pay the whole sum.

If an extra £50m had to be raised via Income Tax, then based on the 2011 and 2012 amounts collected via ETI and other income tax, an extra £50m a year would mean that figure rising by 22.4%. That equates to the standard rate of income tax having to rise by 22.4% from the standard 20% to 24.48%. In other words, every income fax payer on the island would see their total annual income tax bill rise by over one-fifth if the current approximate £500m deficit was to be restored solely at the taxpayer's expense over a 10-year period.

That gives a little perspective to the deficit position and the cost of covering it.

bcb

I was speaking recently with someone who`s expertise is in pension funds and he did indeed confirm much of what you say about the current pension scheme. It is very worrying in its present form.

Spartacus

Did your "pension expert" calculate actuarial projections on the back of a fag packet too?

This is beyond a joke.

GM

Spartacus

In what way is it "beyond a joke"? Do you have access to more recent figures?

Please do enlighten us with your own pension expertise which, as you have previously demonstrated, could be written down on a grain of rice.

bcb

Awwww sparty would you have liked it better if i had said he agreed with you?

It certainly was not a joke just a guy with vastly more knowledge than you who just gave me his OPINION.

The joke is that you try to belittle anything that doesn`t agree with you.

Do you think i`m telling porkies? do you think it strange that somebody may ask another person with far greater knowledge of their take on a certain situation? no sparty if its not rubber stamped it must just be a pack of lies eh?

You gather your knowledge from all these so called experts and follow their word on how to make the world a better place while i`m sitting here wondering why all these experts have have made such a mess of things.

Martino

Spartacus the education expert turned actuarial and pensions expert speaks.

Spartacus

Martino

Come on, did you actually read GMs post number 2?

"I've just done some calculations"

Seriously.

GM

Spartacus

And your point is?

Are you saying that the calculations are wrong?

Are you saying that the assumptions are unrealistic?

Are you saying that the 2012 asset figure and the 2010 liabilities figure are wrong?

I'm all ears.

Spartacus

GM

Are you for real?

Those questions cannot be serious ones surely.

What I can say if it helps dig you out of a hole is that the 2012 asset figure and the 2010 liabilities figure ARE the 2012 and 2010 figures respectively which should be so obvious that it does not need to be said.

GM

Spartacus

So - please explain what your point was in your 9.32pm post of 8th December to Martino.

Or were you simply trolling again for the sheer hell of it?

Spartacus

GM

Hopefully Martino got my drift. Hopefully you did too. Maybe we should just leave it there for now.

GM

Spartacus

No, I didn't "get your drift" at all. If I had done then I wouldn't be asking you for clarification!

Martino

I didn't get the drift either. That's why I didn't respond.

Billythefish

GM

Sorry for seeing all this so late on.

Actually, your assumptions are fine - it's your starting point I'd disagree with.

You're starting with the assumption that the FRS17 valuation is correct in the first place.

What I am arguing is that it is not. It is prudent, yes, phenomenally so. But why, if it is so correct do actuaries base triennial valuations on different assumptions to FRS17?

Can you answer that one? I can't!

GM

Billy the fish

Thank you for your endorsement of my assumptions. Might be worth you having a word with Spartacus who clearly has a problem with them!

Yes, I can answer your question.

FRS17 is an accounting policy, not an actuarial valuation policy. Actuaries value pension liabilities using actuarial methods and systems. This produces the actuarial valuation of the liabilities figure.

The accountants then take that actuarial valuation figure and evaluate it for accounting purposes by applying accounting principles, specifically FRS17.

Martino

Everyone should read this article and GM's additional comments. It's about time all those in the public sector woke up and smelled the coffee.

kevin

While GM may have some idea, there is no up to date figures available on the size of the defecit, until this is known then any calculations are pure speculation.

GM

Kevin

Yes, the calculations are indeed speculative until the 2013 valuation figures are known.

The main purpose of my calculations was to (a) show the folly of using all current contributions to pay current pensions-in-payment, with nothing being added to the fund to help meet future liabilities, and (b) to demonstrate what it would cost the taxpayer, based on what we know at present, to get rid of the existing deficit over a 10-year period.

Spartacus

GM

You need to wait for the 2013 accounts in late spring and the 2013 actuarial valuation later in the year.

It could turn out that your assumption that nothing is being added to the pot is incorrect.

The pre 2007 accrued benefits are underfunded, we know that, but whether the shortfall is being met by the increase of contribution rate which came into effect in 2010 combined with any growth of investments and changes in actuarial assumptions is unknown.

In the absence of professional information you just make up your own assumptions which is frankly ludicrous.

GM

No Spartacus

What would have been "frankly ludicrous" would have been for me to not state the assumptions on what my calculations were based. I have based them on the current information available, as opposed to your "frankly ludicrous" approach of denying that there is even an issue to be concerned about, or failing to grasp the implications of not adding to the pot each year instead of paying out all contributions.

On the basis that the inertia cost the taxpayer £334k per day in 2012, it is important that these things get brought into the open while the negotiations are taking place.

Neil Forman

Martino

Agreed. I await this years actuarial report, I think that is going to show a completely different story to the 2010 one.

Simon

Simply wait for Kevin Stewart's Project Proteus to be rolled out. Any concerns about what's left in the pot will all magically disappear.

Realist

Clearly we need a proper actuarial report to give us an accurate picture, but I would be surprised if GM's assumptions underestimate the potential scale of the black hole. He assumes a generous 6% investment growth figure for a start which would have been hard to achieve in recent years.

One only has to look at public (and private) sector pension liabilities in the UK and elsewhere to get a feel for just how big a problem this is.

The problem is entirely down to us all living longer - no massaging the figures is going to change that so we had better be prepared for some bad news.

Spartacus

Realist

"Clearly we need a proper actuarial report to give us an accurate picture." I totally agree but with this in mind the rest of your post does not really make sense.

For example the "black hole" pertains to the fact that the scheme currently has a funding target of 90% of the pre 2007 accrued benefits. These liabilities are set in stone although their value will fluctuate year to year or depending on actuarial assumptions used. But the fact is that these underfunded liabilities will gradually get paid off, at what ever value they happen to be at the payment date. The States are obliged to pay whatever falls due and the overall value of them will deplete and cease. That is a fact.

When it comes to paying the post 2007 liabilities it is a slightly different matter because from 2008 I gather the scheme changed, to include an increase in retirement date and other changes. These obligations will continue to exist as employees come and go and the scheme remains. The size of liabilities may change higher or lower but the fund is intended to be perpetual. The projected value will of course continue to change depending on the assumptions used at the time of valuation, however this part of the scheme has a funding target of 100% which has been met and is intended to continue being met. There is no black hole for this continuing part of the scheme.

Now, it is of course anticipated that, because the pre 2007 liabilities are being paid at a rate of 100% from a pool which is only funded to 90%, the overall funding level may decrease gradually over time, the employer contribution rate was increased substantially with effect from 2010 and the scheme has yet to see the impact of that change, let alone all the other numerous factors which affect it.

Also, I'm not sure that we do ALL live longer, I would have thought that modern medical advances means that many people now survive when they would previously have had an early death. Therefore the average life expectance is uplifted by those additional people who now make it into old age. This doesn't necessarily mean that people who would have made it to old age anyway will live longer. Perhaps some do but many succumb due to the vices of modern age. I accept that life expectancy will probably generally continue to rise and that people will generally live longer but I think the ramifications of raising retirement age needs to be thought through carefully. For example, perhaps the fact that the retirement age has been lifted means that there will be more death in service payments. Conversely perhaps the fact that fewer die early means that there will be fewer death in service payments.

The actuaries take into account all of these details in their projections and produce a valuation which takes everything into account. That's their job. It is not a simple exercise.

I do not profess to know all the answers but I really do think that we should allow the professionals to do their job. They are paid a small fortune to advise and are deemed qualified to do so. If they say the contribution rate is adequate or needs to change, that is then a matter for the States. Really though, the States cannot make an informed decision or make any claims about sustainability of the scheme without up to date information.

GM

Spartacus

You say: "I do not profess to know all of the answers".

Now that really is a first.

Realist

We are both in agreement about the need for a proper actuarial evaluation then Spartacus - all we are disagreeing on is the potential impact of that report.

I am afraid I cannot share you optimistic outlook. To imply that increased longevity is not necessarily a significant factor is simply wrong.

According to Age UK, ('Later Life in the United Kingdom' February 2013) nearly one in five people currently in the UK will live to see their 100th birthday. Put simply, the money we pay to today's pensioners is funded by those who are working now. As the proportion of people over state pension age grows, the more expensive it gets.

When David Lloyd George introduced the first UK state pension it was worth around 25p a week and could be claimed on reaching the age of 70. At the time, life expectancy was around 50 so very few people ever got to claim anything at all.

These changes in longevity have an exponential impact on the pension system in Guernsey as elsewhere. We cannot afford to be complacent about this, we really do need to address the issue now.

Spartacus

Realist

We can speculate about the potential impact of the report, no problem, as long as no formal decisions are made on the basis of such speculation. We could also speculate on the impact of forcing through changes without the consent of public sector workers and I would not be optimistic about that scenario.

Whether or not increased longevity is a significant factor, the fact remains that the actuaries will take the life expectancy of the public sector workforce into account in their assumptions.

As at 2008 I gather an adjustment was made to the scheme in relation to life expectancy, and surely life expectancy has not shot up in that short time since then.

As at 2010, the date of the last actuarial valuation the actuaries recommended a decrease in the contribution rate for the combined pool.

The current pension payouts are 90% funded for pre 2007 accrued benefits and 100% funded for post 2007 benefits, if this was not the case then I would agree that current employees contributions are funding those who are receiving their pensions however there is a very substantial fund from which those benefits are being drawn.

GM

Spartacus

Utter rubbish, especially your last sentence. Which I have spelt out ad nauseum.

All current contributions are being used to pay all current pensions-in-payment. The "very substantial fund" to which you refer, around £1 billion, is already allocated in full, in fact £500m beyond full, to fund future pensions. The asset of £1 billion is trying and falling short by £500m to cover £1.5 billion of liabilities.

Jon

Spartacus if you're not a civil servant why do you even care, or want the civil servants to keep their existing pension? Wouldn't mind betting you're sitting in your little warm office at the Grange doing very little work.

Spartacus

Jon

Wrong!

It's more about what I don't want. I don't want expensive legal claims against the states. I don't want industrial action disrupting schooling, health and other essential services and I don't want the salary costs to escalate to compensate for the loss of deferred benefits.

The pension fund is healthy according to the experts, if the professional opinion changes I might sit up and listen.

GM

Spartacus

Schools, health and essential services would inevitably need to be cut if the scheme stays as it is!

The pension fund is not remotely healthy to anybody who understands how to read and interpret a set of accounts.

Dot Comma

"....anybody who understands how to read and interpret a set of accounts."

We'll that rules you out GM!

Spartacus

GM

That's not true. The scheme is not to blame for the black hole and for FTP.

Perhaps it has escaped your notice that due to FTP staffing HAS been scaled back and the process has been taking place for several years now. And this year they decided to offer voluntary severance as well.

The actuaries valuation showed a healthy sustainable scheme and that is the purpose of having a valuation. They are the "experts" I was referring to. I don't consider you to be an expert by any stretch of the imagination and few would disagree after your laughable "back of a fag packet" projections in post number 2.

GM

Dot Comma

Really? Please elaborate.

GM

Spartacus

I never said that i was to blame for it.

How else is it going to be paid for, unless taxes are going to rise to pay for it?

No - the actuaries' report showed a ruddy great deficit. Asset liabilities - huge deficit. You clearly don't understand what you are reading.

I'm still waiting for you to tell me what is "laughable" about the assumptions that I made in my calculations. I made it explicitly clear that it was based on assumptions, and I explained exactly what those assumptions were. What bit of that do you not understand?

Spartacus

GM

If the States change their mind and decide they no longer wish to underwrite the risk of maintaining an underfunded scheme then that is for them to decide and it is for them to decide how/when/if to cover it.

We have discussed all the options of how it can or might be done several times before and it always tends to get you in a bit of a tizz so lets not go there.

You are not an accountant GM. No way do you have any accounting qualification or experience.

GM

Spartacus

Well, I can only prove that I'm a qualified accountant by revealing my identity, and I'm not going to do that.

I assure you that I am, but I'm afraid you will have to accept my word on that.

However, I'm intrigued why you might think that I am not. I've yet to see any reasoning to back up your vague criticism of my assumptions and calculations. You simply don't want to accept what they mean.

Dot Comma

GM,

Elaboration, just for you...

I assumed you were an expert in the field (admittedly, it wasn't much of an assumption given your propensity toward self-acclaim).

I then assumed that your level of 'knowledge' surpassed that of my B-Tec in business studies (which had lain dormant at the back of my brain these past 25 years).

I assumed to take an interest in some of your postings (about 6% of them - the other 94% appear to be nothing but very poor attempts at gainsay and oneupmanship).

I then got out my fag packet and performed some complex equations which told me that if I posted on this forum, ad nauseum during work hours, posing as an expert on every subject under the sun, then I would soon need a seven figure business loan to prop up my company.

I then thought to myself 'here's a bloke who can't even see what use chemistry and biology would be to someone entering the plumbing trade, what are the chances of him being an authority on the complexities of a billion pound superannuation scheme?'.

Then, using all my assumptions (which I've clearly stated so I'm entitled to conclude anything I like) i concluded that the chances of that being the case are 0% with an uncertainty of plus or minus zero.

Just putting some perspective on how you're perceived old chap.

Spartacus

GM

Your calculations and conclusions are nonsense.

To suggest your assumptions are inaccurate and naive and that your calculation are incorrect and incomplete would be an understatement.

I can't be kinder to you than that.

GM

Dot Comma

It's a free world. You are of course entitled to your opinions, as am I.

Your perception is entirely up to you. Likewise I have already formed my perception of you.

The proof of the pudding will be in the eating.

GM

Spartacus

Once again, all you can say is that my assumptions and conclusions are flawed, without elaborating on why they are flawed. You simply don't like the outcome.

So come on - put your money where your mouth is. Tell me which elements of my assumptions and conclusions are flawed.

Spartacus

GM

No it's ridiculous. I suggest you let those who are qualified experts do their job and get back to your sudoku.

Island Wide Voting

Hah! Nothing wrong with sudoku.It's the first thing I turn to in the Daily Mail after I've checked out the regular horror stories about how the UK education system is continuing in its downward spiral

GM

Spartacus

As I thought Spartacus. All mouth. You have absolutely nothing with which to counter my assumptions and calculations.

Not very impressive at all. You try to discredit the sums but haven't a clue where to start.

Just go on pretending that its a bad dream. One day you will wake up.

Dot Comma

Sudoku involves numbers, which we all know GM cannot work with. I'd imagine him to be more of a word search man. I've heard he's a big noise down at the Joey club.

GM

Dot Comma

One day you might just post something constructive.

Just like Spartacus, I challenge you to counter my assumptions and calculations instead of ridiculing them without foundation.

Do you deny that the latest available figures show a fund worth circa £1 billion and liabilities of £1.5 billion, meaning a deficit of £500 million?

Do you deny that the scheme receives circa £40m of annual contributions and pays out circa £40m of pensions-in-payment?

Do you deny that the investment fund fell in value by £121.9m in 2012, equating to £334k per day?

Come on - let's hear you.

Spartacus

GM

You are right, I wouldn't know where to start.

GM

Spartacus

You haven't even tried.

Pure trolling.

matt

Dispense with the possible expensive legal claims by changing the law.

Civil service pension rates / contribution levels remain as they are, however remove the individuals tax relief on pension payments going to the States of Guernsey. Therefore all states employees will in effect be paying an extra 20%, and no need for arbitration.

kevin

GM,

You can be a qualified accountant but it makes no difference at all if you are working with out of date figures.

Whilst I would not disagree that the pension scheme needs changes I don't buy into this rubbish that the deficit was increasing by £334k a day! That must be considerably more than what is being paid out and if this really was the case then the island would have sunk by now!

I'm taking your calculations with a very large pinch of salt, as anybody with a bit of common sense would do.

GM

Kevin

In the absence of current figures, assumptions are made on the most up to date figures available. Those assumptions are clearly stated. Nobody is misleading anybody.

Would you prefer that we completely forget about the whole topic until the latest figures are available and then, whoops, the deficit is £500m or £600m or £700m or worse? Can't say that we didn't see it coming.

Procrastination and sweeping it under the carpet saw the deficit rise by £121.9m in 2012 alone due to losses in the investment markets. That is £334k per day. Work it out and check it out for yourself. The information is publicly available.

Yes - it's a lot more than is being paid out. £40m paid in, £40m paid out.

Now do you see why I am so perturbed about it?

islander

Jon.I would guess Spartacus is not a civil servant.Maybe a retired one now recieving a well earned pension.

So much time spent on this forum would not be allowed during business hours through the life of a hard working civil servant.

If Sparticus does work in a little office at the Grange then its time the states sold this building and all its fixture and fittings.

Quizzed

@ sparty

It would seem that you are the only person on these threads, outside of the public sector, that sees the issue from our point.

Thanks for your support. You are right, there will be a stance which may not be favourable to all but a contract is a contract. I think many personnel in many different departments will review their contracts as null and void should this go through.

This will result in many employees reducing the 'good will' that the island enjoys from the public sector employees

People like gm etc are all for the change because they have their own agenda. Don't be fooled by gm, because all he wants is to limit any chance of his business being effected. He views public sector as selfish but his drive is all about his pocket!

Leave the existing employees contract alone and honour them! It is their duty, after all, 4,500 employees HAD to sign with no exception.

Alister Langlois said that the shortfall would be met by the states.

So, States..........meet the shortfall........if there is one......close to new entrants and lets get on with life.

Just sayin

GM

Quizzed

If any employees wish to consider their contracts to be "null and void" then that means they won't be entitled to any salary, let alone any pension benefits. Have you thought that through?

What possible agenda could I have "to limit any chance of (his) business being effected"? You'll need to explain that one to me.

Quizzed

GM things are so cut and dried to you.

Sitting in your ivory tower. Guernsey's number 1.

You are scaremongering on a large scale and it seems strange that any possible over spend will (in your eyes ) result in gst. You keep mentioning this and i could only presume it will effect your business.

I guess you are fully behind the extra 900 being allocated to the finance sector.

So you want us to pay so that you protect your business. Thats my theory ayway

The point i was making reference the contracts was that if the states can decide to change our contracts without our consent, how can they expect us to hold our side of the bargin to the letter?

I don't expect you to know how much 'good will' goes on in the public sector but i would expect it to slow down some time soon.

I guess on the plus side it would create more jobs. Oh that goes against ftp and severence policies.

GM

Quizzed

No, not an ivory tower. Just a concerned taxpayer who can smell the coffee that you and others are incapable of smelling.

Yes - I am in favour of the £900k. We need to protect the industry which directly or indirectly contributes around 70% of our tax revenues. What is your proposal for replacing that tax revenue if we did not support finance? Why should Tourism receive big grants from the States and contribute only a tiny fraction of what finance contributes to the tax coffers?

If you as a civil servant don;t like your contract then you are entirely free to find alternative employment, just the same as any employee in the private sector.

kevin

Quissed

GM is an expert on pensions, education and all things financial (I don't doubt there is a serious deficit in the civil service pension fund) but you won't see him making a move into the civil service or politics, no,no,no too busy piling up his finance package.

He's a middle class boy who never had to struggle for anything. Fell into finance at just the right time, lucky,lucky,lucky and will enjoy his massive pension pot while at the same time trying to deny others much less well paid in service of the community and no less talented than he.

Nice guy gm.

GM

kevin

Firstly, some facts.

I'm happy to be called an "expert" on pensions and (most) things financial. I'm not an expert on education - merely an interested party with strong opinions.

No, you would never see me move into the civil service or into politics for many reasons. Truth be told, I could afford it in 5-10 years time but would then be too old for the civil service, and my temperament would see me last 5 minutes in the States as I could not handle the way in which the system works. I'm used to making business decisions based on commercial principles, not being told "that cannot be done because that's the way the system works". I also don't believe that elected politicians run the island at all - the civil servants have all the executive power, so what's the point of going into politics?

A middle class boy? Yes, I can accept that. Never had to struggle for anything? Not 100% correct, but yes I recognise that I have been more fortunate than many. Lucky? Well - I've worked 70-80 hours a week for probably 20 out of my 30 years in finance, so I guess I have made and deserved my own luck.

Massive pension pot? Er...no. I have a very modest pension pot, which I have funded entirely out of my own income, with no employer contributions apart from 3 years worth when I worked for another institution in my late teens.

No - I'm not trying to deny public sector workers their pensions. I'm just committed to ensuring that the Guernsey does not go bust by trying to fund a scheme which is completely unsustainable. You yourself have admitted that you agree that there is a serious deficit in the pension scheme. How do you want it paid for? GST? Much higher income tax rates for all?

Surely you do not think that Guernsey should just continue with the scheme as it is, despite all the evidence being there that it is unsustainable without massively raising extra taxes to pay for it, and with the working population who would be paying those taxes already certain to dwindle in line with the demographic timebomb over the next 30 years?

Island Wide Voting

If all the vital facts and figures are due to be released sometime in 2014,albeit after the scheduled February? debate, isn't there a Deputy with at least half a working braincell who could come on here and say that he /she will lay a sursis to delay the debate until the 'proper' time?

Deputies Trott and Collins must have ample time between the monthly States meetings to prepare the paperwork or perhaps one of those Deputies who have been pretty much below the parapet since 18/4/12 could step up to the plate for once

kevin

Agreed - then at least we might get a more true picture of the situation.

Even though it will still be somebody's best guess as to what might happen as nobody knows how long they will live for, how many people will work for the States until they retire or what will happen in the investment markets in the future!

GM

Kevin

Re your second paragraph, that will always be the case with any pension scheme valuation. Its why actuarial valuations are based on probabilities. It comes out with a prudent calculation based on standardised probabilities, so that those funding it have the best estimate possible.

It is why assumptions are used. Assuming prudent rates of investment return based on long-term trends (which smooths out volatility). Assumptions re life expectancy (recognising that the average is rising due to medical advancements). Assumptions about how many will work for the States and how long for (although this is more directly correlated to contributions unless of course the scheme is being underfunded and nothing is being added to the investment pot each year as it is all being used to pay current pensions).

The objective of course is to AVOID getting 20-30 years down the line and discovering that there is a massive black hole and no way to actually pay the pensions. In Guernsey's case we have already got the massive black hole re existing liabilities, let alone having to fund the pensions for future service.

There seems to be an aversion to being prudent.

kevin

GM,

If current contributions are meeting the current pension funding requirements and continue to do so then how are you arriving at a £500m deficit?

What is going to change so drastically, is life expectancy going to increase to 250 years?

If the scheme was to be closed to new entrants AND current contributions remain sufficient to cover current requirements I fail to see that the situation is as dire as you would have us believe.

GM

Kevin

Very simple.

The assets of the fund stand at £1 billion. The liabilities at the last valuation were £1.5 billion. That's a deficit of £500m.

Got it?

Liabilities will rise, even just through inflation. Assets may or may not rise, as they are exposed to the volatility of the investment markets. If liabilities rise faster than assets rise, then the deficit gets even bigger. In fact, even if assets rise faster than liabilities, the deficit can still rise because the liabilities figure starts 50% larger.

It is essential therefore to add new contributions to the fund each year, just like anybody trying to save up. Then those extra funds being added each year grow at a compound rate. But that's not happening now, because all contributions received are being used to pay existing pensions-in-benefit. Revisit my calculations and you will see the huge difference when contributions are added to the fund each year instead of just being used to pay current pensions.

Imagine that you had your own personal pension scheme and you are aged 50. Assume it stands at £300k currently. Obviously there is pension-in-payment. Its a money-purchase scheme so there are no guarantees. You will get a pension based on the value of that pot. There cannot be a deficit of course, as there are no obligations of an employer to pay specific pension benefits.

You know that in order to build that pot, you need to add to it by making contributions. Otherwise, the pot will only grow in line with the investment markets. If you manage to put an extra £5k a year in for the next 15 years, then that extra money will grow and grow in a compound manner and by the time you reach 65 your pot will be a lot bigger than if you don't put in that extra £5k a year. It is likely to mean the difference between your pot being worth £600k or £900k by the time you get to 65. The power of compound growth is massive. Extrapolate that to a £1 billion fund. Do the maths.

At the moment, the public sector scheme is not having anything added to the pot each year. All of the contributions are being used up and so there is nothing being added to the fund so that it can grow, Its the same as you ceasing to put in your extra annual contributions to your personal scheme. The pot is not able to grow properly.

With your own scheme, if you don't bother to make extra contributions then the consequences are borne solely by you. You will have a smaller fund upon which your pension will be based. With the public sector scheme, all of the risks of underfunding it are with the taxpayer, because the pension obligation is not simply to pay whatever the asset fund can produce. The obligation is to pay defined benefits. Those defined benefits have to be valued by an actuary and it produces a liability figure which the assets need to cover. But the assets are currently £500m short of where they need to be, based on the latest valuation.

Why has this arisen? There are several factors.

Liabilities have risen because longetivity is rising. People are living longer on average, and so the fund needs to pay out for several years compared with what was projected when current 80-85 year olds were actually working.

Assets have been hit badly and have seen very volatile investment performance since 2008. We are now in a sustained period of low interest rates and thus low returns for government bonds (as low-risk, typical pension assets), so investment returns are modest, at a time when the liabilities are ever-rising, so the gap widens.

And finally the States, in their infinite wisdom in 2011, failed to take FRS17 fully into account and decided to set contribution rates at a level which has spectacularly rebounded on the scheme because there is nothing left to be added to the investment pot once current pensions are paid.

So, either contributions have to rise substantially, both from the taxpayer and from the members, or benefits have to be cut. There are simply no other ways of eradicating the deficit unless investment returns become spectacularly good for a sustained period, but that entails taking much greater risks which are totally inappropriate for a pension scheme as it is very likely to result in further capital losses, making the deficit even bigger.

The other option is to do nothing, ignore it, and then the fund will run out of money in around 30 years time, leaving the States of Guernsey to bail it out, which in turn will bankrupt Guernsey.

I've been consistently saying this for the past couple of years. Doing nothing in 2012 saw the deficit grow by £121.9m.

The noose around Guernsey's neck with this scheme is getting tighter and tighter. Those who are still in a state of denial about it are ignoring the obvious. The evidence is staring us in the face.

Spartacus

GM

It is not "very simple". It is very complicated. The rest of you post is therefore littered with equally flawed observations and analysis.

GM

Spartacus

Rubbish, as ever from you. Its very simple. You are simply either too thick to understand it or too stubborn to accept that I'm right.

Once again, put up or shut up. You repeatedly claim that my views are flawed but not once have you presented any detail. What is flawed?

If the best you can do is bleat "its flawed" and continue to fail to present any counter-arguments then I suggest you simply admit that you have no counter-arguments at all.

Once more - put up or shut up.

Dot Comma

Oh dear GM. You really are embarrassing yourself now, and whoever is employing you should really be dragging you in for an appraisal. Perhaps you've had too much Christmas cheer, or maybe the Joey club wordsearch has you flummoxed.

For your own sanity I'd suggest leaving this topic until you have some relevant data to work from (such as an up to date PSPS fund valuation!!)

I'm all for a constructive debate, but your GCSE style, fag-packet maths is beyond tiresome, it's just cringeworthy.

GM

Dot Comma (ok, let's call you Spartacus)

You're still at it. You are claiming to discredit my calculations and assumptions without actually pointing out where they are flawed.

Put up or shut up.

Spartacus

GM

I'm not "dot comma".

GM

Spartacus

If not then you are two peas in a pod.

Both happy to spout off that my post was flawed but totally unable or unwilling to expand on why.

Pathetic.

kevin

GM,

I'm still not convinced - what exactly do these liabilities consist of if current contributions are covering current payments?

£1.5 billion is a lot of money to account for.

GM

Kevin

The £1.5 billion liabilities is the current capital value of the projected future pensions which have already accrued and which will have to be paid out in the future.

Put very simply, if someone approaching 65 will be entitled to a pension of £25k a year, then the sum of capital needed would be somewhere on the region of £500k. Somebody who is currently 40 and on £40k a year will be projected to be earning a figure of that sum, plus an assumed rate of inflation, until retirement age, which will produce a predicted pension assuming that they remain employed until then. A capital sum needs to exist in order to pay that pension in 25-30 years time.

The £1.5 billion liabilities figure is the 2010 calculation of all of those liabilities to thousands of members, and the whole calculation is re-done every 3 years to take into account changes in the number of employees, changes in earnings levels, changes in normal retirement age, changes in the rate of long-term bond yields etc.

I would expect the level of annual contributions being paid out of the scheme to materially exceed the current pensions-in-payment, with the surplus being added to the investment fund each year and reinvested so that the assets figure gets as close to the liabilities figure as possible. That is simply not happening.

So, by the time you, or more likely colleagues in their 20s and 30s get to retirement age, if there is still a huge deficit then lots of pensions will not be able to be paid without the taxpayer funding it. The £1 billion fund will pay out £1 billion of pensions but who is going to cover the extra £500m? The figures will be much bigger of course in 20-30 years time, but the assets figure won't grow by anywhere near enough if nothing is being added each year.

As per my initial calculations, imagine if the States now need to find an extra £40m or £50m a year to make up that deficit. How much of that are you willing to cover as extra contributions? How much is the taxpayer prepared to fund through GST or higher income taxes to cover the extra contributions?

Not concerned

Kevin,

You raise a good point.

I believe the huge potential deficit is caused because the actuaries can only work with the figures they are given or are available. They will take the number of workers in the scheme, their ages and their salaries and project forward. The problem is that a large number of civil servants are on licences and after three, five or maybe ten years they will return to their previous home. They will never accrue full pension rights and will never be a burden on our pension fund, nor on our health service. I also do not believe there will be a demographic time bomb of the size predicted, licence holders will never move into our nursing homes etc because they simply will not be here.

GM

Not concerned

A licence holder who accrues a pension from the States of Guernsey will receive that pension regardless of whetter he remains here or not. And he is likely to live just as long.

The demographic timebomb issue relates to the number of people working and earning to generate taxes to pay for the island's infrastructure, relative to the number of non-working (ie retired people). Its the dependency ratio. Somebody, whether licence-holders or not, needs to produce the required amount of tax revenue to keep the island afloat. That tax revenue is needed to help pay out the pension benefits, and it will need to be a lot of help because of the funding deficit.

Not concerned

GM,

Sorry, a licence holder who returns to the UK after, say, five years will only have accrued five years worth of pension payable from age 65 until death. It is my belief that the actuary does not differentiate between licence holders currently in employment and local full term residents and therefore his actuarial statements do not reflect the true situation. The so-called demographic time bomb also relies on the statistics available, statistics that do not differentiate between licence holders and qualified residents. Everything seems to derive from a bell graph of our population, a bell graph that is massively distorted due to the number of temporary residents that show up in the working age group. A graph of an island population with no immiration or emigration will be almost perfectly linear, a totally different scenario.The actuarial assumption seems to be that this distortion or bulge is a group of people who will age and become pensioners living on Guernsey; reality is that yes they will age, but not in Guernsey because under the terms of their licence they will be back in the UK or wherever

GM

Not concerned

I don't follow your argument at all.

Someone with 5 years of pensionable employment will earn and receive exactly the same pension regardless of whether they retire in Guernsey or not. The liability of the pension scheme is identical.

If a licence holder leaves the job and leaves the island, then they will be replaced by another person, whether a licence holder or not. That replacement will be carrying out pensionable employment.

The demographic timebomb relates more to the States of Guernsey pension scheme for all islanders, not the public sector pension scheme. However, to the extent that the public sector needs to be propped up by the taxpayer, the dependency ratio becomes critical as there will be far fewer people working in Guernsey (as a percentage of the population) to earn that tax revenue to pay for it.

kevin

GM,

Do these liability calculations take into account the fact that many States employees will not be working up to retirement?

There will be hundreds(if not thousands)who will either leave the public sector before retirement age,emigrate or even die before claiming their pensions.

If this is not taken into account then the liability figures are rather pessimistic to say the least.

GM

Kevin

Yes. The actuarial calculation will factor in average length of employment based on long-term trends.

Not Concerned

GM,

Somebody working in Guernsey for five years aged under 40 (for example) will take away five years of pension entitlement based on his terminal earnings but he won't draw that for 25 years, by which time, even with any pension increases, it will still be worth a bit more than bu**ger all. Our problem would be if everybody currently working for the States of Guernsey were to work to age 65 - then we would have a pension shortfall, a demographic time bomb and a real problem. But they can't so we won't.

In my experience, quite significant as it happens, people under long term licence and nearing retirement age frequently up sticks, sell their grossly overvalued property on Guernsey and decamp to the UK where they still have family and where they can buy a nicer house for less money and also live a whole lot cheaper with free health service.

It is my understanding that the Old Age Pension requires a minimum of ten years of reckonable contributions, according to what I can see on the SSD website anything less than that does not qualify for a state pension. In addition as far as I am aware as we do not have a social security agreement with some European countries any guest workers from those countries do not have any pension entitlement (but they are paying for it).

It is a very confusing subject and I have never found anybody in the States who really understands it, or at least is able to answer complex questions on it.

GM

Not Concerned

Sorry but your point still isn't clear.

I don't see anything in your post which won't have already been taken into account by the actuaries when estimating the liabilities figure.

kevin

GM,

You can argue the point all day long, but it will add far more weight to your claims when we get some up to date figures.

GM

Kevin

Agreed.

I just hope that the further wait and procrastination won't cost us another £121.9m like it did in 2012.

Not Concerned

Sorry GM

I forgot that you are a superior being and the font of knowledge for all things everywhere. I am allowed to express an opinion and I stand by what I have said, I don't believe that the Auditors would take into account how long a person is licensed to work in Guernsey, for a start many do not even see out the term of their licences. I digress, I am not going to make the mistake others have made in getting into a long debate with you, we are both entitled to our opinions and let's just leave it at that. I can understand the frustration that being right all the time brings so if makes you feel any better I will even agree your opinion is the correct one. End of.

GM

Not Concerned

Of course you can express an opinion.

I just don't like to see anyone labouring under a misunderstanding.

beercan

Kevin, spot on.

These aspects will clearly have been overlooked by the actuaries, blind fools that they are.

As a States employee who puts in a pittance of course you should have your final-salary, index linked pension subsidised by the taxpayer.

It's only right because you could have earned so much more in the private sector but selflessly chose not to.

Islanders salute you and all your kind.

kevin

beercan,

Since my 6.5% (that I have to pay - no choice) is such a pittance I take it you won't mind paying 26.5% income tax to prop up my final salary pension?

Thought not.