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Deputies have been urged to reject an amendment which suggests temporarily reducing the States contribution to the public sector pension scheme to zero.
The Retired States Employees Association has written an open letter in response to the amendment ahead of this week's States debate on public finances.
Dear States Members,
Funding and Investment Plan [P.2023/101]
You will be aware that Deputies Heidi Soulsby and Gavin St Pier have placed Amendment No.4 to delete all the propositions from the Policy & Resources Committee in the above policy letter and substitute therefor nineteen alternative measures. The proposals will be debated at the States Meeting commencing on 17th October 2023.
Within their proposed amendment, Deputies Soulsby and St Pier ask the States:
“17) To agree that the employer contribution rate in respect of the defined benefit scheme part of the States of Guernsey Superannuation Fund be decreased to 0.00% for the period 1 January 2024 to 31 December 2026 having regard to the Fund being 107% funded based on the 2020 actuarial valuation, making around £76m available to fund capital expenditure and GWP priorities".
In an accompanying Explanatory Note, they state that:
“17) […] the introduction of GST would have a negative impact on the Public Sector Pension Scheme of £50m. This proposition takes advantage of the fact there is a surplus in the fund that can be used to the benefit of the community.”
Although the Deputies provide a footnote to their Appendix 2 – ‘Cost of introducing GST’ stating that the ‘States employee pension fund impact’ figure of £50,000,000 was “provided by the States of Guernsey Treasury”, they have not provided any detailed explanation for how that figure has been calculated. However, the Bailiwick Express reported them to say that “the impact … would be a one-off deterioration” rather than a recurrent effect. To be clear, the Retired States Employees’ Association (RSEA) is not making any comment on the original propositions from the Policy & Resources Committee, nor on the other elements of Deputies Soulsby and St. Pier’s Amendment No 4.
The Association’s immediate concerns are the impact on the Superannuation Fund (the Fund) and the process that has been adopted. The Fund exists to provide pension benefits to the employees of the States of Guernsey under the Rules of the Public Servants’ Pension Scheme (PSPS), the latest version of which was approved by the States on 22nd May 2019 [P.2019/29]. It can be found at: https://www.gov.gg/CHttpHandler.ashx?id=118510&p=0.
PSPS Rule 18 requires that the Policy & Resources Committee:
“must commission from the Actuary such valuations and reports as it considers appropriate”.
The norm has been for triennial valuations, with the exception of that for 2019, which was deferred for one year due to Covid, with interim annual updates also published. The next full valuation is due at 31st December 2023, for which preliminary work is no doubt already underway.
The Deputies refer to “the [Superannuation] Fund being 107% funded based on the 2020 actuarial valuation”. However, this oversimplifies what is a more complex matter, not least as the valuation is from almost three years ago, and their proposal does not take fully into account the outcome of that valuation. This is for two main reasons. First, action already taken by States Resolution and, second, caveats expressed by BWCI, the Actuary.
On 14th July 2022, after consideration of the Actuarial Valuation report and the Policy & Resources Committee’s recommendations, the States resolved to agree that:
“except for Guernsey Electricity Limited, the employer contribution rate in respect of the States of Guernsey Superannuation Fund be decreased to 10.3% with effect from 1 August 2022 …”
[…]
“that the employer contribution rate for Guernsey Electricity Limited be decreased to 7.5% with effect from 1 August 2022.”
The policy letter stated that the reduction in the employer contribution would save approximately £9m per annum, of which £8m would accrue to General Revenue. It follows that that element of the 2020 surplus has already been utilised and can no longer be available.
The Committee’s recommendations accorded with the following advice from the Actuary:
“The current rate of Employer contributions being paid is an overall rate of 14.1% of Pensionable Salary. The required Employer contribution rate at this valuation is 10.3% of Pensionable Salary. As there is a surplus in the Fund at the valuation date, the Employer could pay contributions in line with the Employer’s future service contribution rate of 10.3% of Pensionable Salary.”
However, the advice continued as follows:
“it should be noted that Employer contribution rates could be required to be increased at future valuations, in order to eliminate any shortfalls arising, if the assumptions are not borne out in practice (e.g. if investment returns were significantly lower than expected).”
The Actuary also stated that:
“It would be possible to use the surplus revealed as at 31 December 2020 to support a reduced Employer’s contribution rate, below the required future service contribution rate [of 10.3%]”.
However, given the volatility of the funding position and uncertainty surrounding how it might evolve over time, the surplus could instead be retained within the Fund to help protect against future adverse experience. In particular, the Fund invests significantly in asset classes such as equities and other return seeking assets that are expected to produce higher future returns than other asset classes over the long term. One of the risks that must be traded off against these expected higher returns is the increased volatility of the Fund’s returns and therefore a volatile funding position. Retaining the surplus within the Fund would help alleviate any adverse impact from volatile investment returns.
It should also be noted that there is significant uncertainty surrounding climate change and the impact it might have on the Fund. […] it would be prudent to retain the surplus within the Fund to help alleviate any adverse impact from climate change.
Retaining the surplus within the Fund will reduce the likelihood of future shortfalls arising and reduce the risk of having to pay significantly higher contribution rates at future valuations.”
It appears that the Deputies have overlooked or set aside the Actuary’s concerns in proposing their amendment.
PSPS Rule 29.2 provides for the Policy & Resources Committee, acting on the advice of the Actuary, to consider such steps as it considers appropriate to apply such surplus, including:
(a) retaining the surplus in the Scheme to cover future liabilities;
(b) reducing Ordinary Employer Contributions or Member Contributions for such period as the Actuary considers appropriate;
(c) improving the benefits granted to Members or granting additional benefits to Members; or
(d) allocating the surplus for the benefit of Beneficiaries or the Employers in such other manner as may be permitted by law.
There is no provision for the surplus in the Fund to be applied outside the scope and purposes of the PSPS.
It is important to note that annual accounts present snapshots while actuarial valuations take into account a range of assumptions covering several factors in assessing current assets and future liabilities over many decades before making recommendations to the P&R.
Looking beyond the figures arising from the Actuarial Valuation, PSPS Rule 16. states that:
“The [Policy & Resources] Committee shall consult with the Pensions Consultative Committee on any decision that relates to: {…]
(c) any proposed amendments to the Rules;
(d) such other matters of general relevance to Members […] as the [Policy & Resources] Committee and the Pensions Consultative Committee shall agree.
The Pensions Consultative Committee (PCC) is a body comprising representatives of trade unions, of the RSEA and of the Policy & Resources Committee representing the States of Guernsey in its capacity as Employer.
There is no provision for the Policy & Resources Committee to propose either increases or reductions in employer contributions without first seeking advice from the Actuary but, in any event, the Committee has made no such suggestion in this Funding and Investment Plan policy letter.
Accordingly, the RSEA believes that the proposition from Deputies Soulsby and St Pier does not comply with current PSPS Rules (that the States of Deliberation have approved) in as much that it is not the Policy & Resources Committee making the recommendation to the States for the reduction in the employer’s contribution rate; there has been no advice from the Actuary as to the implications of such a reduction, nor has there been any consultation with the PCC.
It should also be noted that the States of Guernsey Accounts for 2022, approved by the Assembly on 19th July 2023, included on p91 the following statement under the heading of ‘Events After the Reporting Date’:
“Superannuation Fund – Investment Transfer
On 1 January 2023, £1.521bn of investments were transferred out of the States’ Investment Portfolio. They were moved into a separate Pension Scheme investment portfolio, to reflect the scheme members’ beneficial ownership of the scheme assets.”
In paragraph 2.8 of the proposed Funding and Investment Plan the Policy & Resources Committee explains that:
“The calculations have excluded any annual surplus or deficit of the Public Servants Pension Fund, the Seized Asset Fund or the Core Investment Reserve as these reserves are not available to fund services or capital expenditure.”
In each of the above quotations, the underlining is ours.
It could be considered that the element of the amendment relating to the PSPS and the Fund should be excluded from consideration in this debate by virtue of the clear statement in the 2022 Accounts that the beneficial ownership of the scheme assets rests with scheme members and the statement in para 2.8 are not available to fund services or capital expenditure.
Although the proposed amendment does not state directly that a sum should be withdrawn from the Fund, the proposal to reduce the employer contribution to zero for three years is tantamount to depleting the assets in the Fund to the potential detriment of the scheme members. Deputies Soulsby and St Pier, state that this will equate to some £76m but provide no calculation to validate their figure.
Their statement that there “is” a surplus in the Fund is misleading. Whilst it was true at 31st December 2020, following the actuarial valuation, closing balances reported in the States of Guernsey Accounts in recent years have been:
2018 - £1,357.8m
2019 - £1,501.7m
2020 - £1,615.3m
2021 - £1,754.1m
2022 - £1,524.7m
As already mentioned, those are snapshot figures at each year end and demonstrate how asset values and liabilities are subject to constant change, which is why the States have wisely approved Rules that require periodic actuarial valuations and enables the Policy & Resources Committee to make recommendations to the States in response to advice received from the Actuary. The further that time passes after the valuation date, the more unwise it becomes to treat the actuarial valuations as an indicative measure of the Fund’s current balance.
In summary, the Superannuation Fund serves a specific purpose and is not there as a convenient resource to meet shorter-term demands for the provision of other States services.
The proposed amendment also bypasses the procedures in the PSPS Rules, as approved by the States, for making changes to employer contribution rates and for these reasons should, therefore, be rejected.
Yours sincerely,
Sean McManus
President,
Retired States Employees’ Association
