Staff Pension Scheme. Annual Report Autumn Contact details

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1 Staff Pension Scheme Annual Report Autumn 2012 Dear Member, Welcome to the 2012 Annual Report of the University of Oxford Staff Pension Scheme ( OSPS or the Scheme ). This year, we focus in particular on the changes that come into effect from 1 January 2013 for active members. Communications about the changes were sent out before and after the formal consultation process, which began on 20 April 2012 and ended on 19 June The Employers decided that changes were needed because life expectancy continues to rise and the increasing cost of pension provision, driven by very low rates of interest, has made the Scheme financially unsustainable in its current form. The changes aim to put the Scheme on a more stable financial footing. From the start of next year, the Scheme will change from a Final Salary arrangement to a Career Average Revalued Earnings (CARE) arrangement for all current and future active members. Crucially, this means that your pension benefits after 1 January 2013 will continue to be calculated on a defined benefit basis. Your pension and deferred benefits will continue to be adjusted in line with the Retail Prices Index (RPI), capped at 8% a year. If you are an active member, for the first time you will be able to choose your level of contribution. The enclosed Your pension choice document includes more details on this and explains how you make your choice. You can also read more about the forthcoming changes on pages 2 and 3. Remember, benefits built up to 31 December 2012 will still be calculated on a final salary basis. In the interests of efficiency the Scheme will shortly be governed by a Corporate Trustee. The current board of trustees will become directors of the Corporate Trustee. This brings OSPS into line with most other occupational schemes in the UK. Active members and pensioners will continue to elect member-nominated directors to the Corporate Trustee board. Your summary funding statement is on page 4. Last year we reported that the estimated funding target was 421 million at 31 March At the same date, the value of the Scheme s assets was million. This gave an estimated shortfall of 80.5 million, equal to a funding level of 81%. At 31 March 2012, our actuary calculated that the funding target had risen to million while the value of the Scheme s assets had increased to million. The estimated shortfall has risen to million which is equal to a funding level of 70%. The outcome of the latest update highlights the importance of the changes that are taking place from 1 January Finally, there have been several changes to the Trustee Board since our last Report. It is with great sadness that I must report the death of our former pensioner Trustee, Mr John Kemp, on 21 January He was one of those responsible for setting up OSPS in 1978 and had served on the Board from that time until his death. Mrs Fariba Battye was elected onto the Board for the remainder of Mr Kemp s term to 31 March We would like to extend a warm welcome to Fariba as she joins the Board. Meanwhile, Ms Sophia McMinn and Mr Roger Bowler were re-elected onto the Board for a further three years, and Mr Frank Marshall and Mr Robert Allnutt were re-appointed as Trustees by the University. We would also like to welcome our new Secretary to the Trustees, Mrs Jan Killick, who joins us from the BBC. She replaces Mr Sam Ellis, who is taking flexible retirement after over 10 years of supporting the Trustees. We would like to thank Sam for all his hard work and help over the years. Mr Nick Sykes Chairman of the Trustees Contact details If you have any questions about the Scheme, or if you need to get in touch, please contact the Pensions Office. Telephone: OSPS@admin.ox.ac.uk Write to: The Pensions Office Finance Division University of Oxford Hythe Bridge Street Oxford OX1 2EP In addition, the OSPS website hosts a lot of useful information, including copies of the following formal Scheme documents: The Annual Report and Accounts The Statement of Funding Principles The Statement of Investment Principles The Trust Deed and Rules The actuary s latest report Log on to: pensions/osps 1

2 Changes to your Scheme If you are an active member you may recall from recent communications that your Scheme is soon to undergo some changes. Your Employer wrote to you about their proposals, the consultation process and to announce their final decision. If you are a pensioner or a deferred member, these changes will not affect you in any way. The Employers consulted with all affected members to gather feedback on the proposals and to find out which one of two sets of changes to contributions and benefits was preferred by members. Consultation began on 20 April 2012 and closed on 19 June During the process an OSPS consultation website hosted relevant documents for members to refer to. Open meetings were held around the University and colleges to give members the chance to find out more and to ask questions or raise concerns. Members were also encouraged to give their views through a dedicated helpline, and a questionnaire was issued for members to confirm which set of proposed changes they would favour. Members overwhelmingly voted in favour of package A. There is a summary of the changes in the box on the right. In summary, the changes that will take effect on 1 January 2013 are: OSPS will change from a Final Salary scheme to a Career Average Revalued Earnings (CARE) scheme for all current and future active members. If you are an active member you will be able to choose how much you contribute into the Scheme. Currently member contributions are fixed at 6.35% of your pensionable salary. Please look at the enclosed Your pension choice document for more details and to make your selection. On the enclosed form you should choose one of three contribution rates. Your choice will affect how quickly you build up your pension benefits and you will be able to move between the different rates as your circumstances change. The lump sum payable to your dependants if you die while you are an active member reduces to three times your salary at the date of your death. The dependant s pension payable if you die will reduce to half the pension you built up after 1 January 2013, plus two-thirds of the pension you built up to 31 December AVCs used to purchase additional pension will be restricted to an additional 15% of pensionable salary. Existing contracts to buy added service will be honoured on the current final salary basis. Flexible retirement will allow members, with the permission of their employer, to take part of their benefits and continue working at a lower salary. Your normal retirement date for future service will be linked to your State Pension age. Active members who joined before 1 August 2004 will continue to have the right to retire from age 60 without a reduction being applied to all their service. There will no longer be an upper limit on the age you can join OSPS, although you will not be able to remain an active member beyond age 75. Your pension and deferred benefits will be adjusted in line with the Retail Prices Index (RPI), but capped at 8% per year. Note that these changes apply only to future service. Benefits built up to 31 December 2012 will not be affected and will continue to be linked to your salary when you leave. 2

3 Many other employers are making similar, if not more drastic, changes to reduce the costs of their pension schemes. For example, some companies are closing their defined benefits scheme completely and transferring members to defined contribution arrangements for their future benefits. The future level of benefits from a defined contribution pension is much harder to predict than from a defined benefit pension as it depends on, among other things, stock market returns and the cost of annuities at retirement. The University preferred not to take such an approach but reluctantly decided that changes were needed. The increasing cost of pension provision, driven by very low rates of interest and increasing life expectancy, have made the Scheme too expensive to be sustainable in its current form. The actuarial valuation in 2010 found a shortfall in the Scheme s assets of 82.4 million, compared to the amount needed to pay for all members benefits. This had almost doubled since the previous valuation in 2007, and is estimated to have increased further since. Although the Employers have been making contributions to eliminate the shortfall, our actuary estimated it would have taken 17 years to achieve this if the changes had not been made. These changes are intended to help secure members benefits and the Scheme itself. They should also help to bring our pension costs to a sustainable level, in line with similar schemes. Remember, the changes are crucial to help keep the Scheme a defined benefits arrangement, which promises you and your dependants valuable benefits when you retire. Scheme reminders Additional Voluntary Contributions It is worth remembering that if you are an active member, you can increase your retirement benefits by paying Additional Voluntary Contributions (AVCs). You can make regular additional payments or one-off lump sums but you cannot pay AVCs through Salary Exchange. Up to 31 December 2012 you can only pay money purchase AVCs, but from 1 January 2013, you can choose between two types of AVC: CARE You can buy additional CARE pension in the Scheme by paying up to an extra 15% of your pensionable salary. When you retire, this will be added to your other benefits in the Scheme. Later in the year the Pensions Team will be able to give you a quote for the amount of additional pension you can buy. Money Purchase This option allows you to pay AVCs into a separate fund which you can use for additional benefits when you retire. You can buy extra pension (from OSPS or another annuity provider) or take some or all of it as a lump sum. Retirement age From 1 January 2013, the Scheme s normal retirement date will become your 65th birthday and will be linked to changes in the State Pension age in future (with the exception of active members who joined the scheme before 1 August 2004). However, if you wish, you can continue to work and pay contributions beyond your normal retirement date. The minimum age for taking early retirement is generally 55, but if you joined OSPS before 6 April 2006, you may be able to take benefits built up to that date at the age of 50. Remember that any benefits you take before your normal retirement date may be reduced for early payment. For further details, please contact the Pensions Office (see front cover). Membership figures The number of members in the Scheme rose by 357 over the 12 months to 31 March Active members 4,192 4,145 Deferred members 3,652 3,532 Pensioners 3,164 2,974 Total 11,008 10,651 Active members are paying contributions into the Scheme and building up benefits. Deferred members no longer pay into the Scheme but have benefits left in it for future payment. Pensioners (including the dependants of members who have died) are receiving benefits from the Scheme. 3

4 Your 2012 funding statement At 31 March 2011, our actuary, Jay Harvey of Aon Hewitt Limited, calculated the Scheme s estimated funding target as 421 million. This figure was based on the previous year s valuation result whilst allowing for changes in market conditions. At the same date, the value of the Scheme s assets was million, giving an estimated shortfall of 80.5 million (which is broadly similar to the shortfall at the previous valuation). As you can see, the funding level has dropped since the last annual update. This is largely due to the falling yields on gilts (Government bonds) which are used when putting a value on the funding target. When gilt yields fall, the funding target tends to increase. Although there was also an increase in the value of the assets due to the Employers contributions and positive returns on the Scheme s investments, it was not enough to offset the increase in the value of the funding target. This summary funding update highlights just how important the imminent changes are to the stability of the Scheme. With the changes in place from 1 January 2013, we expect the shortfall to be eliminated sooner than would otherwise be the case. Another way of looking at it 0% 100% The Scheme s estimated funding level at 31 March 2011 was 81%. At 31 March 2012, the estimated funding target had risen to million while the value of the Scheme s assets had increased to million. The estimated shortfall has risen to million. The funding levels shown opposite are worked out on the ongoing basis in other words, on the assumption that the Scheme will continue into the future. By law, a summary funding statement must also include what the funding level would be if the Scheme came to an end on the date of the update, and had to pay for all members benefits at once. This is known as the full solvency position. It does not mean that the University is considering ending the Scheme. The full solvency funding level is nearly always lower than the ongoing funding level. This is generally because: providing all benefits at once is likely to cost more than doing so over time; the insurance policies bought to provide members benefits tend to use low risk investments so usually grow slowly; and insurance companies add on their own administration costs and profit margins. 0% 100% The Scheme s estimated funding level at 31 March 2012 was 70%. Note: the value of the Scheme s assets for both years estimates does not include AVCs and other money purchase investments, which are invested separately. The last formal valuation of the Scheme, in 2010, found a shortfall on the full solvency basis of 290 million. This was equal to a funding level of 52%. Last year, at 31 March 2011, the estimated solvency funding level had risen to 55%. Twelve months later, at 31 March 2012, the estimated shortfall had risen to million, equal to a full solvency funding level of 48%. Again, the fall in the solvency funding level is due to falling gilt yields causing the funding target to rise more than the value of the assets. The Pension Protection Fund The Pension Protection Fund (PPF) offers protection to members of defined benefits pension schemes, if the employer providing the scheme is unable to meet the costs. For example, if the company goes out of business. In such circumstances, members may receive partial compensation. The Employers of your Scheme pay a levy to the PPF for this protection. You can read more about the PPF online at 4

5 The recovery plan All Employers in the Scheme are paying a contribution rate of 21.5% of members pensionable salaries. However, the vast majority of this (around 18% of members pensionable salaries) was being used to meet the ongoing cost of members future benefits. This left just 3.5% to help reduce the deficit. The benefit changes being introduced in 2013 aim to reduce the ongoing cost of providing pensions. As the Employers are maintaining the same level of contributions, this should allow more money to be directed towards reducing the Scheme s deficit. Returns on the Scheme s investments can also help to reduce the deficit. The Trustees and Investment Committee have been reviewing the investment strategy to maintain the desired level of investment returns while reducing the risk of short-term falls in the value of the Scheme s assets. This involves reducing the Scheme s reliance on equities to generate growth. The Trustees have appointed new investment advisers, Lane Clark & Peacock. With their input we have been reviewing a range of different types of investment. Recognising the stronger long-term growth potential of emerging markets such as China and Brazil compared with the developed markets of Europe, we have introduced an emerging markets multi-asset fund. We expect to report on further changes to the Scheme s investment strategy next year. From the accounts We summarise below the Scheme s accounts for the year to 31 March The figures are taken from the Annual Report and Accounts and our auditors have confirmed that they are accurate. The increase in the value of the Scheme s assets over the year was 27.9 million. The increase in the value of the Scheme s assets over the year to 31 March 2011 was 28.7 million. 000s Income Employers contributions (including salary sacrifice) 21,055 Members ordinary contributions 2,356 Members additional voluntary contributions 486 Transfers in 1,511 Investment income 688 Total income 26,096 Expenditure Pensions 9,709 Cash sums paid when members retired or died 4,642 Payments for members who left 4,560 Administration and investment management fees 1,145 Total expenditure 20,056 The value of the Scheme s assets at 31 March ,944 The difference between income and expenditure 6,040 The change in the market value of the Scheme s investments 21,887 The value of the Scheme s assets at 31 March ,871 The Pensions Regulator The Pensions Regulator is the UK watchdog of employers pension schemes. Its aim is to raise the standards of all UK work-based pension schemes, and increase members confidence in them. The Regulator has the authority to enforce a schedule of contributions and even change the way your future benefits build up in the Scheme. We are pleased to confirm that it has not needed to use its powers in this way for our Scheme. The Regulator also requires us to state whether there have been any payments from the Scheme to the Employers since our last Report. We have reimbursed the University for the cost of the administrative services provided by the Pensions Office and other expenses, but otherwise the Scheme has made no such payments. You can read more about the Regulator at 5

6 Investment update Financial markets have been very unstable over the past few years. The global financial crisis of , and the subsequent struggles of economies and markets to return to some sort of stability, has affected the investments of many pension schemes including our own. It is important to remember that pension scheme investment takes place over lifetimes. Our Scheme will be managing assets and making pension payments at least 50 years into the future. What is more the University and colleges, as the Employers, have several hundred years of history behind them and will, hopefully, continue several hundred years into the future. As current stewards of these very long-term assets, the Trustees try to look through the noise (which has been extreme of late) of short-term market movements and media commentary, and concentrate on what is likely to serve the Scheme well over many years. At 31 March 2012 Scheme Benchmark Over one year 6.5% 7.4% Annual average over three years Annual average over five years 15.3% 15.2% 3.6% 3.9% The benchmark is not a target for the investment managers to aim for but rather refers to how we can reasonably expect investments to perform, bearing in mind market conditions. It gives us an indication of how our strategy is faring and how our investment managers are performing. The chart below shows the spread of the Scheme s investment types at 31 March Equities and bonds make up almost 90% of our investment strategy. The table on the right shows the returns achieved by our investments over one year, and the average yearly returns over three and five years, ending on 31 March The performance of the Scheme s assets over one year has been acceptable, over three years, exceptionally good, and over five years positive but somewhat disappointing. The value of the Scheme s liabilities has risen strongly throughout the period as interest rates (particularly gilt yields, which are used to calculate the value of pension scheme liabilities) have fallen and fallen. We do not yet know whether these record low yields will be a temporary phenomenon, driven by expansionary monetary policy, quantitative easing and the Euro crisis, or will continue into the future. However, we believe it remains appropriate for the majority of the Scheme s assets to be invested in assets that provide growth, aiming to reduce the deficit over the medium to longer term. In the past the investment strategy has relied heavily on equities from developed countries, especially the UK. These have become volatile and unreliable in recent years so we are looking at other kinds of investment in other parts of the world that might help us achieve growth at a lower level of risk. We will proceed carefully and in modest steps when changing the Scheme s investments. We are keeping around one-third of the Scheme s assets in investments that protect the value of the money building up, and are not expecting to reduce this component. We continue to keep a close eye on our strategy and we regularly meet with our appointed investment managers to check the reasoning behind the decisions they make which are necessary for the Scheme. Equities 58.3% UK 42.3% North America 5.2% Europe 6.3% Japan 1.4% Pacific (excluding Japan) 3.1% Bonds 30.8% Fixed Interest 6.9% Index Linked 23.8% Property 5.8% Infrastructure 4.1% Cash and other investments 1.0% 6

7 Investments explained Equities These are shares in the value of a company which investors buy and sell on the world s stock markets. Their performance is related to the economy, market conditions and the company itself, and their values can quickly rise or fall. Long term, however, their growth is generally expected to outweigh any falls (though this is not guaranteed, and has not been the case in recent years). Bonds A bond is a type of loan. Companies and governments issue bonds to raise money which they promise to pay back with interest. Like equities, the value of bonds can change over time, but generally their volatility is less than that of equities. The value of bonds also tends to move in line with pension prices. Property Property investments tend to behave in a similar way to bonds and gilts (Government bonds). Spreading a proportion of investments between bonds and property can help to minimise the risk of a fall in value. Infrastructure This involves investing in the construction and provision of transport facilities such as roads and bridges, public utilities such as water and power, schools, offices, hospitals and communication networks. Opportunities for infrastructure investment have increased as more of these projects are financed by the private rather than the public sector. Cash Cash investments offer low growth which can fall below the rate of inflation in the long-term. However, cash tends to hold its face value well which is why it is generally used to protect the cash payments the Scheme needs to pay members. The State Pension The future of the State Pension remains a source of much discussion and planning. State Pension age Under the latest set of proposals announced by the Government last autumn, men and women born after 5 April 1968 will have to wait until they reach age 67 before they can claim their State Pension. These changes will require approval from Parliament before they become law. State Pension age is then set to rise to 68 by However, the Government has also announced that it is looking at ways of making sure that the State Pension age continues to reflect future changes in life expectancy. The increase to 68 may come under further review in the months ahead. We expect a further announcement later this year. If you are unsure when you will be eligible to claim your State Pension, the Government s website features a State Pension age calculator. Go to Combining State Pensions Meanwhile, earlier this year the Government also proposed to combine the two types of State Pension into a single payment arrangement. It is due to merge the basic State Pension and the State Second Pension by To ensure that no one loses out financially, the new payment will be at least as high as: The standard Guarantee Credit (the minimum level of pension payable from the State); and The level of State Pension the individual has built up through paying National Insurance. Under current rules, this would mean a weekly payment of about 140. We will keep you updated. Keeping us updated It is important that we can contact you about the Scheme and your pension benefits so if you are a pensioner or have deferred benefits and move house or change your name, please let the Pensions Office know in writing as soon as possible. It is also helpful if you keep your nomination form up to date. This is the form you fill out to tell us who you would like to receive any benefits due if you were to die before you retire. An up-to-date form can help save time and unnecessary distress. You can update your form at any time and we will always refer to your most recent form. If you need to update your nomination you can request a new form from the Pensions Office, download one from the OSPS website or complete the enclosed form. Contact details for the Pensions Office are on the front page. 7

8 Your Trustees We run the Scheme in line with its own rules and pensions law, and always try to act in the best interests of all members. We meet regularly with our appointed advisers and also in two sub-committees. A Trustee s term of office is three years and there is no limit to the number of terms a Trustee may stand. There are currently 11 Trustees. Five are appointed by the University, four are elected by active contributing members, and one by pensioner members. The Chairman of the Board is appointed by the Vice-Chancellor. These are the current Trustees: University-appointed Mr Nick Sykes Mr Robert Allnutt Professor Gordon Clark Mrs Alana Davies Mr William Jensen Mr Frank Marshall Independent Chairman Independent School of Geography Department of Materials Exeter College University College Back row, left to right: Alana Davies, William Jensen, Leo Catney, Robert Allnutt. Front row, left to right: Gordon Clark, Nick Sykes, Kate Kele, Sam Ellis, Frank Marshall. Member-nominated Mr Leo Catney Mr Roger Bowler Miss Kate Kele Ms Sophia McMinn Mrs Fariba Battye Department of Physics Pensioner Asset and Space Management Christ Church Pensioner The Secretary to the Trustees is Mrs Jan Killick. Tribute to John Kemp We are saddened to report that former pensioner Trustee, Mr John Kemp, died on 21 January We would like to extend our condolences to his family and friends. John worked for the Department of Plant Sciences for over 40 years until his retirement in July 2000 and was one of those responsible for setting up OSPS in He continued to serve on the Trustee Board from that date until his death, first as a Union-nominated Trustee and later as the Trustee nominated by OSPS pensioners. We greatly miss his expertise and dedication to the running of the Scheme and to the provision of pension benefits to members. 8 Following John Kemp s death, we wrote to all pensioner members asking for Trustee nominations. We received one, from Mrs Fariba Battye who has previously served as a Trustee, so she was automatically elected onto the Board for the remainder of Mr Kemp s term to 31 March She will then be eligible to stand for re-election. We would like to take this opportunity to welcome Fariba to the Trustee Board. Sophia McMinn, Roger Bowler, Frank Marshall and Robert Allnutt all reached the end of their terms of service on 31 March We received four nominations for the two active member vacancies so we held a ballot to determine who would be elected onto the Board. Sophia McMinn and Roger Bowler won the majority of votes and will serve on the Board for a further three years to 31 March Frank Marshall and Robert Allnutt were both re-appointed as Trustees by the University. Our advisers Below is a list of our specialist advisers who help us to run the Scheme on your behalf. Actuary: Jay Harvey, Aon Hewitt Limited Pensions Consultancy Services Provider: Aon Hewitt Limited Auditor: RSM Tenon Audit Limited AVC Manager: Prudential Assurance Company Limited Banker: Lloyds TSB Bank plc Custodian: State Street Bank and Trust Company Investment Adviser: Lane Clark & Peacock LLP Investment Managers: Blackrock Advisors (UK) Limited, Macquarie Investment Management (UK), Prudential Assurance Company Limited, Schroder Property Investment Management, State Street Global Advisors Legal Adviser: Burges Salmon LLP Financial advice We are unable to provide any advice that is tailored to your own circumstances so if you are thinking about making a change to your pension arrangements we recommend that you talk to an independent expert. If you do not have an independent financial adviser (IFA), you can find one in your area by visiting Simply type your postcode into the search bar on the homepage. Before you appoint an IFA, we would recommend that you check that they are suitably authorised and qualified. You can check this online at the Financial Services Authority website. Go to or telephone Another organisation that can help is the Money Advice Service. Their website features a number of free, downloadable guides, including one on finding an IFA. Go to or telephone SB3427_News