From Ron Amy.
I WRITE as the independent chairman of the committee of management of the public employees contributory retirement scheme (PECRS) and the management board of the teachers’ superannuation fund (TSF) in response to your headline report (JEP, 11 November) about the criticism of the two schemes by the States Public Accounts Committee (PAC).

The PAC raised a number of interesting and important points in its wide-ranging report on the accounts of the States of Jersey for the year ended 31 December 2010. I have no remit to address those. But on public sector pensions in Jersey, and indeed on the nature of pension funds generally, I fear the PAC is under a number of misapprehensions that need to be corrected.

This is not only in order that taxpayers in the Island can be properly informed but also that the very many members of the two schemes, and their dependants, can be reassured about the sufficiency and good management of their pension provision.

It is worth noting in this context that the scale and reach of the two schemes is extensive. PECRS has assets of over £1.2 billion, and TSF over £280 million. Between them they have over 15,000 members in Jersey – active members in employment (about 15% of all current workers in Jersey), those who have deferred pensions, and over 4,500 pensioners (including widows and widowers). The schemes cover a variety of other public sector bodies, for example the Parishes. Taking just PECRS, the larger scheme, the median pension in payment at present is about £8,300 per annum.

These figures underline the economic importance of the two schemes to the Island. It is estimated that their combined membership touches well over a third of all Jersey households, and a rather higher proportion of pensioner households. So it is crucial that there is wholly accurate information about the two pension schemes in the public domain, and that any public comment about them by such an influential body as the PAC, is weighed with care.

In its report, the PAC made several assertions about the position of PECRS, in what, one regrets, might be termed alarmist tones. In particular, the report averred in one paragraph that the deficit of PECRS was £1 billion, in another in excess of £0.5 billion, and thus ‘significantly larger than’ the Island’s strategic reserve.

The report went on to argue from this that the scheme was ‘not fit for purpose’ and that its solvency ‘must be questioned’. Comments were made on the ‘mismanagement’ of the scheme together with disparaging remarks about the PECRS Committee of Management.

These comments in the report were derogatory and misleading. Unchallenged, they obviously have the potential to cause a great deal of worry among many thousands of scheme members across the Island.

Pension funds are valued in relation to their liabilities over time. The youngest members of PECRS may well not start drawing a pension until around 2050, and are likely on average to live into the 2070s and even beyond.

So we rely on actuarial valuations to make best estimates at regular intervals of the liabilities of the scheme over time against the assets already in the pension fund and those that will accrue from the continuing flow of contributions from employers and employees. The scheme rules, set by the States, require this.

The last actuarial valuation, at 31 December 2007, showed that PECRS had a deficit of £63 million, that is, its expected long term liabilities, at that point in time, exceeded its expected assets by that amount over the whole period of time that the current membership would be alive. This was a relatively small sum – around 5% – compared to the scheme’s assets.

The actuary’s calculations reflected, as always, a wide range of assumptions, for example about the rate of inflation and earnings growth in the future, the age at which on average people will retire and die in the future, and the likely return on investments based on the chosen investment strategy.

Different assumptions about these factors as circumstances change produce different results (they are just assumptions, albeit as well-considered as possible). So we follow best practice and commission an actuarial valuation every three years, which is lodged with the States.

The latest valuations as at 31 December 2010 for both schemes are in progress now. There is work yet to be done on them, but it is my expectation that these will not show material deficits in either scheme. In other words current and future assets and liabilities will, within quite a small range, be broadly in balance. This is notwithstanding the challenging investment climate we face today and the undisputed fact that people are living longer.

Accounting rules for the States Accounts, however, require a different approach. The Minister for Treasury and Resources made this clear in his comments last week as your report indicated. But the point bears repetition because I believe it explains why the PAC’s comments about the sustainability of the two pension schemes are so misleading.

The States Accounts have to report pension liabilities on the basis of Financial Reporting Standard 17 (FRS 17). This values the pension fund liabilities more conservatively, using a discount rate based on high quality corporate bonds of equivalent currency and term to a scheme’s liabilities.

The discount rate used for the FRS 17 calculation of liabilities takes no account of a scheme’s actual investment strategy, which is designed to achieve long-term real growth through, for example, a substantial exposure to ‘blue-chip’ shares. FRS 17 is not the valuation method used to calculate whether a scheme has a surplus or a deficit under the States regulations, nor is it an appropriate basis for assessing the long-term sustainability of the scheme. The PAC has taken the FRS 17 valuation disclosures in the States Accounts, using them to draw wrong conclusions about PECRS.

I must also comment briefly on the PAC’s frankly ill-considered and unfounded remarks about the PECRS committee of management. This comprises myself as independent Chairman plus 14 others, all appointed by the States, seven of whom are nominated by the States as employer, and seven by employee representative bodies. Although the PECRS constitution and rules are set out in States regulations, the Committee members are obliged to perform, and certainly do so, as trustees.

The seven employee nominated members of the Committee bring a wealth of experience to the management of the scheme, and some, like myself have served on the committee for over 20 years. The seven nominated by the States as employer, are people of experience and standing in Jersey, four of whom have otherwise no direct connection with PECRS. All 14 offer their services and considerable expertise on a wholly honorary basis.

To say as the PAC does that the committee of management is ‘self-interested’, and that ‘there are no completely Independent members of the committee, nor are there any direct representatives of the taxpayer’, is a travesty of the facts and the PAC would do well to apologise for these comments and withdraw them.

The same goes for the report’s comments about ‘mismanagement’, which are perhaps the more surprising since the PAC Chairman, ex-Senator Shenton, was a member of the PECRS committee of management from 2007 until 2009. In 2008 the Comptroller and Auditor General in his report on the development, constitution and governance of PECRS stated that, ‘The governance and management of PECRS have followed best practice for such schemes. As a result, the service and support provided to members have been exemplary and the state’s interests as employer reasonably protected’.

I certainly do not dispute the broader point that emerges from the PAC report that these are challenging times for pension schemes. PECRS and TSF are no exception to this. As people live longer, the cost of pensions goes up, and how those additional costs are met, looking a long way forward, also has to reflect the uncertainties of key factors such as investment performance and future inflation.

This is exactly why the Minister for Treasury and Resources has established a technical working group of Treasury and PECRS Committee of Management representatives, to look at all the options for ensuring the scheme’s sustainability and best possible governance over the long term.

In due course, and after much consultation, recommendations for some change and development will no doubt have to be put before the States for decision. The macro-economic significance of the two schemes for Jersey will obviously be a key factor in that deliberation.
The Old Rectory, Cruden Bay, Peterhead, Aberdeenshire.