Outcome of the Actuarial Valuation of the DB Plan as at 31 December 2019
Over the past few months, the Trustee of BPS has been working with the Employers’ Group set up by BUGB to complete the latest formal actuarial valuation. We continue to pursue full funding of the DB Plan and are pleased to report that we are ahead of schedule in terms of bringing down the deficit. Figures are shown in the Appendix but the main consequences of this for you are that:
there will be no increase in employers’ deficit recovery contributions (other than the annual uplift for inflation);
our expectation for when those contributions might cease is brought forward by two and a half years to June 2026; and
we are applying a temporary reduction of 50% to the deficit recovery contributions for the remainder of this year to alleviate some of the additional financial pressure employers are under at this time.
In essence we have reflected the improvements already achieved, made allowance for the current uncertain climate, provided some help for churches/employers during the next six months and still been able to shorten the time we expect deficiency recovery contributions to be needed. More detail of each aspect follows in this letter.
Changes since the last valuation
A full valuation of the DB Plan takes place every three years. The estimated deficit as at 31 December 2019 was £18m. The deficit identified at the previous valuation, as at 31 December 2016, was £93m. There have been some positive developments over the three-year period which have led to this significant reduction in the deficit.
Regular deficit recovery contributions from churches and employers in the DB Plan over three years amounted to around £14m.
BUGB made a contribution of £33m in December 2018 as part of the Family Solution agreed under the previous valuation.
We have continued to collect additional payments (employer debts) from employers who leave the DB Plan.
Investment experience has been good, although this is largely offset by the continuing low levels of expected returns for the future.
The purchase of a bulk annuity contract in December 2019 was at a favourable price.
Movements in the deficit in 2020
There are two substantial developments coming into play since December 2019 that have an impact on DB Plan funding:
Although mitigated to some extent by the Trustee’s relatively low-risk investment strategy, the Coronavirus pandemic has impacted financial markets and led to a reduction in the value of some DB Plan investments.
The Government is currently consulting on how and when to change how the Retail Prices Index (RPI) is calculated to bring it more into line with the, generally lower, Consumer Prices Index (CPI) We anticipate that this change will lead to a lower value for some of the RPI-linked assets held by the DB Plan. This impact is partially offset by an assumed reduction in the cost of providing deferred benefits which are revalued up to retirement in line with RPI.
The DB Plan’s actual financial position moves daily with changes in financial market conditions. However, in the agreed deficit recovery contributions we have made an allowance for a £10m deterioration in the deficit since 31 December 2019 to take account of the current impact of the two items above.
Financial pressures on employers
BUGB recognised very early that some churches and employers would suffer significant financial loss because of being unable to meet or to rent out their premises during the Coronavirus lockdown. BPS circulated a survey to all employers in April to ascertain how extensive this was. Although the proportion of employers expecting to struggle over the short term was fairly low, BUGB and the Employers’ Group were eager to offer some reduction since the effects are continuing.
We are not able to treat individual employers differently depending on their circumstances, so we have had to balance both the immediate needs of those churches under financial pressure and the longer term need to fully fund the DB Plan. We believe a 50% reduction for the six months from July to December 2020 achieves this balance.
The reduction will happen automatically, you do not need to take any action. Deficit recovery contributions from January 2021 will then return to the full level, including the normal inflationary increase for 2021. Please note that your contributions to the DC Plan for any ongoing members of BPS will continue at their full rate. This reduction only applies to the DB Plan deficit recovery contributions.
BUGB’s Coronavirus financial support scheme
remains open for applications from employers in particular need.
To support the DB Plan’s reduced income over 2020, BUGB has agreed to bring forward a payment of £0.5m that it was due to make by the end of 2023. It will now be paid by the end of 2020.
How long will deficit recovery contributions be required for?
Our forecast at this time is that contributions will need to continue until June 2026. This is two and a half years earlier than the expectation at the previous valuation.
In practice, nobody can say for certain how long contributions will need to continue. To give a sense of the scale, a swing of just 1% in the value of the liabilities changes the deficit by around £3m, which equates to around 8 months of deficit contributions. The next full actuarial valuation will take place as at 31 December 2022, but the Trustee and the Employers’ Group are continuing to look at ways to manage down the DB Plan’s deficit and risk exposure.
Our long-term objective is to reach a position where the DB Plan no longer requires contributions from the employers and there are no exit debts when employers leave. That involves more than just clearing the valuation deficit as it requires enough assets to cover full solvency (the cost of buying-out all the benefits with an insurer) and the removal of the risk of bad experience causing a deficit to come back. We are not there yet, but it is good that we are moving in the right direction.
Finally, during the volatile market conditions earlier in the year we suspended calculation of the monthly employer debt estimates on the 4mystaff portal. These will be resumed from July 2020.
Moderator for the Baptist Pension Scheme Trustee
Moderator for the Employers’ Group
Click here for the Appendix: Comparison of results with the previous valuation