Financial Assessment
2011 was the first year that the SHAPS undertook a financial assessment exercise of all it's participating employers. So, why was this done and what was the outcome?
Why did the Scheme undertake a Financial Assessment Exercise?
SHAPS is a multi-employer defined benefit (DB) scheme, which currently 156 employers participate in to provide pension benefits for their employees. Year on year liabilities continue to accrue as active members build up pensionable service in the Scheme.
The Pensions Committee aims to manage the various risks that SHAPS is exposed to as effectively as possible. It wants to ensure that each employer participating in the Scheme does so in a benefit structure that is sustainable. In addition, the Committee wants each employer to understand fully the risks that participation in a DB pension scheme brings and to be aware of how it can manage its pension risk.
The financial assessment process provides an indicator of an employer’s asset and earnings strength based on two Key Performance Indicators (KPIs). The basis was set out by PwC, in its capacity as the Trustee of The Pensions Trust’s adviser on employer covenant, and agreed by the Committee.
Any employer that was unable to pass the KPIs was assessed as a higher risk employer and as such, in order to ensure continued participation within the Scheme, was required to move to the lower benefit option of CARE 120th.The reasoning being that although the past liabilities have already accrued, if an employer cannot provide the required degree of comfort to the Committee in respect of the ability to meet the debt on withdrawal, then as a risk mitigation exercise it is sensible to limit the accrual of future liabilities.
Employers who were assessed as higher risk have had the opportunity to raise an appeal on the basis of additional or further financial information or to provide security.
2011 Results
- 156 employers completed the financial assessment questionnaire for 2011. We would like to thank all employers for meeting this requirement.
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- 134 employers were assessed as a low risk organisation, and therefore were able to continue their participation in their existing benefit option.
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- No employers were assessed as medium risk.
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- 22 employers were assessed as a higher risk organisation, from which eight appeals were received.
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- Of these 22 employers, five were already participating in the CARE 120th benefit option.Each appeal received was assessed and reviewed by the Trustee’s advisers and the Committee.
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- Five appeals were upheld based on additional financial information received which supported the overall asset and earnings strength of these employers. As a result, these employers are able to continue within their existing benefit structure and will not be required to move into the CARE 120th benefit option at this time.
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2012 – What to Expect
The financial assessment process will be an annual exercise, so you should expect to complete a questionnaire each year.
Following your feedback, we have reviewed the process and basis and where necessary we have made some amendments. Key changes to note are:
LGPS and Other Schemes
For those of you who participate in other DB schemes, such as the LGPS, you will be required to provide the buy-out debt figure in respect of these other schemes. This figure is called the cessation event amount and will need to be requested from your other scheme as at 30 September 2011. Please ensure that you allow enough time from the previous scheme – usually a minimum of four weeks – to request and receive the information.
Web Portal
For 2012 the questionnaire will require the same information as in 2011. However,the difference this time will be that the questionnaire will need to be completed through a web-based portal to ensure a more secure environment for data submission. More information will follow in due course.
Timescales
It is important for us to have the most up-to-date audited accounts information to ensure the integrity of this assessment. It became clear from 2011 that the timescales in place made this difficult for some of you to provide. Therefore, we have reviewed the programme for 2012 and the key dates will now be:
Submit financial assessment information By 31 August 2012
Raise intention to appeal By 31 August 2012
Full appeal raised By 30 September 2012
Higher risk employers move to CARE 120th on 01 April 2013
Appeals
The appeals process itself has not changed. However, it is worth outlining the impact an appeal may have as five of the eight cases received in 2011 were reassessed as a low risk employer. Appeals should be made on the grounds of additional financial evidence and information, which perhaps is not captured in the assessment or where guarantees or security can be put in place to strengthen the covenant that the employer offers to the Scheme. If you raise an appeal, any external adviser costs incurred as a result of this appeal will need to be met by your organisation.
Further information regarding the 2012 assessment will follow in due course.