The C-plan Investment Record

The archived messages on this site contain criticism of the trustees choice of companies to hold Additional Voluntary Contributions, but they do not contain complaints about investment policies in general. The numbers here may account for that. They are calculated from the full Annual Reports of our pension plan.

The benchmark numbers which the trust uses to measure investment performance are provided by The WM Company, which is the world's largest independent performance-measurement supplier. The WM Company also measures the performance of our fund, using its own methods, and does not come out with exactly the same percentage increase as you would calculate from the accounts. (If you ask two accountants, or two actuaries, to do the same calculation you get two similar but different answers because of minor differences of method.)

The numbers are with dividend reinvestment in a benign tax environment. Two years of the ten in the decade 1990 to 1999 had a negative return on investment but the others saw good returns, outstripping inflation. In 1990 the WM benchmark figure is not given as a number but our funds -11.1% performance is described as "Compared with other UK pensions funds' reported returns the overall return is a little below average", so we can make a reasonable guess at the WM benchmark.

The geometric average return for the benchmark is 12.4% and the average for our fund 12.7%. There are rounding errors that make the answers inexact, but anything at or above the benchmark over ten years is good. Congratulations to the trustees.

Managing a fund like this one is complicated business - "Various factors are considered when assessing assets for inclusion in the plan including short and long term risk/reward trade-off, correlation of asset value with plan liabilities, income generated and liquidity". It is generally agreed that the recent removal of the Minimum Funding Requirement will give fund managers more leeway. Some measure of the costs of constraints is provided by the fact that if the funds had just been all put in a UK index tracking mechanism, then the funds would have returned more than they did. (And that would have saved some of the £47M spent on investment management.)

Depending on what you believe about the relation between reserves and pension payments, you may care about how this performance translates to a "surplus". Now, May 2001, is not the best time for working this out because there were full Actuarial Reports for the end of years 1997 and 2000 but the latter is not yet available to members. (We were told it would be ready in May but that has changed to August.)

From the 1997 Actuarial Report we know that at the end of 1997 the funds needed to pay the already earned pensions in the predicted way (which includes an assumption of increases at 2.8% p.a. compound) were £2380M and the actual funds were £2928M, giving reserves ("the surplus") of £548M. This makes the "cover", the ratio of what is in in hand to what is needed, 123%.

The 1997 Annual Report gives a higher figure for the funds at the same date, end of 1997, £3252M instead £2828M. Presumably this is down to different actuarial methods of valuing the actual assets.

During 1998 the assets, by their growth and dividends, gained more value than was paid out as pensions, by £361.9M. The corresponding figure for 1999 was £431.1M.

So at a first glance, by January 2000, the surplus would have grown to 548+362+431 = £1341M. However, that calculation does not take into account any changes in the liabilities - some people will have died, some previously active members will have retired, etc. We really need to see the next Actuarial Report. Even so, it is hard to see how a figure of a billion dollars (£714M) could be an unreasonably high estimate of the reserves which are being transferred away from the C-plan.

The way this on-going surplus is calculated (as opposed to the statutory surplus which is a different thing with a different calculation) means that it is calculated on the basis that employee and employer contributions will fund that part of people's pensions which will be earned after the date of the actuarial report. In practice, this does not happen because the trustees usually allow the employer to take a "contributions holiday", so that some of the surplus goes to pay for that earned-in-the-future pension cost. (For tax reasons, contribution holidays for employees are not allowed.)

The C-plan is closed, i.e. nobody can join. Eventually the existing members will die, so an actuarial calculation can be done now that will cover all the payments the fund will ever have to make. One interesting question is "Does the fund already have enough assets to expect to cover all those payments?". If so, on what basis of pensions-in-payment increases?

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