Agenda item

25.       

26.       

27.       

28.       

29.       

30.       

30.1.      The Board considered a Quarter 1 report on the ESPF 2020/21 Business Plan that included an appendix by the Fund’s actuary on managing ill-health early retirement risk.

30.2.      Russell Wood (RW) clarified that the table 1 sub-total for Pension Fund Oversight and Governance should be £979k and the 2020/21 forecast outturn should by £3.702m. 

30.3.      The Chair asked whether the £687k estimate for the new Pension Fund Team was for a whole year and that the forecast outturn of £385k represented a proportion of that total as the new team had not been fully recruited yet.

30.4.      RW confirmed that the £385k represented a proportion of the total based on the new team being established in-year. The £687k was also an estimate, as the current team was in a consultation period and the full costs of new appointments was not yet known. The bringing in-house of the PAT would also need to be represented in future in the outturn forecast but that figure was not yet known. 

30.5.      The Board then discussed the paper on Ill-health management. The Chair asked whether ill health insurance could be made mandatory for employers under a certain size and the option to opt in or opt out for medium and large employers, respectively.  MK confirmed this approach was being looked at.

30.6.      SO asked what the current cost to employers was for the ill health retirement arrangements in place.

30.7.      Robert McInroy (RM) said that employers currently put aside 0.4%-2% of their pensionable salary roll, depending on membership profile, towards covering their own employee’s ill health retirement costs. The average is around 0.9%. Any new ill health insurance would attempt to be cost neutral and so any insurance premiums should not be higher than around 1% of each employers’ pensionable salary roll. The insurance premium would be paid to the insurer, rather than put in a reserve, and the insurer would pay the full cost of any ill health retirement.

30.8.      The Chair asked whether a payout of ill health insurance for a small employer could lead to significantly increased premiums for them.

30.9.      RM said that the cost of premiums would be spread over a number of employers (as each would pay 1% of their own contributions and not a flat rate) and any increase would be from a starting point of around 1% per annum of employer contributions rate. The cost of ill health retirement can be at least £100k per person and so can have a significant impact for small or medium employers. Larger employers may feel the impact much less.

30.10.   SO asked whether smaller employers’ exposure to ill health retirement payments would be so large relative to income that their contribution rates to an insurer would always be less than their exposure, resulting in them being subsidised by larger employers. 

30.11.   RM said this would be the case but Legal & General advised that medium size employers that are admitted bodies to the fund could incur liabilities of over £1m on their payroll from ill health retirement and so could stand to benefit from the protection of insurance too.

30.12.   DP asked whether all contribution rates to insurance would be the same for all employers and whether increases in premiums would be cross-subsidised.

30.13.   RM confirmed that the rate for all employers would be around 1% of their contribution rate to the Fund. He said that premiums would be increased across the board if there was poor  claims experience, meaning there was a cross subsidy between employers. However, Legal & General insure 20 Funds currently and report there is relatively little volatility in premiums year on year.  He added the policy would be renewed annually so if there was a large increase in premiums the Fund could review which insurer it opts to use.

30.14.   DP asked whether it is worth it for employers with contribution rates currently less than 1% to sign up for the insurance.

30.15.   The Chair said an insurer would pay out in full the cost of ill health retirement if needed, but the costs to the employer would be spread out over a number of years. On the other hand, if ill health retirement happened without their self-insurance being able to cover the cost, they would find themselves in deficit. 

30.16.   The Chair asked whether stop loss insurance is an option, i.e., payments made for ill health retirements where the number of cases in a year exceeds a certain amount.

30.17.   RM said this is not something discussed with Legal & General but would be raised with larger employers who may be more interested in this approach.

30.18.   SO observed ill health insurance would reduce the risk to the Fund of those employers who may be in financial difficulty now and could become insolvent as a result of ill health liabilities. He recommended any insurance should be mandatory for them.

30.19.   The Board RESOLVED to:

1) note the report;

2) recommend that ill health retirement insurance should be made compulsory for smaller organisations, medium sized organisations should have the option to opt out, and larger employers should be given the choice to opt in; and

3) The definition of smaller, medium and larger in this context should be determined by officers and

4) request a further report on the ill health management policy following the outcome of consultation with employers.