The RBS Group Pension Fund Main Fund Section

Financial health of the Main Fund Section – Keeping you in the know

The Trustee and the Bank have recently agreed the 31 March 2013 funding valuation.

The purpose of a funding valuation is to consider, on a ‘going concern’ basis:

a) the financial position of the Main Fund Section, comparing the actual assets held against a target amount planned to be sufficient to pay the benefits (known as the ‘liabilities’);

b) the planning or budgeting of contributions required to bring the assets in line with the liabilities and to pay the extra benefits being earned by active members in respect of their future membership of the Main Fund Section.

These ‘going concern’ calculations require a number of assumptions about the future such as the rate of pension increases, the rate of return that will be achieved on the Main Fund Section’s assets and how long pensioners will live. In practice, to the extent that actual experience is different from that assumed, the contributions required will need to be adjusted at the next valuation.

As well as full funding valuations every three years, the Trustee receives interim updates every year.

In the rest of this article, we summarise the results and outcome of the funding valuation as at 31 March 2013 (‘2013 valuation’) and the annual interim update as at 31 March 2014 (‘2014 update’).

Summary of financial position reported in previous newsletters

In previous newsletters, we reported that the interim update as at 31 March 2012 had shown that the Main Fund Section’s assets fell short of the amount needed to provide members’ benefits. The Actuary’s formal report showed that the funding level was 80% as at 31 March 2012.

2013 valuationIn the year following 31 March 2012, there was strong performance in global investment markets which led to increases in the Main Fund Section’s assets. The liabilities also increased over the same period due to falls in underlying market yields, although by a smaller percentage than the assets. Overall these had a small positive impact on the funding level over the year to 31 March 2013.

The 2013 actuarial valuation showed the Main Fund Section’s funding level to be 81% as at 31 March 2013, and the corresponding size of the shortfall of the assets relative to the liabilities was £5,652 million.

To address the shortfall of £5,652 million, the Bank has agreed to pay the following lump sum cash contributions into the Main Fund Section.

Year Amount £million Payment Due Date

2014 400 31 March

2014 125 30 June

2014 125 30 September

2015 650 31 March

2016 650 31 March

2017 450† 31 March

2018 450* 31 March

2019 450* 31 March

2020 450* 31 March

2021 450* 31 March

2022 450* 31 March

2023 450* 31 March

†Increased from £450M by the increase in Retail Prices Index for the twelve months ending 31 January 2017, subject to a minimum increase of 0%.

* Increased from the contribution paid in the previous year by the increase in Retail Prices Index for the twelve months ending 31 January immediately preceding the date of payment, subject to a minimum increase of 0%.

If experience from 31 March 2013 is line with the assumptions adopted for the 2013 actuarial valuation, these contributions together with investment returns are expected to remove the shortfall by 31 March 2023.

The Trustee and the Bank have agreed for the Bank to pay, with effect from 1 July 2014, contributions to meet administration expenses and the cost of future benefits being earned by active members at the following rates:

• For members accruing service in the Retiring Age 65 Schedule, 23.9% of members’ basic salaries less any member contributions payable

• For all other active members, 31.1% of members’ basic salaries less any member contributions payable

2014 updateSince 31 March 2013 experience has been more favourable than assumed, and there has been a further rise in the funding level and an equivalent reduction in the shortfall. Over the year to 31 March 2014, increases in underlying market yields caused the liabilities to fall. Over the same period the Main Fund Section’s assets increased, mainly due to the payment of the £400 million deficit repair contribution by the Bank into the Main Fund Section in March 2014 (this is the first payment referenced in the table opposite).

The Actuary’s latest formal report on the Main Fund Section showed that the funding level was 86% at 31 March 2014.

The graph below shows the changes in the funding level of the Main Fund Section since the 2013 valuation.

Payments to the BankWe are required to tell you if there have been any payments made to the Bank from the Main Fund Section in the previous 12 months, and we can confirm that there have not been any payments.

Intervention by the Pensions RegulatorThe Pensions Regulator can make changes to a scheme, give directions on working out its liabilities, or impose a schedule of contributions. We are pleased to say that it has not needed to use its powers in this way for the Main Fund Section.

Full solvencyThe above figures assume the Main Fund Section will keep going as it is. As part of the actuarial valuation, the Actuary also considers what the position would be if the Main Fund Section came to an end and no longer had support from the Bank. For this scenario, the Actuary estimates the cost of buying insurance policies to cover the benefits members have already earned. This is known as the ‘full solvency’ liability. Insurance companies have to invest in ‘low risk’ assets, which usually give low returns, and their prices include allowances for costs and profits. So the amount needed to buy policies is likely to be far more than the total assets of the Main Fund Section. The 2013 actuarial valuation showed a solvency level of 49%.

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