8. CONCLUSION
8.1 In my judgement, the assets held at
30 September 2003 were likely to be more than sufficient to meet
the liabilities in respect of existing commitments, including
future awards to surviving spouses of former Members receiving
benefit. Unless the number of new awards, including lump sum gratuities,
is likely to be very high, consideration could be given to reducing
the level of the Grant in Aid.
8.2 Some consideration should be given to
the nature of the investment portfolio that is appropriate for
a Fund where assets could, in the near future, have to be realised
to meet liabilities. If a large proportion of the Fund is invested
in equities, there could be a problem if assets have to be sold
at a time when market values are low. If it is intended to continue
to increase benefits broadly in line with changes in the Retail
Price Index, then the liabilities are effectively linked to the
movement in the RPI. A measure of protection against adverse investment
experience could be achieved by holding index-linked bonds as
a significant proportion of the portfolio. This would have the
effect of limiting potential losses, while leaving some scope
for the equity holdings to deliver better-than-expected returns.
However, the large margin of the value of assets over liabilities
could act as a buffer to allow continuation of a substantial equity
investment if the Trustees are willing to accept the risk to the
value of those excess assets. I understand that the Trustees have
recently considered some of these issues but it will continue
to be appropriate to monitor the Fund's investment strategy.
C D Daykin, CB FIA
Government Actuary
29 July 2004
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