2019 Valuation update Norfolk Pension Fund Gemma Sefton FFA 9 July 2019 Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority
Agenda 1. Progress update 2. Valuation basics 3. Assumption setting 4. Next steps 2
Progress Update 3
Reminder: 2019 valuation timeline Q4 18 – Q1 19 Pre-valuation work: - Planning April - June 2019 - Data cleansing Data submitted by employers - Long term employer modelling Committee review assumptions July 2019 July – August 2019 Data cleansed and submitted to actuary Actuarial calculations processed. Whole Fund results issued September 2019 Employer results reviewed and funding and November 2019 investment strategy discussed with officers Funding Strategy Statement (FSS) drafted Individual employer results prepared and October 2019 issued Committee review whole Fund results Employer Forum FSS consultation started December 2019 Pension committee consider updated FSS January - February 2020 Consultation of FSS and employer rates March 2020 and policies confirmed Final valuation report signed off by 31 Pension committee agree final FSS March 1 April 2020 4 New contributions start to be paid
Valuation basics 5
Why we do a valuation • Calculate employer contribution rates • Compliance with legislation • Analyse actual experience vs assumptions • Review Funding Strategy Statement • Part of continual ‘health check’ on fund solvency 6
How we do the valuation Data for c84,000 Benefit projections members Financial assumptions Actuarial Total liability estimate valuation Demographic assumptions Contribution Calculations Asset data 7
Valuation begins at member level Lump Sum Expenditure Member’s Dependant’s Pension Pension Contributions Income 40 65 85 Death Retirement Recruitment 8
Valuing all members 250 Pension Amounts (£Millions) 200 150 Pensioner members Deferred Members Active members 100 50 0 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 Year from the valuation 9
How contributions are set 10
Valuation ‘health check’ Liabilities Assets Managers Benefits earned to Assets today date 11
Approach to setting contributions Liabilities Assets Managers Future investment Benefits outperformance earned in Where to draw future this line? Future contributions Benefits earned to Assets date today 12
The funding strategy is a balancing act High risk funding strategy Low risk funding strategy Investment returns Investment returns Cost of Cost of benefits benefits Contributions Contributions 13
Risk-based method ‘Success’ ‘Failure’ 14
Funding strategy – 3 step approach What is the funding target? How long do we want to give the employer to get to the target? How sure do we want to be that the employer hits the target? 15
Risk-based method 16
Assumption setting 17
Recap: approach to setting contributions Liabilities Assets Managers Future investment Key decision : outperformance Benefits Where to draw earned in future this line? Future contributions Benefits Assets earned to today date 18
Why do we need assumptions? Salary increases, CARE reval Pension increases Life expectancy Lump Sum Expenditure Member’s Dependant’s Pension Pension Contributions Income 40 65 85 Recruitment Retirement Death 19
What assumptions do we need? Financial assumptions Demographic assumptions • • Investment return Life expectancy • • Inflation Retirement age and cause • • Pay increases Withdrawals • • Pension increases Marriage Statistics Consider: Consider: Economic outlook Population trends Members’ social status Actual scheme assets Historical pay growth Past scheme experience 20
Financial Assumptions 21
Discount Rate • Prudent estimate of future investment returns • Lower discount rate → more prudence → more reliance on contributions • Look at market outlook for returns on asset held by Fund 22
Outlook for investment returns – March 2016 Future investment return vs risk 23 Source: Hymans Robertson ESS model, for indicative information purposes only
Outlook for investment returns – updated Future investment return vs risk PE Equities Property Bonds Cash 24 Source: Hymans Robertson ESS model, for indicative information purposes only
Salary growth assumption Allow for: • Final salary liabilities running-off – salary growth less important • Short and long term pay expectations 25
Salary growth assumption RPI – as per 2016 Cost of living assumption Long term 2% p.a. until 31 RPI - 0.3% single Short term expectations March 2022 assumption Allow for projected Final salary ‘run off’ run off Assumption: RPI less 0.3% (RPI less 0.7% in 2016) 26
Salary strain risk 27
Benefit increases assumption • Pension increases and CARE/deferred revaluation linked to CPI inflation (may move to CPIH in future) • Standard approach – derive expected RPI inflation from markets and assume an RPI- CPI ‘gap’ RPI vs CPIH RPI > CPI RPI vs CPI RPI < CPI Aassumption: gap of 1.0% (same in 2016) 28
Demographic Assumptions 29
Longevity trends – 175 years Period life expectancy from age 65 88 86 84 82 80 78 76 74 Infectious diseases (Respiratory &) Circulatory 72 70 68 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Men Women Source: Hymans Robertson using data from ONS and Human Mortality Database 30
Are life expectancy increases slowing down? 31
Longevity: improvements Most LGPS liabilities – still improving Assumption: use latest improvements model calibrated to Club Vita data 32
Mortality improvement by segment Group Annualised mortality improvement (age- standardised) 2000-2005 2005-2010 2010-2015 Population 2.8% (±0.1%) 2.8% (±0.1%) 1.1% (±0.1%) Club Vita 2.4% (±0.5%) 2.8% (±0.3%) 1.3% (±0.4%) Comfortable 2.4% (±1.1%) 2.1% (±0.8%) 2.1% (±0.7%) Making-do 2.2% (±0.8%) 3.2% (±0.5%) 0.9% (±0.6%) Hard-pressed 2.5% (±0.7%) 2.9% (±0.5%) 1.0% (±0.6%) Source: Club Vita analysis of VitaBank experience 33
What might be driving the slowdown? End of an era High-rise 00s Have we exhausted the era of cardio-vascular Were the 2000s simply abnormally good e.g. improvements with no replacement driver of strong investment in health care, drives for improvements? social (health) equality? Cash-strapped Britain Frailty decline Are funding cuts (supply) impacting health A few harsh winters and flu seasons, each of outcomes, particularly of older people in an which trigger frailty decline and premature ageing population (demand) ? mortality have merged together. Data anomaly?.. Rise of Dementia Some have questioned if there an anomaly Larger rise in dementia than attributable to within the population data. Unlikely given the ageing population – are current generations results replicated in Club Vita. more ‘prone’ for some reason? 34
Fund uses tailored assumptions High life expectancy Mid life expectancy Low life expectancy Assumption: adopt latest Club Vita longevity curves 35
Differences in longevity Life expectancy from 65: Life expectancy from 65: Healthy lifestyle Unhealthy lifestyle Lifestyle 3.5 years postcode postcode Affluence 3 years High affluence Low affluence Ill health retirement Health 2 years Normal health retirement Occupation Manual worker Non-manual worker <1 year No such thing as a typical member 36
Other demographic assumptions Compile data from 40 Funds Compare actual experience over 3 year period with expectations Revise assumptions to reflect observed experience (and any other wider issues) • • Level of ill health retirements Take-up of the 50-50 option • • Death in service Salary scale • • Withdrawal Commutation • Proportion married 37
Demographic assumptions Parameter Proposed assumption Comment based on analysis of experience Withdrawal from active Hymans default Slight increase in rate of withdrawal to service reflect recent experience Pre-retirement mortality Hymans default Experience closely in line with assumption at 2016v Ill-health retirement Hymans default Lowered likelihood since 2016v Promotional salary scale Hymans default Experience closely in line with assumption at 2016v Cash commutation Keep at 50% and 75% Experience closely in line with assumption respectively at 2016v 50:50 take-up Lower to 0.2% 5% at 2016v, less members opting to 50:50 scheme than initially assumed Assumption: adopt the demographic assumptions outlined above 38
Employer controlled risks Issue Early retirement When assumptions change the cost of early retirements changes Ill health retirements Fund seeking to pool ill health retirement risks Salary strain Annual check to ensure pay increases are within the assumption Employers can input during Funding Strategy Consultation 39
Next steps 40
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