2019 valuation update Royal Borough of Kingston-Upon-Thames Pension Fund Peter MacRae FFA 19 December 2019 Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority
What are we going to cover? 1. Introduction to the actuarial valuation 2. Whole fund results 3. Funding Strategy Statement 4. National hot topics & next steps 2
1. Introduction to the actuarial valuation
How the Fund works Member contributions Benefits to members and Employer contributions dependants Pension Investment returns Fund Determined by investment strategy & manager performance Determined by LGPS Regulations Determined by the fund actuary 4
Putting a funding plan in place Investment Uncertain and volatile Returns Cost of Benefits Fixed by regulations Employee Contributions Must make up the balance of Employer Contributions cost in the long term 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
Who is interested in the valuation? Council/Taxpayers value for money and minimal inter-generation cross-subsidies Employers Pension Panel affordable, stable formally sign off assumptions contributions and valuation results Actuary Local Pension Board carries out oversees process ensuring good Fund members valuation governance and clear audit trails benefits paid accurately and on time Officers liaise closely throughout process External regulators with Actuary and other advisers, (TPR, GAD, MHCLG) Investment adviser Pension Panel, and Employers want to ensure national considers valuation projections relative to Fund’s investment standards are being met strategy 7
How we do the valuation Data for c16,000 Benefit projections members Financial assumptions Actuarial Total liability estimate valuation Demographic assumptions Employer contribution rates Asset data 8
Membership data received and validated Membership of the Pension amounts Payroll of actives RBK Pension Fund 120 450 Millions 18,000 Millions 400 16,000 100 350 14,000 80 300 12,000 250 10,000 60 200 8,000 40 150 6,000 100 4,000 20 50 2,000 0 0 0 2016 2019 2016 2019 2016 2019 Actives Deferred Pensioners Pensioners Deferred pensions Pensions 9 Source: Hymans Robertson, RBK Pension Fund
Valuation begins at member level Lump Sum Expenditure Member’s Dependant’s Pension Pension Contributions Income 40 65 85 Death Retirement Recruitment 10
Valuation assumptions Assumption 2016 2019 Reason valuation valuation Pension increases RPI less 1.0% RPI less 1.0% No significant change observed CARE revaluation rate RPI less 1.0% RPI less 1.0% No significant change observed Salary increases RPI less 0.6% RPI less 0.6% Updated short/long term assumptions but overall combined rate unchanged Life expectancy - Baseline VitaCurves VitaCurves Market leading approach - Future CMI 2013 CMI 2018 Reflect latest trends improvements model model Other demographic Observed Observed Updated to reflect latest national assumptions national national trends experience experience 50:50 take up 5% 0% Reflect low take up rate 11
Life expectancy in retirement High life expectancy Mid life expectancy Low life expectancy 12
Data received + assumptions agreed = projected benefits 13 Source: Hymans Robertson, RBK Pension Fund
Future assumed investment returns Frequency Increasing prudence of outcome Results: 50% likelihood of the Fund’s investments achieving at least an annual return of 5.4% p.a. 70% likelihood of the Fund’s investments achieving at least an annual return of 3.9% p.a. 80% likelihood of the Fund’s investments achieving at least an annual return of 2.9% p.a. 14 Source: Hymans Robertson, RBK Pension Fund
Projected benefits discounted back to today Assumed impact of future returns 15 Source: Hymans Robertson, RBK Pension Fund
2. Whole fund results
Whole fund funding position £m 2016 valuation 2019 valuation Active liabilities 259 255 Deferred pensioner liabilities 176 210 Pensioner liabilities 359 417 Total liabilities 794 882 Assets 649 839 Surplus/(Deficit) (145) (42) Funding level 82% 95% 17 Source: Hymans Robertson, RBK Pension Fund
What’s changed since 2016? Assets Liabilities £m £m 2016 valuation 649 794 2016 valuation Contributions 105 96 Accrual of new benefits Benefits paid (90) (90) Benefits paid Other cashflows (35) (47) Other Investment return 210 100 Anticipated return 8 Membership experience (2) Demographic (20) Longevity 0 Salary increases 24 Benefit increases 18 Future anticipated returns 2019 valuation 839 882 2019 valuation 18
3. Funding Strategy Statement (FSS)
Approach to setting contributions Liabilities Assets Managers Future Investment Benefits returns earned in future Future contributions Benefits Assets earned to today date 20
Context for 2019 valuation Factor Impact Investment outperformance No change from 2016 assumption Funding levels up Helps contain employer costs Slowing down for some groups – Longevity improvements reduces expected pension costs Future investment returns Outlook slightly worse than in 2016, puts pressure on rates McCloud court case Cost increase for employers Quadrennial valuations 2019 and 2022 valuations are going ahead – not clear beyond that 21
All brought together in the Funding Strategy Statement (FSS) • Purpose ‒ clear & transparent fund-specific strategy, ‒ how contributions are set for different types of employer, ‒ how contributions vary in different circumstances, ‒ how employers are treated when they join/leave the fund. • Principles agreed by Pensions Panel • Details agreed between Officers & Actuary 22
Proposed Changes to the FSS • LGPS (Amendment) Regulations 2018 – “exit credits” - Allowance for new regulations Note that exit credit/surplus payments may be made - Risk sharing If contractor bears no risk, then doesn’t get exit credit either - Assumptions for cessation calculations No benefit to contractors trying to cease early • McCloud ruling (see later) Add loading to liabilities for employers leaving the fund • Academies now paying their own rate (no link to RBK) 23
4. National hot topics & next steps
McCloud & cost cap Age 55 or Still active older in scheme 2014 2022 2012 • Pension based on current benefit structure Administrator will calculate: • Pension based on previous benefit structure Member gets the better of the two The ‘McCloud’ Case • Transitional protections judged to be age discriminatory • HM Treasury & LGPS Scheme Advisory Board cost cap process paused • Mediation to agree form of ‘levelling up’ • Costs will go up somehow, but no details yet on exactly how • Uncertainty about past and future LGPS benefit structure 25
Valuation cycle • MHCLG published consultation on 8 May 2019* 2016 2022 2019 2024 2028 OPTION 1 Triennial Triennial Triennial Biennial Quadrennial 2020 Cost Cap Valn 2016 2019 2024 2028 OPTION 2 Triennial Triennial Quinquennial Quadrennial • Brings LGPS cycle into line with other public schemes • Permit interim valuations to help with risk management • Adverse impact on employer engagement and data quality? • Recently confirmed that 2022 valuation will go ahead 26 * https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/800321/LGPS_valuation_cycle_reform_consultation.pdf
Next steps Employer Funding Data sign off consultation Data Strategy submission Statement Now 31 March 2020 Individual Whole fund Sign off employer Assumptions results Council results contribution modelling modelling and R&A rates 27
Thank you 28
Professional notes • This presentation has been requested by, and is addressed to, the Royal Borough of Kingston-Upon-Thames, in its capacity as Administering Authority to the Royal Borough of Kingston-Upon- Thames Pension Fund (“the Fund”), rather than as a participating employer in the Fund. It may be shared with the Pensions Panel. • The details and results contained in this presentation are a summary of the formal valuation progress to date, to update the Committee on the long term funding strategy for the Fund. It should not be used for any other purpose, for instance in determining investment strategy. • The models used to carry out this modelling, and this presentation, comply with Technical Actuarial Standards 100 (Principles for Technical Actuarial Work) and 300 (Pensions). 29
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