London Borough of Hammersmith and Fulham Pension Fund 2013 - PowerPoint PPT Presentation

London Borough of Hammersmith and Fulham Pension Fund 2013 Actuarial Valuation Initial Results alison.hamilton@barnett-waddingham.co.uk November 2013

Agenda Purpose of the valuation How do we do it? Funding models and assumptions Funding models and assumptions Valuation Data Results Next Steps 2

Purpose of valuations Approach depends on question being • Many questions! asked Ongoing triennial • How much do employers need to pay in future to have enough assets to pay benefits? funding valuation Annual accounting • Help accountants compare valuations • If we were a plc how much would we need to borrow to finance liabilities? (IAS19/FRS17) • Have we enough assets to meet liabilities? Cessation • How much risk do we leave on the table? valuations • Different approaches depending on employer situation 3

Triennial Funding Valuation • to certify levels of employer contributions to Set out in LGPS Regulations secure the solvency of the Fund Also have to look at • As determined by administering authority Funding Strategy • With some actuarial help! Statement Statement Actuary to “have regard to • Function of Funding Model / investment desirability of maintaining strategy as stable a contribution • Spreading and stepping rate as possible” Different approaches • Statutory/non statutory bodies possible for different • Open or closed admission agreements employer types 4

How do we do it? Step 1 Step 2 Step 3 • Projection of all possible • Attach probabilities to • Discount “expected” benefit payments for each each possible payment to payments to obtain member get “expected” payments “value” Total cashflows - £3.1bn 5

How do we do it? Look at accrued benefits and future benefits separately Past Service • Compare assets with value of accrued benefits Future Service • Determine contribution required to meet value of annual accrual of benefits Calculations completed at • Whole fund level • At individual employer level to identify any outliers and for accountants! But maybe pool similar employers to help with stability • Price of stability is some cross subsidy • Complete or partial risk sharing possible 6

Assumptions Price Salary Discount Statistical Inflation Increases rates assumptions (RPI) • Usually 1-2% • Depends on • Investigate pa more than purpose and past • Usually price inflation price inflation objectives of objectives of experience experience difference difference valuation • Short term • Use national between fixed adjustment? data interest and index linked • Adjust for gilts actual experience • CPI adjustment required 7

Discount Rates Choice of discount rate depends on the question being asked Funding valuation • What contributions are required to build up a fund of assets to meet pension liabilities for a given investment strategy? pension liabilities for a given investment strategy? Accounting valuation • How much would a corporate body need to borrow to finance their pension liabilities? Cessation valuation • How much cash would we need to buy gilts to fund liabilities? 8

Discount Rates Accounting valuation • Corporate bond yields / cost of borrowing Minimum risk cessation • Gilt yields Ongoing funding valuation • Expected future investment returns from actual investment strategy Expected future investment returns from actual investment strategy Gilts and bonds – easy…. • Redemption yields Equities – less easy…. • Fixed risk premium over gilts (Gilt + model) • Economic model (BW model) Property/alternatives – keep it simple • Somewhere between equities and gilts 9

Change in Employer Contribution 10

Financial Assumptions - Summary Inflation 31 March 2013 31 March 2010 %pa %pa 3.8% Implied Inflation 3.5% (0.25%) Inflation Premium - 3.5% RPI assumption 3.5% 3.0% CPI assumption 2.7% Smoothed Equity Returns 31 March 2013 31 March 2010 %pa %pa Dividend Yield 3.4% 3.3% Discount Risk Central Real Dividend Grow th - 0.5% rate function adjusted if Max real Adjust for of actual 75%+ in discount rate RPI assumption 3.5% 3.5% expenses asset equity type of 4% strategy investments Equity Return 6.9% 7.3% Smoothed Investment Returns 31 March 2013 31 March 2010 Central Assumptions %pa %pa Equity type investments 6.9% 7.3% Gilt type investments 3.3% 4.5% Bond type investments 3.9% 5.6% Property type investments 6.0% 5.6% Financial Assumptions 31 March 2013 31 March 2010 %pa %pa 6.0% 6.7% Central Discount Rate Pay Increases 4.5% 5.0% Retail Price Inflation 3.5% 3.5% Pension Increases 2.7% 3.0% 11

Statistical Assumptions Pre retirement Based on LGPS experience Post Retirement mortality 1.5% pa SAPS 1 improvement Tables factor Fund specific rating 100% 12

Valuation Data - Liabilities Key Stats This Valuation Average Number of Members 2013 % 2010 % Average Age Retirement Age Actives 3,834 26% 4,125 30% 47.1 64.4 Pensioners 4,384 29% 3,614 26% 69.9 - Deferred Members 6,805 45% 6,032 44% 46.8 62.1 Total Members 15,023 100% 13,771 100% Actual Pay/Pensions £ (000) £ (000) % Change Actives 93,822 107,704 (13%) Pensioners 27,167 20,538 32% Average Pay/Pensions £ £ % Change Actives 24,471 26,110 (6%) Pensioners Pensioners 6,197 6,197 5,683 5,683 9% 9% Pensionable Pay at This Valuation FT Females 28% FT Males PT Males 21% 4% PT Females 47% 13

Assets and Fund Accounts Revenue Accounts Year to March 2013 March 2012 March 2011 TOTAL Assets at This Valuation £(000) £ (000) £ (000) £ (000) £ (000) Expenditure 38,679 34,638 32,439 105,756 UK Equities 166,092 Income 31,192 32,066 39,279 102,537 Overseas Equities 224,207 Net income (7,487) (2,572) 6,840 (3,219) Investment Income 7,132 6,224 4,676 18,032 UK Gilts 14,398 Corporate Bonds - Cashflow movement (355) 3,652 11,516 14,813 Overseas Bonds 9,357 Fund Value Cash 12,553 Assets at start of year 638,640 595,718 554,314 Cashflow movement (355) 3,652 11,516 14,813 Property - Change in value Change in value 85,801 85,801 39,270 39,270 29,888 29,888 154,959 154,959 Other assets Assets at end of year 724,086 638,640 595,718 724,086 Alternative assets 297,479 Annual Returns Approx rate of return (per annum) 14.6% 7.7% 6.2% 9.4% Total 724,086 • Investment return one of the highest amongst LGPS Funds over the inter-valuation period. • Average return across the Funds we have so far advised approximately 8% p.a. 14

Intervaluation Experience Intervaluation Experience Actual Expected Investment Return 9.4% pa 6.7% pa Pay Increases ** 0.9% pa 3.2% pa Pension Increases 3.5% pa 3.0% pa Deaths 345 317 Pension Ceasing £1,655k £1,743k ** includes short term overlay. Calculation based only on members present throughout the entire intervaluation period and thus avoids distortion arising from member movements in and out of the Fund. 15

Valuation Results Last Valuation • The published 2010 results • Changes in financial conditions and actual Intervaluation experience Revised • Pay increases, retirement age, pre retirement leavers and post retirement mortality leavers and post retirement mortality Assumptions Assumptions LGPS 2014 • New scheme benefits from 2014 • Assume 10% of members opt for 50/50 10% 50/50 scheme • Assume 5% of members opt for 50/50 5% 50/50 scheme 16

Valuation Results – Whole Fund 17

Valuation Results – Whole Fund Sensitivity - Real Dividend Growth Funding Level % of Pay 90% 40% 88% 35% 86% 84% 30% 82% 25% 80% 78% 20% 76% 15% 74% 72% 10% Dividend growth plus Dividend growth less LGPS 2014 10% 50/50 5% 50/50 0.5% 0.5% Funding Level 83% 83% 83% 88% 78% Ongoing Cost 14.5% 13.8% 14.2% 12.7% 16.5% Total Rate - 22 22.8% 22.1% 22.5% 17.8% 26.3% years 18

Valuation Results – Whole Fund 19

Major Employers Results – LBHF including HF Homes Valuation Date 31 March 2010 31 March 2013 31 March 2013 31 March 2013 LGPS 2014 with 10% LGPS 2014 with 5% Description LGPS 2008 LGPS 2014 50/50 50/50 Past Service Funding Position £(000) £(000) £(000) £(000) Smoothed Asset Value 472,984 629,557 629,557 629,557 • Current Value of Scheme Liabilities 659,643 791,280 791,280 791,280 Surplus (Deficit) (186,659) (161,723) (161,723) (161,723) employer Funding Level 72% 80% 80% 80% Future Service Contribution Rates % of payroll % of payroll % of payroll % of payroll rate is Employer 13.5% 14.2% 13.5% 13.9% 24.7% Deficit Contribution % of payroll % of payroll % of payroll % of payroll 25 years 25 years 11.2% 11.2% 9.8% 9.8% 9.8% 9.8% 9.8% 9.8% 22 years 10.9% 10.9% 10.9% • Some 20 years 11.8% 11.8% 11.8% stepping Total Employer Contribution % of payroll % of payroll % of payroll % of payroll 25 years 24.7% 24.0% 23.3% 23.7% applied for 22 years 25.1% 24.4% 24.8% 20 years 26.0% 25.3% 25.7% HF Homes Deficit Contribution £(000) £(000) £(000) £(000) 25 years 9,290 7,600 7,600 7,600 22 years 8,500 8,500 8,500 20 years 9,200 9,200 9,200 Total Contributions £(000) £(000) £(000) £(000) 22 years 19,600 19,000 19,300 Interest on Deficit £(000) £(000) £(000) £(000) 12,500 9,400 9,400 9,400 20