London Borough of Hammersmith and Fulham Pension Fund 2016 - PowerPoint PPT Presentation

London Borough of Hammersmith and Fulham Pension Fund 2016 Valuation Graeme Muir FFA, Partner Barnett Waddingham LLP November 2016

Agenda • Purpose of valuations? • Where were we 2013? • Where are we at 2016? • Data • Challenges • Assumptions • Results • Next steps 2 2

Purpose of valuations? BACKGROUND 3

Purpose of valuations • Answer questions Valuations • Many questions! • How much do employers need to pay Ongoing triennial in future to have enough assets to pay funding valuation benefits? Annual accounting valuations • Help accountants compare (IAS19/FRS102) GAD valuations • Long term costs of LGPS / section 13 4

Triennial Funding Valuation • to certify levels of employer contributions to secure the Set out in LGPS Regulations solvency of the Fund and the long term cost efficiency of the Scheme • As determined by administering authority Also have regard to the Funding Strategy Statement • With some actuarial help and guidance from CIPFA Actuary to “have regard to • Function of Funding Model / investment strategy desirability of maintaining as nearly constant a (primary) • Spreading and stepping contribution rate as possible” • Statutory/non statutory bodies Different approaches possible • Open or closed admission agreements for different employer types • Look at employer financial strength (“covenant”) 5

Funding Strategy Statement Regulation 58 of the LGPS 2013 Regulations • Responsibility of the administering authority • Keep under review • Consult other parties (mainly employers) • Have regard to CIPFA guidance CIPFA Guidance • Transparency • Prudent long term view • Stability of contributions Revised CIPFA guidance just issued “Administering authorities are reminded that securing solvency and long term cost efficiency is a regulatory requirement whereas a constant as possible (primary) contribution rate remains only a desirable outcome”. 6

How do we do it? Step 1 Step 2 Step 3 • Projection of all possible • Attach probabilities to each • Discount “expected” benefit payments for each possible payment to get payments to obtain “value” member “expected” payments 7

2013 valuation results WHERE WERE WE IN 2013? 8

March 2013 valuation results • Liabilities of £863m less assets of £716m = deficit of £148m • Funding Level of 83% • Deficit contributions of 8.3% of Pensionable Pay to eliminate the deficit over a period of 22 years • 13.6% of Pensionable Pay to meet the cost of new benefits as they are earned from year to year • Total rate of 21.9% of Pensionable Pay • Contributions for LBHF • 13.5% plus £8.1m per annum 9

Where are we in 2016? 2016 VALUATION CHALLENGES 10

2016 valuation KPIs New CIPFA guidance Standardised results on Funding Strategy published Statement Section 13 Increased transparency Employer Cost Cap and governance Consistency 11

Section 13 valuation “Section 13 to provide for an independent review (by GAD) of the valuation and employer contribution rates to check that they are appropriate and requires remedial action to be taken where that review identifies a problem.” • Have valuations been completed in accordance with the Compliance Regulations? • Has a Fund’s valuation been completed on a basis “not Consistency inconsistent” with other Funds ? • Will certified contributions accumulate enough assets to Solvency meet liabilities over an “appropriate” period? Long term cost • Are certified rates “enough”? efficiency • Are employers kicking the contribution can down the road? 12

Summary Funds can still have their own bespoke funding plan • Funding model / assumptions / recovery period etc. But need to keep an eye on s13 valuation • And avoid being summoned to the headmaster’s office….. • Will be an issue for some Funds/employers re affordability / stability of contribution Some additional complexity expected… Longer term • Gravitating to the middle… • Everyone will be average • No need to compare! • The public sector equivalent of the Minimum Funding Requirement? 13

Where are in 2016? DATA USED 14

Valuation data Key membership statistics Number of members % of membership Average age 2016 2013 2016 2013 2016 2013 Actives 3,949 3,834 26% 26% 47.4 47.0 Deferred pensioners 6,975 6,805 45% 45% 48.0 46.8 Pensioners 4,531 4,384 29% 29% 70.8 69.9 Total 15,455 15,023 100% 100% 54.5 53.6 Key pay/pension statistics Total £000 Average £ 2016 2013 % change 2016 2013 % change Actives 93,659 93,822 0% 23,717 24,471 -3% Pensioners 29,563 27,167 9% 6,525 6,197 5% Market asset valuation as at 31 March 2016 of £856m Average annual return of 7.0% p.a. since 2013 15

Where are we in 2016? FINANCIAL ASSUMPTIONS 16

Setting assumptions • Use market indices / yield curves • Use 20 year point on curves (duration of Fund liabilities) • Our model uses assumptions assessed over six month period spanning valuation date (smoothed) to give stability • Assets smoothed in a consistent way • Start with neutral assumptions (not deliberately optimistic or pessimistic) • Introduce prudence where there is uncertainty • The greater the uncertainty, the greater the prudence 17

Inflation As at 31 March 2016 • 3.3% p.a. is the smoothed 20 year point on the BoE curve • 0.9% deduction for CPI to get 2.4% p.a. • Long term salary increases of 1.5% more than CPI (1.8% at 2013) • Short term salary increases of CPI (until 2020) 18

Discount rate – derivation • Ongoing funding valuation so discount rate is… • Weighted expected future investment return from long-term investment strategy • Assumptions assessed over six month period spanning valuation date (smoothed) 19

Discount rate – gilts & bonds • Straightforward, based on current yields and credit spreads As at 31 March 2016 • 2.4% p.a. from gilts • 3.3% p.a. from bonds 20

Discount rate – equities – BW model equity return = dividend yield + inflation (CPI) + real capital growth As at 31 March 2016 • Smoothed dividend yield of 3.8% p.a. • plus CPI of 2.4% p.a. • plus real capital growth of 1.2% p.a. • equals 7.4% p.a. 21

Discount rate - others • Property • Expect to return between equities and gilts • CPI + 3.5% p.a. gives 5.9% p.a. • Cash • Smoothed 20 year LIBOR swap curve point gives a rate of 1.8% p.a. • Absolute return • Based on mandate – inflation / cash plus 22

Discount rate – prudence allowance • What is prudence? • Opposite of rashness… • Based on a number of factors: • the actual proportion of the liabilities that are the responsibility of tax raising bodies (or where a tax raising body is providing a guarantee) • views on the ability of employers to pay more later if required • attitude to risk and risk appetite of the Administering Authority • levels of volatility in the assumed asset returns • consistency of prudence margin with the 2013 valuation Starting point for 31 March 2016 • We propose that an allowance of 0.7% is appropriate 23

Discount rate – combining returns Asset class Percentage of Initial proposed Real (relative to Fund assumption (% p.a.) CPI) Equities 45% 7.4% 5.0% Property 10% 5.9% 3.5% Absolute return fund – inflation plus 2.5% 10% 5.8% 3.4% Absolute return fund – LIBOR plus 4% 25% 5.8% 3.4% Absolute return fund – LIBOR plus 2% 10% 3.8% 1.4% Expenses (deduction) -0.2% 6.1% 3.7% Neutral estimate of discount rate based on long-term investment strategy Prudence allowance 0.7% Proposed discount rate assumption 5.4% 3.0% 24

Where are we in 2016? DEMOGRAPHIC ASSUMPTIONS 25

Pensioner mortality assumptions • Review of Fund mortality over period 2011 – 2015 • Now using revised tables • Impact best demonstrated using life expectancies Life expectancy from age 65 (years) 2016 mortality assumption 2013 mortality assumption Retiring today Male 24.3 22.9 Female 25.9 25.4 Retiring in 20 years Male 26.5 25.2 Female 28.2 27.7 Small increase in the value of liabilities 26

Where are we in 2016? WHOLE FUND RESULTS 27

Initial results Primary rate % of payroll Total future service rate 22.8% less employee contribution rate (7.0%) Total primary rate 15.8% Past service funding position Total rate % of payroll Proposed basis Primary rate 15.8% 31 March 2016 plus deficit recovery over 22 years 6.9% £000 Total rate 22.7% Smoothed asset value 851,202 Past service liabilities Total rate % of payroll Actives 255,750 Primary rate 16.1% Deferred pensioners 272,224 plus deficit recovery over 21 years 7.2% Pensioners 444,957 Total rate 23.3% Total 972,931 Total rate % of payroll Surplus (Deficit) (121,729) Primary rate 16.1% plus deficit recovery over 20 years 7.5% Funding level 87% Total rate 23.6% Total rate % of payroll Primary rate 16.1% plus deficit recovery over 19 years 7.8% Total rate 23.9% 28